Edited version of your written advice

Authorisation Number: 1012947985248

Date of advice: 3 February 2016

Ruling

Subject: Land subdivision

Question 1:

Will the proceeds from the sale of the proposed subdivided lots be subject to the capital gains tax provisions in Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer 1:

Yes.

Question 2:

Are couple C entitled to a full main residence exemption on the sale of the lot with the main residence on it, limited to 2 hectares of adjacent land?

Answer 2:

Yes.

Question 3:

Would the fact that one of the persons in couple C carries out some of the required work for the subdivision change the answer from question 1 above from yes to no?

Answer 3:

No

This ruling applies for the following period:

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant Facts and circumstances

Many years ago couple A who are now of retirement age as joint tenants purchased a rural property with two residential dwellings, sheds, stockyards and dams (the property) as additional farmland for farming and also to supplement their income with rental income from the two dwellings.

Later couple B who are related to couple A as joint tenants purchased a 50% share of the property as tenants in common from couple A. The main dwelling was renovated and was couple B's main residence. The second dwelling was rented and farming was conducted on the land. All infrastructures was maintained or improved for the purpose of farming.

At the same time couple A ceased farming on the property and have not collected any rental income, or paid for any expenses.

Some years later, couple C who are also related to couple A as joint tenants purchased couple B's 50% share in the property (as a going concern). The main residence became their main residence, the second dwelling continued to be rented and the land used for farming.

It is proposed that the property will be subdivided into four separate blocks.

Couple A and Couple C are the registered owners of the property prior to the subdivision and will be the registered owners after the subdivision.

Two of the newly subdivided blocks will be sold as vacant land.

Of the two remaining subdivided blocks one will be sold with the pre-existing dwelling that has been rented on it.

The other block will continue to be the main residence of couple C and includes adjacent land of greater than 2 hectares.

Once the subdivision is completed couple C will have the land including the house that they currently reside in, transferred into their names only, this means that they will need to purchase the other half share from couple A.

One of the persons in couple C would like to carry out some of the services required as it is the type of work that they currently undertake. This work will be undertaken on a part time, ad hoc basis between existing contracts and estimated to be a few weeks work in total.

Road works including driveways etc. would be undertaken by an earthmoving contractor.

Fencing etc. would be undertaken by a fencing contractor.

Revegetation requirements would be undertaken by a contractor.

Survey and planning administration will be carried out by surveyors.

Earthworks will be carried out by an earth moving contractor.

The subdivision will be funded by couple C who will borrow funds. Couple A will potentially use their own savings with any shortfall borrowed by couple C on their behalf. (Due to the age of couple A they would be unlikely to be able to take out a loan.)

The envisaged start date for the subdivision is some time in this financial year with a completion date sometime in the next financial year.

A real estate agent will sell the three subdivided blocks that will be for sale and has advised sale estimates.

Couple A are retired and have minimal involvement in the subdivision administration however they are concerned about outcomes and are consulted on any key issues as they arise.

There are no future plans for any subdivision developments. This potential subdivision has arisen only as a result of the change in circumstances over a long period of time while holding the property. In particular couple C's desire to have a property in their names only and being able to live on the property that they have lived on for many years now. Couple A want to separate their affairs with couple C and provide funds to support their retirement.

Couple A wish to dispose of their share of the property. Couple C can't afford to purchase the additional 50% without the planned subdivision.

Due to scale of economies the property in its current capacity is becoming unviable for farming and would require further investment to specialise in other niche primary production activities.

In order to maximise the property's return, reduce couple C's debt and provide for couple A's retirement the parties are proposing to subdivide the property into the four blocks.

You have provided copies of the following documents, these documents are to be read with and form part of the scheme for the purposes of this private binding ruling:

Planning Commission Approval (annexure 6)

Shire Council Approval (annexure 7)

A copy of the subdivision layout (annexure 1)

A copy of the projected cash flow (annexure 8)

Weed management plan (annexure 3)

Condition management report (annexure 4)

Rehabilitation plan (annexure 2)

Payments in relation to the subdivision (annexure 5)

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5,

Income Tax Assessment Act 1997 Section 8-1,

Income Tax Assessment Act 1997 Section 25-40,

Income Tax Assessment Act 1997 Section 104-10,

Income Tax Assessment Act 1997 Section 112-25,

Income Tax Assessment Act 1997 Section 118-110,

Income Tax Assessment Act 1997 Section 118-145 and

Income Tax Assessment Act 1997 Section 995-1.

Reasons for decision

Question 1

Summary

The proceeds from the sale of the subdivided lots will be subject to the capital gains tax provisions in Parts 3-1 and 3-3 of the ITAA 1997.

Detailed reasoning

We need to determine whether the proceeds from the future sale of the proposed subdivided lots:

• is assessable ordinary income under section 6-5 of the ITAA 1997 as you were carrying on a business of property development

• is assessable ordinary income under section 6-5 of the ITAA 1997 as you conducted an isolated commercial transaction with a view to a profit, or

• is a realisation of a capital asset and assessable under the CGT provisions of the ITAA 1997.

Carrying on a business of property development

Based on the information provided, we do not considered that any proceeds received from the sale of the subdivided lots would be derived in the course of carrying on a business.

Profits from an isolated transaction

Profits arising from an isolated business or commercial transactions 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). 

Under section 6-5 of the ITAA 1997, the assessable income of an Australian resident includes ordinary income derived both in and out of Australia during an income year. Ordinary income is defined as income according to ordinary concepts.

Taxation Ruling TR 92/3 considers the assessability of profits on isolated transactions in light of the principles outlined in Myer Emporium. According to Paragraph 1 of TR 92/3, the term isolated transactions refers to:

• those transactions outside the ordinary course of business of a taxpayer carrying on a business, and

• those transactions entered into by non-business taxpayers.

Paragraph 6 of TR 92/3 provides that a profit from an isolated transaction will generally be income when both the following elements are present:

• your intention or purpose 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.

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.

In your case, you do not carry on a business of buying, selling or developing land. Couple A purchased the initial property primarily for use as additional farmland for use in the family farming business and for use as the family home by couple B and then later as a family home by couple C. This potential subdivision has arisen only as a result of the change in circumstances over a long period of time while holding the property. In particular couple C's desire to have a property in their names only and being able to live on the property that they have lived on for many years now. Couple A want to separate their affairs with couple C's and provide funds to support their retirement. Couple A wish to dispose of their share of the property. Couple C can't afford to purchase the additional 50% without the proceeds from the planned subdivision.

Accordingly, the proceeds from the sale of the subdivided blocks will not be included in your ordinary income. Rather, the sale will be considered a capital transaction subject to the capital gains tax provisions in Part 3-1 and 3-3 of the ITAA 1997.

Question 2

Summary

Couple C are entitled to a full main residence exemption on the future sale of the lot that has their main residence on it, limited to 2 hectares of adjacent land.

Reasoning

You make a capital gain or a capital loss if a capital gains tax (CGT) event happens to a CGT asset. CGT event A1 will happen when couple C sell the lot with their main residence on it.

Generally, you disregard any capital gain or capital loss that you make on the disposal of a dwelling that was your main residence (and up to maximum area of 2 hectares of adjacent land) for your entire ownership period.

Question 3

Summary

The sale of the subdivided lots will remain on capital account even if one person in couple C and or their business carry out some of the required works for the subdivision.

Reasoning

This amount of involvement by one of the persons in couple C does not change the character of the subdivision from a mere realisation of a capital asset to that of a profit making undertaking.

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