Edited version of your written advice

Authorisation Number: 1012733703247

Ruling

Subject: Subdivision property

Question 1

Will the profits on the subdivision and sale of the property be assessable as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 2

Will the profits on the subdivision and sale of the property be assessable as a capital gain and statutory income under section 6-10 of the ITAA 1997?

Answer

Yes

This ruling applies for the following period(s)

Income year ended 30 June 2014

Income year ended 30 June 2015

Income year ended 30 June 2016

Income year ended 30 June 2017

Income year ended 30 June 2018

Income year ended 30 June 2019

The scheme commences on

1 July 2013

Relevant facts and circumstances

You are xx years old.

You inherited property in 20xx.

This property was part a larger property originally acquired by your deceased spousein 19xx.

You and your deceased spouse carried on a business on this larger property since 19xx.

This property was dissected from the larger property by a compulsory acquisition.

This part of the property was initially used as storage shed and for an access to the business conducted on the larger property.

The surrounding land has been rezoned and developed.

In 20xx you applied for approval to subdivide the property.

In 20xx this approval was granted.

In relation to the development:

• It is proposed to subdivide the property into xx separate lots and to sell each lot to third party purchasers.

• You have not claimed any GST input credits in relation to the expenses incurred to date in relation to the development.

• Neither you, nor your family has previously been involved in the business of property subdivision or property development for resale at a profit. Rather, any previous property development activity has been to develop land into income producing assets that are held as long term investments.

• You have not been directly involved in any of the subdivision process, rather you have engaged a company as project managers, which has engaged contractors.

• Your child in her/his capacity as an employee of the company has been and will continue to be the project manager for the development.

• To date, no earthworks have been carried out in relation to the property, other than the annual maintenance of firebreaks on the site as required by the city. All existing external retaining walls at the property were constructing by neighbouring landowners when undertaking development activities on the neighbouring land.

• It is proposed that the only works to be carried out in relation to the development are what has been prescribed by the conditional. In relation to any proposed works to be carried out for the development, contractors will be engaged by the company on behalf of you to complete such works.

• It is proposed that the subdivided lots in the development will be sold as vacant land and a real estate agent is to be engaged to sell the lots on your behalf.

• There is not currently, nor is it proposed, to have a sales office located onsite at the development.

• You do not propose to construct any dwellings on the subdivided lots to sell as 'house and land packages. That is, you are only proposing to do the bare minimum required to be able to sell the subdivided lots.

No additional land adjacent to the property has been acquired by you for the purpose of increasing the return of the development.

You do not presently intend to borrow funds to enable you to complete the development

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 6-10

Reasons for decision

Generally the proceeds from transactions involving the sale of real property will be assessable as ordinary income under section 6-5 of the ITAA 1997 where they are income from a business activity or profits from an isolated commercial transaction. In those instances where the profits of the sale would have been ordinary income any losses will generally be deductible. Alternatively, where the sale of real property is not part of a business or an isolated commercial transaction any profit or loss will be subject to the capital gain tax provisions.

Carrying on a business

The question of whether a business is being carried on is a question of fact and degree to be determined on a case by case basis. The courts have developed a series of indicators to determine the matter, which are summarised in Taxation Ruling TR 97/11. Although TR 97/11 specifically refers to primary production, the same principles apply to all businesses. Some indicators of carrying on a business which the courts have considered to be relevant include:

• whether the activity has a significant commercial purposes or character

• whether the taxpayer has more than just an intention to engage in business

• whether there is regularity and repetition of the activity

• whether the activity is of the same kind, and carried on in a similar manner, to that of ordinary trade in that line of business

• whether the activity is planned, organised and carried on in a businesslike manner such that it is described as making a profit

• the size, scale and permanency of the activity, and

• whether the activity is better described as a hobby, a form of recreation or sporting activity.

Applying the above indicators to your circumstances, it is clear that you personally are not in the business of developing or selling property. Consequently the proceeds will not be assessable as business income under section 6-5 of the ITAA 1997.

Isolated commercial transactions

However the proceeds of any sale of property may still be assessable as ordinary income from an isolated commercial transaction. The Commissioner's view on whether profits on isolated transactions are assessable income under ordinary concepts is contained in Taxation Ruling TR 92/3. Profit from an isolated transaction is ordinary income where both:

• the intention and purpose for the taxpayer in entering into the transaction was to make a profit or gain and the transaction was entered into; and

• the profit was made in the course of carrying on a business or in carrying out a business operation or commercial transaction.

