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This edited version has been archived due to the length of time since original publication.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: 1013004492169

Date of advice: 28 April 2016

Ruling

Subject: Property - subdivision - Am I in business? - isolated transaction - mere realisation

Question 1:

Will the profit from the sale of the subdivided blocks of land be treated as ordinary income under section 6 -5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer:

No.

Question 2:

Will the profit from the sale of subdivided blocks of land be treated as statutory income under the capital gains tax provisions in Parts 3-1 and 3-3 of the ITAA 1997?

Answer:

Yes.

Question 3:

Will you be able to fully disregard any capital gain made on the disposal of your ownership interest in the subdivided blocks of land?

Answer:

Yes.

This ruling applies for the following periods

Income year ending 30 June 2016

Income year ending 30 June 2017; and

Income year ending 30 June 2018.

The scheme commences on

1 July 2015.

Relevant facts and circumstances

Documentation has been provided with the private ruling which should be read in conjunction with, and forms part of, the scheme.

You purchased the Property before 20 September 1985. The land area of the Property is more than 3 hectares.

You purchased the Property for the purpose of building a house on it. However, you travelled overseas for a number of months after you had purchased the Property and had opened a business when you returned from your travels, at which point you did not have enough funds to build a house on the Property.

The Property was zoned as "special rural" when it was purchased.

The township near the Property has expanded and the property has been rezoned as "residential" as part of an Outline Development Plan (ODP) for all land situation in the street where the Property is located.

From the time you purchased the Property until the present time, you have not purchased any additional land or private dwellings, and have resided in rental properties.

The Property has been vacant since it was purchased and has not been used to produce assessable income.

Over twenty years after you purchased the Property, you listed it with a real estate agent for a number of months. However you did not receive any offers to purchase the whole property. The Property continued to be listed with the real estate agent as an 'open agency' for a further period of around 12 months.

You received numerous enquiries from interested parties who had not wanted to purchase, the whole Property, but who were interested in purchasing smaller lots.

You have recently retired from full-time employment and require funds to build your main residence, as you are still renting. The Property is too large for you to manage at your stage of life. As you could not sell the Property as a whole, you are now subdividing the Property and selling the subdivided blocks of land (the Project).

The market value of the Property prior to the commencement of the Project is estimated to be over $1,500,000.

The Project will be financed by a bank loan secured by taking out a mortgage over the Property. The loan is conditional upon the pre-sale of a predetermined number of the proposed subdivided blocks of land.

You have engaged the services of a company (the Company) to manage the subdivision of the Property, who:

An application for the subdivision of the Property was lodged by the Company, with approval for the subdivision being given a number of months later for a specified number of subdivided blocks and a public open space lot.

In accordance with the subdivision approval, the following infrastructure work will be undertaken on the Property:

You will not have any involvement in the Project other than attending meetings and addressing enquiries with the Company.

You do not intend to keep any of the subdivided blocks of land unless they cannot be sold on the open market.

It is anticipated that the Project will be completed in the relevant income year, with over $3,500,000 in gross sale proceeds on the sale of the subdivided blocks of land being received, with the Company receiving over $1,500,000 of the gross sale proceeds and you receiving over $2,000,000 of the gross sale proceeds.

The services of real estate agents will be engaged to sell the subdivided blocks of land.

The proposed subdivided blocks of land were put on the market around two months after the subdivision approval was granted, for "off the plan" sales of the subdivided blocks of land.

At this point some of the proposed subdivided blocks of land have been sold.

You have not undertaken any land subdivision and sale activities in the past and do not intend any similar activities in the future.

For the purposes of this private ruling:

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 15-15

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 104-10

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

Income Tax Assessment Act 1997 Section 112-25

Income Tax Assessment Act 1997 Section 995-1

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 Part 3-3

Reasons for decision

Legislative references referred to herein are from the ITAA 1997.

Summary

The proceeds from the sale of the subdivided blocks of land will not be ordinary income and not assessable under section 6-5. The proceeds represent a mere realisation of capital assets which will fall for consideration under the capital gains tax provisions in Part 3-1.

