Edited version of your written advice

Authorisation Number: 1012779164211

Ruling

Subject: CGT - subdivision and disposal - realisation of an asset

Question 1

Will the proceeds from the sale of the subdivided land considered a mere realisation of a capital asset for income tax purposes?

Answer

Yes.

Question 2

Will the subdivision activity undertaken by you be classed as an enterprise under section 9-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No. The subdivision activity undertaken by you will not be classed an enterprise under section 9-20 of the GST Act.

This ruling applies for the following periods:

Year ending 30 June 2015

Year ending 30 June 2016

The scheme commences on:

1 July 2014

Relevant facts and circumstances

You acquired residential property (property) in 19XX and have occupied the property as a main residence since that time. The total area of the property is XXXX square metres and is recorded on one land title.

You have identified an option to subdivide the property into three separate housing blocks. This will require the demolition of the current dwelling on the property.

You intend to retain one of the subdivided blocks and construct a new main residence for yourself on that block.

The remaining two blocks of land will be sold as vacant housing blocks. You intend to engage a real estate agent to sell these two vacant housing blocks.

You have obtained an approved plan of subdivision and development application from the local shire council for creating the three residential blocks.

Any capital works carried out on the property will be the minimum to comply with the council subdivision and development conditions.

You have not carried out any previous property subdivision and or development activity.

You are not registered for GST.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

A New Tax System (Goods and Services Tax) Act 1999 section 9-20

Reasons for decision

Issue 1

Summary

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

Detailed reasoning

Subdivision of land

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 Income Tax Assessment Act 1997 (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

Having regards to your circumstances and the factors outlined above, we consider that any proceeds from the sale of the subdivided land will represent a mere realisation of a capital asset which will fall for consideration under the capital gains tax provisions of the ITAA 1997.

Issue 2

Subsection 9-20(1) of the GST Act defines what constitutes an enterprise. The definition includes an activity or series of activities done in the form of a business or in the form of an adventure or concern in the nature of trade.

Miscellaneous Taxation Ruling MT 2006/1 The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number (MT 2006/1) provides the Commissioner's view of an entity carrying on an enterprise.

The question of whether an entity is carrying on an enterprise often arise where there is an isolated or a one-off real property transaction.

Paragraphs 262-270 of MT 2006/1 provide guidance in determining whether activities are of a revenue nature and considered to be activities of carrying on a business, or an adventure or concern in the nature of trade (profit-making undertaking or scheme) as opposed to the mere realisation of a capital asset.

Specifically paragraph 265 lists a number of factors which can be used to determine whether activities in relation to a sale of property are done under a profit-making undertaking or scheme. If several of these 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 considered below:

There is a change of purpose for which the land is held

You acquired the property in 19XX as main residence and you have been occupying the property as such since then. You intend to subdivide the property into three blocks and whilst you will sell two of the blocks as vacant land, you will retain one block to build and occupy as your main residence. As such there is no change in purpose for which the land is held.

Additional land is acquired to be added to the original parcel of land

You have not acquired any additional land to be added to the original parcel of land.

The parcel of land is brought into account as a business asset

The property was used as your principal place of residence and therefore it is a private asset and not a business asset.

There is a coherent plan for subdivision of the land

You have made submissions to the council and obtained an approved plan of subdivision for creating three blocks from the property. You have engaged a real estate agent to carry out the marketing and sale of the two vacant blocks. These activities are planned and organised.

There is a business organisation - for example a manager, office and letterhead

You do not have a business organisation in relation to these activities. For example there is no manager, sales office or office letterhead.

Interest on money borrowed to defray subdivisional costs was claimed as a business expense.

No expenses in relation to the subdivision have been claimed as a business expense.

There is a level of development of the land beyond that necessary to secure council approval for the subdivision

Any capital works to be carried out on the property will be the minimum to comply with the council subdivision and development requirements.

Buildings have been erected on the land

The only building to be erected on the subdivided land will be your principal place of residence. The two other blocks are to be sold as vacant land.

Paragraph 266 of MT 2006/1 provides that in determining whether activities relating to isolated transactions are an enterprise or are the mere realisation of a capital asset, it is necessary to examine the facts and circumstances of each particular case. However, there may also be other relevant factors that need to be weighed up as part of the process of reaching an overall conclusion. No single factor will be determinative. Rather it will be a combination of factors that will lead to a conclusion as to the character of the activities.

In weighing up all of the factors in your case, it is our view that the activities of subdivision and subsequent sale of the two vacant blocks will be a mere realisation of a capital asset.

It follows that your subdivision of the property into three blocks and the subsequent sale of the two vacant blocks does not constitute an enterprise for the purposes of subsection 9-20(1) of the GST Act.

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