| Disclaimer This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law. You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4. |
Edited version of your written advice
Authorisation Number: 1012734084038
Ruling
Subject: Subdivision of land
Questions and answers
(1) Will the gain or loss from the disposal of subdivided land be assessable as ordinary income?
No.
(2) Will the gain or loss from the disposal of subdivided land be treated as a mere realisation of a capital asset?
Yes.
This ruling applies for the following periods:
Year ending 30 June 2015
Year ending 30 June 2016
The scheme commenced on:
1 July 2014
Relevant facts and circumstances
You purchased the property in 2014.
The property was vacant land which you intended to build your main residence on.
The size of the property was less than 2,500m2.
You own a small number of investment properties, none of which were used as part of a land development scheme.
You have never carried on a business of land development.
You have since decided to subdivide the land into two blocks, keeping one to build your main residence on, and selling the other to fund the construction of the main residence.
Relevant legislative provisions:
Income Tax Assessment Act 1997 Section 6-5.
Income Tax Assessment Act 1997 Section 6-10.
Income Tax Assessment Act 1997 Section 102-5.
Income Tax Assessment Act 1997 Section 104-10.
Reasons for decision
Profits from a land subdivision 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.
The mere realisation of a capital asset was described in Commissioner of Taxes v Melbourne Trust Limited [1914] AC 1001 as "liquidating or realising the old assets". 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 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, Justice Ryan 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 your case, the gain or loss from the disposal of the subdivided land will be treated as a mere realisation of a capital asset because the land was not originally purchased for the purpose of subdivision, the land had another purpose other than the subject of trade, namely, long term residential, and you are not in the business of land development.
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).
