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Authorisation Number: 1051294253127

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Date of advice: 17 October 2017

Ruling

Subject: Subdivision of land

Question 1

Will the gain or loss from the disposal of subdivided land be treated as a mere realisation of a capital asset?

Answer

Yes

This ruling applies for the following period(s):

Year ending 30 June 20ZZ

The scheme commences on:

1 July 20XY

Relevant facts and circumstances

R Pty Ltd (you) is the trustee for the T Trust.

The T Trust (the trust) was formed in 19XX.

The trust purchased a dwelling in 20YY for the purposes of leasing it to obtain a rental income.

There are X beneficiaries of the trust who have retired.

The express purpose of the trust is to provide a regular source of income to the beneficiaries.

The other assets of the trust include another rental property, shares and cash.

The trust does not engage in any trading activities or has ever sold or offered for sale real property.

The trust continued to offer the dwelling for lease throughout the period it held the dwelling.

The decision to demolish the dwelling was due to the following:

● The dwelling developed major cracking throughout due to movement in the soil, which reduced the ability to attract quality tenants.

● A storm damaged a shed and fencing on the site which was removed and not replaced.

Giving due consideration to the above circumstances and realising that the house was badly damaged and it was not reasonable to expect tenants to be able to live there, you decided to demolish the house

You sought Council approval to demolish the dwelling in 20XY.

You arranged for a land surveyor (surveyor) to arrange for the land to be subdivided into X lots.

All enquiries from Council regarding the subdivision and change of zoning were handled by the surveyor.

The subdivision process was completed in early 20XY.

No capital improvements or buildings have been erected on the X lots.

You contacted the same real estate agent that sold the original dwelling and land to the trust, to sell the X subdivided blocks.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5 .

Income Tax Assessment Act 1997 Section 6-10.

Reasons for decision

Summary

The proceeds received from the sale of the subdivided land were not derived in the course of carrying on a business. Similarly, proceeds from the sale of the subdivided land are not considered an isolated profit making transaction, but a mere realisation of a capital asset.

Detailed reasoning

Proceeds from the sale of property for tax purposes are treated as either:

● income according to ordinary concepts under section 6-5 derived:

1. in the course of carrying on a business, or

2. from an isolated transaction for the purpose of profit making, or

● subject to capital gains tax.

Whether the proceeds are treated as income or capital depends on the situation and circumstances of each particular case.

Carrying on a business

You have stated that you and have no expertise relevant to property subdivision activities and have not been involved in any type of subdivision before. You also stated that you relied on the land surveyor to organise plans and approvals for the subdivision and liaise with the local council.

Therefore, it is considered that the proceeds received from the sale of the subdivided land were not derived in the course of carrying on a business.

Isolated profit making transaction

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 ITAA 1997 as ordinary income.

TR 92/3 defines the term ‘isolated transactions’ as:

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

● transactions entered into by non business taxpayers.

It is not necessary that the intention or purpose of profit-making be the sole or dominant intention or purpose for entering into the transaction. It is sufficient if profit-making is a significant purpose.

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.

The taxpayer must have the requisite purpose at the time of entering into the relevant transaction or operation. If a transaction or operation involves the sale of property, it is usually necessary that the taxpayer has the purpose of profit-making at the time of acquiring the property.

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.

In determining whether activities are a business or an adventure or concern in the nature of trade (a profit making undertaking or scheme) a list of factors in MT 2006/1 are indicative 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 was 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.

In your case, in accordance with MT 2006/1 we considered the following factors and determined that that the property subdivision was not a business or adventure or concern in the nature of trade based on the following:

● You purchased a parcel of land with a dwelling on it and derived rental income for a period of X years, before subdividing the land into X lots.

● When acquiring the dwelling, it was your intention to retain the dwelling for rental purposes, but the structure of the dwelling deteriorated over time due to structural cracking and storm damage which resulted in shedding and fences being demolished.

● The subdivision was relatively small in scale and complexity and had been carried out over a short period of time, with the subdivision works being completed within X months. The extent of subdivision works undertaken by you were limited to the servicing of each lot with sewer and water and meeting the minimum requirements of the approval body.

Therefore, the proceeds from the sale of the lots will be considered a mere realisation of a capital asset and will be considered statutory income and subject to the capital gain tax provisions within the Income Tax Assessment Act 1997.

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