You acquired the Property before 20 September 1985, therefore the subdivided blocks of land will also be viewed as having been acquired before 20 September 1985, being pre-CGT. As the subdivided blocks of land are pre-CGT assets, any capital gain made on their disposal can be disregarded.

Detailed reasoning

Income or capital

As a general principle, profits from property sales will either be assessable as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) or statutory income under the capital gains tax (CGT) provisions of the ITAA 1997.

Where the profit has been made as a result of a taxpayer carrying on a business of property development or as a result of a taxpayer entering into an isolated business transaction, the profit will be assessable as ordinary income. However, where the profit is a mere realisation of a capital asset, the profit will be assessable under the CGT provisions of the ITAA 1997.

There have been several cases in which the courts have addressed the question of whether the proceeds received for the sale of an asset are revenue or capital in nature. The decision in each case depended on its own facts, and very often will be a matter of degree.

The extent of the personal involvement of the taxpayer in much of the planning, organisation and management of the activities has been held to be significant factors in the determination of whether or not a business was being carried out. For example:

From the cases involving the subdivision of land and from Taxation Ruling TR 92/3 (TR 92/3), it would appear that the following are the most important factors to consider when determining whether profits made as a result of an isolated business transaction are assessable income:

In determining whether an isolated transaction amounts to a business operation or commercial transaction the following factors are relevant:

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.

Application to your situation

In your case, the Property was purchased before 20 September 1985 with the intention of building a home on it. This did not occur and the Property has remained vacant and has not been used to produce assessable income since it was purchased.

Due to your retirement and the size of the Property, you made the decision to sell the Property as a whole. You put the Property on the market, without success. Numerous people had approached you and had expressed the desire to buy small blocks of land. You still want to sell the Property and have decided to subdivide it into subdivided blocks of land in an effort to sell the Property.

You have engaged the services of the Company to manage the subdivision of the Property and you will not undertake any activities in relation to the subdivision of the Property.

Only the minimum activities required under the development application will be undertaken in relation to the subdivision

No other subdivision activities have been undertaken by you in the past and you do not intend to undertake any similar activities in the future.

Based on the information provided, there is nothing to suggest that the subdivision of the Property was the beginning of a continuing business of property subdivision. Your activities do not display the salient indicator of a business, being transactions entered into on a continuous and repetitive basis. Therefore, it is the Commissioner's view that your activities in relation to the subdivision are not those of an entity carrying on a business of buying, subdividing and selling subdivided land.

Making an overall assessment on the factors set out in TR 93/2, it is the Commissioner's view that the subdivision of the Property and sale of the subdivided blocks of land will not be considered commercial in nature but will be a mere realisation of a capital asset, being a long-held privately owned property.

In conclusion, the activities involved in the subdivision and sale of the subdivided blocks of 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, as it is not viewed that you are carrying on a business, or that the subdivision activities will be an isolated transaction, any profit arising from the sale of the subdivided blocks of land, but that it will be a mere realisation of your Property which will be accounted for under the capital gains tax provisions in Part 3-1.

Capital gains tax

The capital gains tax (CGT) provisions are contained in Part 3-1. Broadly, the provisions include in your assessable income any assessable gain or loss made when a CGT event happens to a CGT asset that you own.

CGT event A1 happens if you dispose a CGT asset. A CGT asset is any kind of property or a legal or equitable right that is not property. However, any capital gain or capital loss made on the disposal of a CGT asset will be disregarded if the asset was acquired before 20 September 1985.

When a CGT asset (the original asset) is split into 2 or more assets (the new assets), such as when land is subdivided, the subdivision of the land into subdivided blocks is not a CGT event, according to subsection 112-25(2). Where the original land was acquired before 20 September 1985, each new block retains its pre-CGT status.

Application to your situation

In this case you acquired the Property before 20 September 1985. Therefore, the Property is a CGT asset.

When the Property is subdivided, the subdivided blocks of land will retain the CGT status of the Property. That is, each subdivided block of land will be a pre-CGT asset.

While CGT event A1 will occur when the sale contract on each subdivided block of land is entered into, as each subdivided block of land is a pre-CGT asset, any capital gain made on the disposal of the subdivided blocks of land will be disregarded.


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