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Authorisation Number: 1012706530494

Ruling

Subject: Profit derived from subdivision and sale of land - whether mere realisation of capital asset or income according to ordinary concepts

Question 1

Will the sale or other disposal by the taxpayer of any part of its land, following the development by a third party give rise to ordinary income for the purposes of section 6-5 of the Income tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

Will any capital gain in respect of the realisation of the land be assessable to the taxpayer under Part 3-1 of the ITAA 1997?

Answer

Yes.

This ruling applies for the following periods:

Income Year Ending 30 June 2015

The scheme commences on:

1 July 2014

Relevant facts and circumstances

The taxpayer is one of a number of owners of separate parcels of land. The separate parcels of land are contiguous and abut another parcel of land owned by Company X.

The taxpayer is not related to Company X.

The taxpayer has entered into a number of agreements with Company X.

Under those agreements:

The taxpayer did not purchase their land with the intention or purpose of profit-making by sale or as part of a profit-making undertaking or scheme.

The land was zoned Rural when the taxpayer purchased the land and subdivision was heavily restricted. The land was re-zoned to allow for development at a later date.

The taxpayer has neither the resources nor the expertise to undertake a development of their land. It is reliant on Company X's expertise and resources, or ability to procure resources, to have the land developed in a manner that is consistent with how other land in the vicinity will be developed now that it is zoned to allow for development.

Relevant legislative provisions

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 section 6-5

Reasons for decision

Question 1

Summary

The profit derived from the subdivision and sale of the land is not assessable as ordinary income under section 6-5 of the ITAA 1997.

Detailed reasoning

Section 6-5 of the ITAA 1997 includes in a taxpayers assessable income, where the taxpayer is an Australian resident, all ordinary income derived by the taxpayer both in and out of Australia during an income year. Ordinary income is defined as income according to ordinary concepts.

While the Courts have not applied a strict definition of income for each receipt, they have traditionally identified a number of characteristics that provide the basis in determining whether a receipt is income. The main characteristics that have been identified may include the receipt being:

In the present case, the land was zoned Rural when the taxpayer purchased the land and subdivision was heavily restricted. The plan to develop and sell the land arose only when the land was re-zoned to allow for development. The proposed development and sale of the land, though done in a systematic way, does not contain any of the qualities of being income according to ordinary concepts. There is no periodicity, regularity, or recurrence in sale of the land.

However, periodicity, recurrence or regularity are not always essential for an amount to be income. In FC of T v. The Myer Emporium Ltd 87 ATC 4363 (the Myer Emporium case), the High Court clearly established that the profit arising from an isolated transaction will be of an income nature if the taxpayer's purpose in entering into the transaction was to make a profit.

Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income (TR 92/3) sets out the Commissioner's view regarding the profits from isolated transactions and when an isolated transaction amounts to a business operation. Paragraph 35 of TR 92/3 states:

Paragraph 9 of TR 92/3 states:

In this case, when the land was acquired by the taxpayer, there was no intention or purpose to make profit from the sale of the land.

Paragraph 13 of TR 92/3 states:

In this case, the nature of the taxpayer cannot be said to be a property developer. They have neither the resources nor the expertise to undertake a development of their land and that is why they have entered into agreements with Company X to carry out all related activities in developing and selling the land.

Based on the above analysis, the proposed development and sale of the land cannot be considered as a business operation or commercial transaction and hence the profit from the sale is not income derived from the ordinary course of business. Therefore the profit is not assessable as income under section 6-5 of the ITAA 1997.

Question 2

Summary

The profit derived from the proposed subdivision and sale of the land is a mere realisation of capital asset and hence assessable under Part 3-1 of the ITAA 1997.

Detailed reasoning

The question as to whether profit derived from subdivision and sale of land is a mere realisation of a capital asset or assessable as ordinary income is considered in a number of cases.

In McClelland v. FC of T 70 ATC 4115, the Privy Council held that the question to be answered was whether the facts revealed a mere realisation of capital, albeit in an enterprising way, or whether they justify a finding that the taxpayer went beyond this and engaged in a trade of dealing in the asset, albeit on one occasion only.

