Edited version of private advice

Authorisation Number: 1012680920492

Ruling

Subject: Capital gains tax

Question 1

Are the proceeds from the sale of the subdivided lots assessable as ordinary income?

Answer

No.

Question 2

Are the proceeds from the sale of the subdivided land assessable under the capital gains tax provisions?

Answer

Yes.

This ruling applies for the following period

Year ending 30 June 2015

Year ending 30 June 2016

Year ending 30 June 2017

Year ending 30 June 2018

The scheme commences on

1 July 2014

Relevant facts and circumstances

You and your spouse jointly own land.

You and your spouse's land was originally a portion of a larger land holding that was used to operate a farm by your relatives.

Your relatives passed away, the land was subdivided and you were gifted a portion.

You became the owner of the property in the relevant financial year and transferred half of the property to your spouse.

You and your spouse currently live in another city but return to work on the property when possible. You and your spouse intended to build a holiday home on the property.

The land is currently vacant and holding costs such as rates, taxes, fire breaks, clearing and general upkeep are increasing.

You and your spouse have obtained development approval to subdivide the land into X lots. X will be rural residential lots and X larger rural tourism lots.

You and your spouse do not intend to build any houses or similar on the lots that you sell.

You and your spouse intend to carry out the minimum works required by council to sell the vacant lots.

You and your spouse intend to sell some rural residential lots. Ideally, you and your spouse want to retain the largest rural lot with tourist node to build a house on.

You and your spouse intend to keep some of the rural residential lots and give one to each of your children.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Reasons for decision

We need to determine whether the proceeds from the sale of the land:

• are assessable ordinary income under section 6-5 of the ITAA 1997 as you were carrying on a business of property development

• are assessable ordinary income under section 6-5 of the ITAA 1997 as you conducted an isolated commercial transaction with a view to a profit, or

• are a realisation of a capital asset and assessable under the CGT provisions of the ITAA 1997.

Carrying on a business of property development

Based on the information provided, we do not considered that any proceeds received from the sale of the subdivided land would not be derived in the course of carrying on a business.

Profits from an isolated transaction

Profits arising from an isolated business or commercial transaction will be ordinary income if the taxpayer's purpose or intention in entering into the transaction is to make a profit, even though the transaction may not be part of the ordinary activities of the taxpayer's business (FC of T v. Myer Emporium Ltd 1987 163 CLR 199; 87 ATC 4363; 18 ATR 693) (Myer Emporium). 

Taxation Ruling TR 92/3 considers the principles outlined in the Myer Emporium case and provides guidance in determining whether profits from isolated transactions are assessable under section 6-5 of the ITAA 1997 as ordinary income.

If a taxpayer makes a profit from a transaction or operation, that profit is income if the transaction or operation is not in the course of the taxpayers business but:

• the intention or purpose of the taxpayer in entering into the profit-making transaction or operation was to make a profit or gain, and

• the transaction or operation was entered into, and the profit was made, in carrying out a business operation or commercial transaction.

Whether an isolated transaction is business or commercial in character will depend on the circumstances of each case.  Where a taxpayer's activities have become a separate business operation or commercial transaction, the profits on the sale of subdivided land can be assessed as ordinary income within section 6-5 of the ITAA 1997. TR 92/3 lists the following factors to be considered:

a) the nature of the entity undertaking the operation or transaction 

b) the nature and scale of other activities undertaken by the taxpayer

c) the amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained

d) the nature, scale and complexity of the operation or transaction

e) the manner in which the operation or transaction was entered into or carried out

f) the nature of any connection between the relevant taxpayer and any other party to the operation or transaction

g) if the transaction involves the acquisition and disposal of property, the nature of that property, and

h) the timing of the transaction or the various steps in the transaction.

In contrast, paragraph 36 of TR 92/3 notes that the courts have often said that a profit on the mere realisation of an investment is not income, even if the taxpayer goes about the realisation in an enterprising way. However, if a transaction satisfies the elements set out above it is generally not a mere realisation of an investment.

Miscellaneous Taxation Ruling MT 2006/1 provides a list of specific factors relevant to isolated transactions and sales of real property. If several of the factors are present, it may be an indication that a business or an adventure or concern in the nature of trade is being carried on. These factors are as follows:

• there is a change of purpose for which the land is held;

• additional land is acquired to be added to the original parcel of land;

• the parcel of land is brought into account as a business asset;

• there is a coherent plan for the subdivision of the land;

• there is a business organisation - for example a manager, office and letterhead;

• borrowed funds financed the acquisition or subdivision;

• interest on money borrowed to defray subdivisional costs was claimed as a business expense;

• there is a level of development of the land beyond that necessary to secure council approval for the subdivision; and

• buildings have been erected on the land.

No single factor is determinative; rather it will be a combination of factors that will lead to a conclusion as to the character of the activities.

Application to your circumstances

In this case, given the scale of the activity, the time involved in the subdivision process and the level of involvement, any proceeds from the sale of the subdivided land will represent a mere realisation of a capital asset.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).