Edited version of your written advice

Authorisation Number: 1012691492887

Ruling

Subject: Subdivision of property

Questions and Answers:

Is your land subdivision transaction are mere realisation of a capital asset?

Yes.

This ruling applies for the following periods:

Year ended 30 June 2009

Year ended 30 June 2010

Year ending 30 June 2011

Year ending 30 June 2012

Year ending 30 June 2013

Year ending 30 June 2014

The scheme commences on:

1 July 2008

Relevant facts and circumstances

You decide to subdivide your private residential property, which you held for many decades. You appointed a property developer to manage a subdivision, into less than 10 lots.

You borrowed approximately $X million for the subdivision. The unimproved value of your property was approximately $Y million.

The subdivision was basic and nothing beyond what was required by Council regulations, namely, the construction of relevant access ways, roads and drainage and meeting native vegetation plans.

You sold some of the allotments personally, after being personally approached whilst the development was occurring. Other allotments were sold through real estate agents.

Your partners have never been previously involved in the subdivision of land.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 102-5

Reasons for decision

Profits from a land sub-division can be treated in at least three ways for taxation purposes:

(1) As ordinary income under section 6-5 of the ITAA 1997, as a result of carrying on a business of property development, involving the sale of land as trading stock.

(2) As ordinary income under section 6-5 of the ITAA 1997, as a result of an isolated commercial transaction entered into by a non-business taxpayer or outside the ordinary course of business of a taxpayer carrying on a business.

(3) As capital gains under Part 3-1 and Part 3-3 of the ITAA 1997, from the mere realisation of a capital asset.

The term 'business' ordinarily refers to trade engaged in on a regular or continuous basis. Whereas an isolated (one-off) commercial transaction does not amount to a business but has the characteristics of a 'business deal'. Taxation Ruling TR 92/3 explains, for an isolated commercial transaction to occur, it is usually necessary the taxpayer has the purpose of profit-making at the time of acquiring the property and that the property has no use other than as the subject of trade.

In The Alabama Coal, Iron, Land and Colonization Co Ltd v Mylam (1926) 11 TC 232, a commercial transaction was distinguished from a mere realisation as "there must be something in the nature of buying at any rate, and not merely selling, which is mere turning your property into money''.

In Commissioner of Taxes v Melbourne Trust Limited [1914] AC 1001, the mere realisation of a capital asset was described as "liquidating or realising the old assets".

In the High Court of Australia case of Federal Commissioner of Taxation v NF Williams 72 ATC 4188; (1972) 127 CLR 226, at ATC 4194-4195; CLR 249, Gibbs J explained mere realisation of land as follows:

An owner of land who holds it until the price of land has risen and then subdivides and sells it is not thereby engaging in an adventure in the nature of trade, or carrying out a profit-making scheme. The situation is not altered by the fact that the landowner seeks and acts upon the advice of an expert as to the best method of subdivision and sale or by the fact that he carries out work such as grading, levelling, road-building and the provision of reticulation for water and power to enable the land to be sold to its best advantage. The proceeds resulting from the mere realization of a capital asset are not income either in accordance with ordinary concepts…even though the realization is carried out in an enterprising way so as to secure the best price…

In the Federal Court of Australia case of Casimaty v Federal Commissioner of Taxation 97 ATC 5135, at 97 ATC 5152, Ryan J described a salient characteristic of the mere realisation of land as follows:

…[to not] undertake any works on, or development of, the land beyond what was necessary to secure the approval by the municipal authorities of the successive plans of subdivision and enhance the presentation of individual allotments for sale as vacant blocks.

In distinguishing mere realisation from a commercial transaction, Ryan J further said:

Had he constructed dwelling houses, internal fencing or other improvements, it would have been easier to impute to him an intention to carry on a business of land development and improvement.

In the High Court of Australia case Ruhamah Property Co Ltd v Federal Commissioner of Taxation (1928) 41 CLR 148 (Ruhamah), it was observed, at 154:

A man has capacity to sell his property, but he may be realizing it and changing his form of investment and not engaging in a profit-making scheme.

In echoing Ruhamah and addressing the subject of "a change in the purpose or object", (at 97 ATC 5151) Ryan J concluded the case of Casimaty by stating the mere subdivision of land was not in itself a change of purpose; and contrasted the taxpayer's case with those cases (Whitfords Beach, Fox's Case and Melbourne Trust) where a change of the purpose of the asset coincided with a change in controlling interests.

In Casimaty, Ryan J also discussed Stevenson v FC of T 91 ATC 4476; (1991) 29 FCR 282, under the periscope of established principles found in other cases. Here, the matter of 'not only obtaining finance but risking finance' was mentioned, together with other factors such as a scale and repetition of land subdivision activity, which would distinguish a business case from "where an area of land is merely divided into several allotments'.

In your case, your gains from the disposal of subdivided land are a mere realisation of a capital asset because: (i) the land was not originally purchased for the purpose of subdivision; (ii) the land had another purpose other than the subject of trade, namely, long term residential; (iii) you are merely realising or selling an old asset; (iv) you did not undertake any works on the land apart from what is necessary by the municipal authorities; (v) there was not a change of purpose since the land remained a mere investment; (vi) you appointed a property developer to undertake the work and thus did not engage in any repetitive acts that could be construed as carrying on a business; (vii) although obtaining finance, the amount borrowed and risk was not large in relation to the unimproved value of your land; (viii) the scale of your development was small; and (ix) although you sold some of the allotments personally, this was done in an unsolicited manner, i.e., you did not establish a land sales office that could be construed as a carrying on a business.

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