Lord Justice Clark, in distinguishing between proceeds that is mere realisation of capital and ordinary income, stated in California Copper Syndicate v. Harris (1904) 5 TC 159 at pp 165-166 that:

In FC of T v. Whitfords Beach Pty Ltd 82 ATC 4031, Gibbs CJ said (at p.4034) that:

In the Myer Emporium case, it was held (at p 4369) that:

In Case 32/96, 96 ATC 361, the taxpayer purchased 148 acres of mostly arable farming land in 1950s. Over time, the taxpayer realised part of the land for various purposes including allowing a brickworks operator to extract clay, for the expansion of a school and for the building of a hospital. Following a rezoning of the land, the taxpayer subdivided 38 lots and sold all but one. For one sale, the taxpayer was required to construct an access road which was financed by the subdivision and sale of a further 14 lots.

The taxpayer claimed that the sale of the land represented the realisation of a capital asset which had been held over a long period of time and which was originally purchased for farming purposes. The Commissioner claimed that having regard to the financial commitment undertaken as part of the subdivision and the fact that the taxpayer himself undertook the subdivision, the subdivision amounted to the carrying on of a business. The AAT held that:

In Scottish Mining Co. Ltd v. FC of T (1949) 9 ATD 135; (1950) 81 CLR 188, the company engaged in coal mining on land it owned since 1863, however it ceased to operate as a mine sometime in 1942. Thereafter it sold off, from time to time, parcels of land formerly used for mining, for residential and other purposes, after having systematically subdivided the land, constructed roads, made sites available for schools and set aside areas for parks, etc. The subdivision was so systematic and scientific that the Commissioner argued that the company had ceased to be a coal miner, and instead was carrying out the profit-making undertaking of selling land. This argument was rejected by the Court, where William J stated (at ATD p 140; CLR p 195):

His Honour further stated (at ATD p 141; CLR p 197):

In McCorkell v. FC of T 98 ATC 2199; (1998) 39 ATR 1112, the court found that proceeds made by the applicant, who had subdivided land he previously used in his orchard activities and subsequently sold the subdivided lots, did not constitute assessable income as the applicant was not carrying on a business of subdividing and selling land in the relevant years. Relevant factors in the decision included the following:

The decision stated that the facts were very similar to those in Statham v. FC of T (1988) 20 ATR 228; 89 ATC 4070. In this case, the court found that the sale by subdivision of farming land constituted a mere realisation of the asset and not proceeds of a business. In reaching the decision the following factors were considered significant by the court:

Further, in Casimaty v. FC of T 97 ATC 5135, the taxpayer Casimaty acquired the property known as 'Acton View' comprising of 988 acres of land from his father by way of gift in 1955. He conducted dairy and fencing business from that property until faced with financial hardship and deteriorating health, he decide to sell two thirds of the property by eight subdivisions between 1975 and 1995. The proceeds from the sale of the property were considered as derived in the course of carrying on of business of selling land. Ryan J found in the favour of the taxpayer. After considering many reported decisions including Stevenson v. FC of T 91 ATC 4476; (1991) 29 FCR 282 upon which the ATO relied heavily to come to its decision, Ryan J stated (at ATC p 5149; ATR p 373):

From the above case analysis, it can be said that there is no general indicia as to whether the proceeds for the sale of a land is a mere realisation of capital asset or derived in the course of carrying on a business. However, the following factors seem to be common among the judges in deciding that the profit is a mere realisation of a capital asset, namely:

In the present case, the following factors are important to take into account in considering whether the proposed development and sale of the land by the taxpayer is a mere realisation of a capital asset or done in the course of carrying on a business:

From the above factors, it is considered that the proposed development and sale of the land is a mere realisation of capital asset. There was no intention or purpose on the part of the taxpayer to carry on a business of development and sale of the land. The activities involved in the proposed development and sale of the land show nothing but the most enterprising way that the taxpayer could realise the best outcome from the land now that it is included within the City X's urban growth boundary.


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