As was held in FC of T v The Myer Emporium Ltd (1987) 163 CLR 1999 the relevant intention is your intention taking into account objective consideration of all the facts and circumstances of the case.

It is a general principle that where a person purchases land not for the purpose of resale, and then sells the land either in its entirety or in separate lots that the party is merely realising their assets (see Californian Copper Syndicate v Harris (1904) 5 TC 159 and does not have a profit making purpose or intention. However this may not always be the case where there is an intervening act and a clear change in purpose for the use of the land (see White v FCT (1968) 120 CLR 191, Whitfords Beach v FCT 150 CLR 366).

Subdivision of Farmland

Numerous court cases have considered the application of the above principles in relation to the subdivision of land originally purchased and used for primary production. In Statham v FCT 89 ATC 4070 it was held that a significant staged, subdivision of property previously used as a cattle beef farm was a mere realisation. In reaching this conclusion the Federal Court had regard to the following:

• the owners were content to sell the land as one parcel but were unable to do so

• no money was borrowed by them, although a bank guarantee was provided

• only very limited clearing and earthworks were involved

• the owners relied upon the council to carry out roadworks, kerbing, electricity and sewerage works

• the owner did not erect buildings on the land

• there was no business organisation or structure

• the taxpayer maintained their occupation

• the owners did not advertise the land

• the owners did not engage contractors

Another case similarly favourable to the taxpayer was the case of McCorkell v FCT 98 ATC 2199. In that case the AAT held that the subdivision and sale of a commercial orchid was a mere realisation of a capital asset. In reaching this conclusion the Deputy President had regard to the following factors:

• the taxpayer was not directly involved in the planning and contracting of work

• the taxpayer had no involvement in marketing the land

• taxpayer relied on consultants

• taxpayer did no more than necessary than to secure the necessary approvals and enhance the presentation of the properties ready for sale

• urban developments were beginning to encroach on the land and consequently it was concluded that it was reasonable that the taxpayer consider her/his options available to her/him to realise the property to her/his best advantage.

These cases can be contrasted against the decision in Stevenson v FCT 91 ATC 4476 which was unfavourable to the taxpayer. In that case the taxpayer decided to develop and sell the majority of his farm. The case was an appeal from an AAT decision which had determined the sale to not be a mere realisation based on the following:

• the taxpayer was the sole decision maker in relation to the development

• the taxpayer personally sought and obtained finance for the development

• the taxpayer personally dealt with the council and prospective purchasers

• the taxpayer controlled the marketing of the subdivided properties

• the taxpayer personally undertook work on the development to save in labour costs.

In upholding the decision of the AAT the Federal Court agreed with the Tribunal that the fact that the owner of the asset undertook much of the planning and managing of the activities, they had crossed the line between merely realising the asset into carrying on a business.

Application to your circumstances

In applying the above case law to your factual circumstance we consider that your circumstances are on point with Statham and McCorkell. The development and subdivision of your land will be a mere realisation and not an isolated commercial transaction. In reaching this conclusion we have had regard to the following:

• The properties have been in your family for an extended period of time. The property was originally used to accommodate a storage shed and as an access way to the residence and business on the land.

• You inherited the property in 20xx and consequently cannot have been deemed to have acquired the property for the purpose of making a profit on resale.

• The subdivision is on a relatively small scale involving only xx residential lots and a limited capital outlay.

• The extent of the development is only to the level needed to meet the minimum requirements to the sell the land as subdivided lots.

• The development does not involve the construction of any buildings.

• You have not acquired any additional land.

• You have a limited involvement in the development, in that you will not be performing any of the work in relation to the development and you will not be involved in directly engaging contractors to perform the work.

• While your family has experience in property development, these activities have previously focused on developing property to hold for investment purposes. The company you have appointed as a project manager is not controlled by you, the only connection between the company and you, is that the company employs your child.

Consequently as the sale of the subdivided properties will be a mere realisation of a capital asset and any profits made on those sales will not be assessable as ordinary income but will instead be dealt with under the capital gains regime.

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