Edited version of private advice

Authorisation Number: 1051998372423

Date of advice: 28 June 2022

Ruling

Subject: Property subdivision - sale of subdivided lots

Question

Will any portion of the proceeds from the sale of the Subdivided Lots be assessable under section 6-5 of the Income Tax Assessment Act 1997?

Answer

No. Based on the information provided, the proceeds from the sale of the Subdivided Lots will not be ordinary income and not assessable under section 6-5 of the ITAA 1997as either:

•         the carrying on of a business in accordance with the factors listed in Taxation Ruling TR 97/11, or the commencement of the carrying on of a business of subdividing land; or

•         a profit-making or commercial transaction in accordance with the principles contained in Taxation Ruling TR 92/3.

Therefore, the disposal of the Subdivided Lots will represent a mere realisation of capital assets, with any capital gain or capital loss being made on their sale being assessed under the capital gains tax provisions contained in Parts 3-1 and 3-3 of the ITAA 1997.

This ruling applies for the following period:

Income year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You had been seeking a property to purchase in Suburb A without success as you had spent your childhood there, had close family members living there, and had been part of the community for a long time.

You obtained a valuation for the Property and then purchased it off the market for the valuation amount.

A house constructed in prior to 20 September 1985 was located on the Property. The Property had a land area of more than XXX square metres (m²) and was zoned Residential.

You made an arrangement with the persons residing at the Property (the Occupiers) to continue to reside there until they found a suitable place for them to move into (as outlined below).

You engaged the services of a property manager to manage the rental of the Property, which was rented to the Occupiers after you purchased it.

You obtained a principal and interest loan to fund the purchase of the Property, with the purpose of the loan being to purchase an established house for owner occupation, with the term of the loan for thirty years.

You determined that you would most likely demolish the house and construct your home and started investigating what you could do with the Property in accordance with the existing development rules.

You contacted Person A, from Company X to discuss the Property shortly after settlement occurred, who confirmed that the Property could be subdivided.

You developed an idea to build your home on one subdivided lot, with your siblings building their homes on the other two subdivided lots so that you were living side-by-side. You prepared a draft drawing of the proposed subdivision of the Property and discussed it with your siblings to determine whether they agreed to this idea. Additionally, you and your siblings held discussions with several builders in relation to potential homes that could fit the three proposed subdivided blocks.

You had discussions with the local council (the Council) about your ability to construct a multi-storey house, who advised that you could not construct a house of that kind, and that houses of that type already located on the Property street were built under different State Planning rules. It was indicated that the current draft of the new rules would allow for the construction of a multi storey house, and if you waited for the new rules you would be approved you would be allowed to construct a multi storey house.

The Surveyors prepared a draft drawing of the proposed subdivision of the Property into three subdivided lots and lodged a subdivision application with the Council for the subdivision of the Property into three subdivided lots during the month after settlement had occurred.

After a short period, Person A contacted the Council to request the subdivision application be put on hold while you considered house sizes in relation to land size and the subdivision application was on hold for several months.

Several months later, Person B from the Council advised you that it was unlikely that the construction of multi storey dwelling would be supported due to the current policy provision, but that three single storey dwellings combined with the land subdivision would be okay.

During the following year you indicated to Person A that you wished to proceed, that you had changed your mind in relation to building, now wishing to build single storey to gain approval from Council. You indicated that you would be looking to subdivide the Property and then sell off two subdivided lots, with you not building on the remaining subdivided lot until sometime in the future.

Person A contacted the Council to request them to resume the assessing of the approval of the subdivision of the Property.

You contacted the State Department responsible for the relevant planning rules on several occasions to determine if they had finalised the new rules to enable you to construct a multi storey house, which were finalised during the month in which you proceeded with the subdivision application.

The Occupiers leased the Property for several years from settlement occurring, with the Property then being vacant for several months until it was leased to Person X for several months.

Person X was aware of your plans to demolish the house and you kept them informed about the progression of securing a demolition team and a start date for the demolition activities, which was originally planned to commence after their lease had ended.

The demolition works did not commence as planned, not starting for months after the anticipated date. However, you organised for all other works in preparation for the activities to commence which made the house unliveable.

The subdivision application was approved by the Council and the Property was subdivided into three subdivided lots of vacant land as follows:

•         Lot 1, the largest subdivided lot which you intended to keep; and

•         Lot 2 and Lot 3 (the Subdivided Lots), which were smaller in size than Lot 1, having the same land area as each other.

You were listed as the owner of the three subdivided lots.

During the beginning of the following year the house was demolished.

You funded the activities with your savings, and an amount borrowed from a relative with no interest or repayment timeframe.

During the period it had taken to get the relevant approvals and organise the relevant activities, the property market had increased significantly, and your siblings decided it was better for you to sell the Subdivided Lots on the market rather than sell to them at a discounted price.

You had discussions with a real estate agent in relation to the property market in the area the Property is located, which led to you deciding to sell the Subdivided Lots on the market and you engaged the services of a real estate agent to sell the Subdivided Lots.

Lot 2 and Lot 3 have both been sold.

You will keep Lot 1 on which you are anticipating building your future home, using the proceeds from the sale of Lots 2 and 3.

Neither you nor any related parties have undertaken any subdivision activities in the past and neither you nor any related parties have any plans to undertake any subdivision activities in the future.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 995-1

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 Part 3-3

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