Edited version of your written advice

Authorisation Number: 1012986435936

Date of advice: 18 March 2016

Ruling

Subject: CGT - subdivision of property

Questions and answers

1. Will any profit you make on the sale of the subdivided blocks of land be assessable as ordinary income under section 6-5 of the Income Tax Assessment Act 1997?

No.

2. Will any capital gain or capital loss from the sale of the subdivided blocks be assessable income subject to the Capital Gains Tax provisions?

Yes.

This ruling applies for the following periods

1 July 2014 to 30 June 2015

1 July 2015 to 30 June 2016

1 July 2016 to 30 June 2017

1 July 2017 to 30 June 2018

1 July 2018 to 30 June 2019

1 July 2019 to 30 June 2020

Relevant facts and circumstances

You completed the sale for the purchase of a home on acreage.

You purchased the property so you could live in the house.

You wish to subdivide the property to provide land to your relative so they can build their own home and because the acreage is too much for you to manage.

The council is supportive of you subdividing the property into a number of lots. You intend to subdivide the land as follows;

• acreage for you, which includes the existing home on the property

• acreage for your relative

• acreage to be sold as one parcel of land

The acreage to be sold has further development potential but you are not interested in developing it.

You will be engaging a professional to manage the subdivision for you.

The only subdivision work that will be required will be what the local council requires to be undertaken so the subdivision can be approved.

You will not be actively involved in the subdivision.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 15-15

Income Tax Assessment Act 1997 subsection 104-10(1)

Income Tax Assessment Act 1997 subsection 104-10(3)

Income Tax Assessment Act 1997 subsection 104-10(4)

Income Tax Assessment Act 1997 subsection 112-25(1)

Reasons for decision

Question 1

Under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997), your assessable income includes the ordinary income you derived directly or indirectly from all sources, during the income year.

Additionally, section 15-15 of the ITAA 1997 includes profit arising from the carrying on or carrying out of a profit-making undertaking or plan. However, this provision does not apply to a profit that is assessable as ordinary income under section 6-5 of the ITAA 1997, or which arises in respect of the sale of property acquired on or after 20 September 1985.

Although the legislation does not define income according to ordinary concepts, a substantial body of case law has evolved to identify various factors that indicate the nature of ordinary income.

Taxation Ruling TR 92/3 discusses profits on isolated transactions. This ruling states that profits on isolated transactions may be income.

Profit from an isolated transaction will be ordinary income when:

• the intention or purpose of a 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 on a business operation or commercial transaction.

Some of the factors to consider when looking at whether an isolated transaction amounts to a business operation or commercial transaction are listed at paragraph 13 of TR 92/3. They are:

(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.

Profits on the sale of subdivided land can be income according to ordinary concepts within section 6-5 of the ITAA 1997, or as a profit making undertaking or plan within section 15-15 of the ITAA 1997, if the taxpayer's subdivision activities have become a separate business operation or commercial transaction, or an isolated profit making venture.

Application to your circumstances

The activities involved in the subdivision and sale of your land will not amount to carrying on a business. The transactions will not have the character of business operations or commercial transactions. There is no indication that your subdivision activities will become a separate business operation or commercial transaction, or that you will be carrying on, or carrying out a profit-making undertaking or plan.

Therefore, proceeds will not be ordinary income and not assessable under sections 6-5 and 15-15 of the ITAA 1997. The proceeds will represent a mere realisation of capital assets.

Question 2

Under subsection 104-10(1) of the ITAA 1997 a Capital Gains Tax (CGT) A1 event happens if you dispose of a CGT asset. Under subsection 104-10(3) of the ITAA 1997, the time of the event is when you enter into the contract for the disposal or if there is no contract when change of ownership occurs.

Section 112-25 of the ITAA 1997 considers the treatment of split, changed or merged assets for CGT purposes. Subsection 112-25(1) of the ITAA 1997 states that if a CGT asset (the original asset) is split into two or more CGT assets (the new assets) and you are the beneficial owner of the original asset and each new asset, the splitting is not a CGT event.

Application to your circumstances

The subdivision of the original block of land into separate blocks will result in each block having its own separate title. For CGT purposes, subdividing land is not a disposal as ownership of the asset does not change.

However, there will be a CGT event A1 when you dispose of the acreage to your relative and sell off the acreage as one parcel of land.

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).