Edited version of private advice

Authorisation Number: 1052396566766

Date of advice: 15 May 2025

Ruling

Subject: Capital versus revenue

Question 1

Is the sale of a residential block in the 20XX financial year a mere realisation of on asset and to be treated on capital account?

Answer

No.

Question 2

Is the sale of a residential block in the 20XX financial year a mere realisation of on asset and to be treated on capital account?

Answer

No.

This ruling applies for the following periods:

Period End Date 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The parties and property holdings

Person A has an ABN

Person B has not got an ABN and is not registered for GST.

You purchased a property (vacant land) at XXX in 20XX. You each have 25% ownership in the property.

You own the property with your parents who are listed individually with the other 50% ownership in the property.

You have a partnership together. The partnership applied for an ABN and registered for GST from August 20XX. The ABN application confirmed their industry description as property development - land development or subdivision only.

Your parents have a partnership together with their business description as property development - land development or subdivision.

The total property size was X m² and zoned residential.

You purchased the property with a development application/approval (DA) in place.

When the land was purchased, your intention was to subdivide, build a house on each lot and retain the properties for the rental income.

You own two other residential rental properties being:

   1. property 1

   2. property 2

You declared the rental income from the two rental properties in your tax returns.

Subdivision

The subdivision is planned in stages.

Stage 1 of the subdivision is subdivided into X lots. X have been sold or in the process of being sold.

There is a plan to build residential housing on remaining blocks in stage one.

There is potential for more subdivision of blocks in stage 2 but building on the remainder of stage 1 is the priority.

You retained the following contractors for the subdivision:

   • surveying & planning

   • civil works

   • land surveyors

   • fire report

   • electrical work.

Two lots have been sold. One for $amount the other for $amount.

You engaged a realty to sell the blocks.

The sale of the lots in the context of alternate funding

Your intention when you purchased the property was to initially subdivide into X blocks at a future point and build rental properties to live off the income stream in retirement. If this went well, you had further plans to develop more of the land and split the bigger blocks in half leading to more blocks.

You had existing funds, including an existing loan facility with a redraw available which you used to fund the purchase the property and the development cost to date.

You originally had a loan approved with the bank to build the first 2 dwellings. The intention was to build the first 2 dwellings and then refinance once done to continue building more.

You put your plans on hold as the covid-19 pandemic hit, interest rates increased significantly, the loan offer lapsed so the loan was no longer offered by the bank.

The cost to build the dwellings had also nearly doubled. The higher building costs along with the higher interest rates made the viability of the dwellings challenging. You looked at alternate funding sources such as selling one of your investment properties which helped cashflow for a while, but ultimately more funds were needed to build the dwellings on the vacant land.

You then decided to sell some of the blocks with one sold in the 20XX financial year and another 2 for sale and planned to be sold in the 20XX financial year. With these funds, you intend to build dwellings on the remaining blocks and hold them as long-term investments.

You advised:

   • this is the only subdivision activity you have ever done or plan to do

   • you held this property long term with the intention to build residential dwellings for long-term investments

   • the land wasn't purchased with the intention of re-sale or profit making

   • minimum amount of work was carried out on these blocks to achieve sale, no building work on dwellings had commenced

   • the blocks were sold after you faced challenging financial circumstances

   • there was a no business plan - the subdivision was planned as part of a long-term investment strategy

   • the level of development of the land did not go beyond what is required for approval of the subdivision

   • no buildings have been erected on the land of the first two blocks

   • interest on money borrowed to defray subdivisional costs was not claimed as a business expense.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 6-5(2)

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 subsection 104-10

Income Tax Assessment Act 1997 section 112-25

Income Tax Assessment Act 1997 Division 115

Reasons for decision

Issue Capital versus Revenue

Question 1

Is the sale of a residential block in the 20XX financial year a mere realisation of on asset and to be treated on capital account?

Summary

The proceeds from the sale of the subdivided blocks are assessable under sections 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) as the proceeds represent an intention to make a profit. The proceeds from the sale are not capital but assessable income in the 20XX financial year.

Question 2

Is the sale of a residential block in the 20XX financial year a mere realisation of an asset and to be treated on capital account?

Summary

The proceeds from the sale of the subdivided blocks are assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) as the proceeds represent an intention to make a profit. The proceeds from the sale are not capital but assessable income in the 20XX financial year.

Detailed Reasoning

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Section 6-10 of the ITAA 1997 states your assessable income also includes some amounts that are not ordinary income, which is assessable as statutory income.

There are 3 ways the proceeds from property can be treated for taxation purposes:

   • assessable ordinary income under section 6-5 of the ITAA 1997 as income from carrying on a business; or

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

   • as statutory income under the CGT provisions, where the proceeds of sale are a mere realisation of a capital asset.

Carrying on a business of land subdivision

Taxation Ruling 97/11 Income tax: am I carrying on a business of primary production? (TR 97/11) provides the Commissioner's view on whether a taxpayer is carrying on a business. Although TR 97/11 deals with the issues in determining whether a taxpayer is carrying on a business of primary production, the same principles can be applied to the question of whether a taxpayer is carrying on any type of business including property subdivision and development.

Paragraph 13 of TR 97/11 states that some of the following indicators are relevant in determining whether a taxpayer is carrying on a business:

   • whether the activity has a significant commercial purpose or character;

   • whether there is repetition and regularity of the activity;

   • whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business;

   • whether the activity is planned, organised, and carried on in a businesslike manner such that it is directed at making a profit;

   • the size, scale, and permanency of the activity; and

   • whether the activity is better described as a hobby, a form of recreation or a sporting activity.

Whether a business is being carried on depends on the impression gained from looking at all the indicators against the case facts and whether these indicators provide the operations with a commercial flavour.

Isolated commercial transaction

Taxation Ruling 92/3 Income tax: whether profits on isolated transactions are income (TR 92/3) provides guidance in determining whether profits from isolated transactions are ordinary income and therefore assessable under section 6-5 of the ITAA 1997.

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

   • 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 operation or commercial transaction.

Whether an isolated transaction is business or commercial 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 the land can be assessed as ordinary income within section 6-5 of the ITAA 1997. Paragraph 13 of TR 92/3 lists the following factors which are relevant in considering whether an isolated transaction amounts to a business operation or commercial transaction:

   (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 the timing of the transaction or the various steps in the transaction.

If a transaction satisfies the elements set out above, it is generally not a mere realisation of an investment.

Application to your situation

Based on the facts and circumstances applied to the above indicators, you will make a profit from the activity that will contribute towards constructing a dwelling on the remaining land in the future as well as potential future subdivision.

While the activity is on a small scale, your intention is to continue to subdivide blocks and build homes on those blocks showing regularity and repetition.

You are partners in a partnership whose business description is property development. The other registered owners of the land also have a partnership with the business description as property development. When you acquired the property, you recognised there was potential to subdividing the land indicating your intention. The structure of the partnerships involved indicates complexity and the planned stages indicates the activity is planned in a businesslike manner.

Your land subdivision and sale of the lots demonstrate the characteristics of a commercial transaction. Therefore, it is considered your intention was to make a profit and the proceeds from the sale in both the 20XX and 20XX financial years will be assessable income under section 6-5 of the ITAA 1997.

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