Edited version of private advice

Authorisation Number: 1052397865282

Date of advice: 22 May 2025

Ruling

Subject: Property sub-division

Question 1

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

Answer 1

No.

Question 2

Will the proceeds from the sale of the vacant land be treated as ordinary income under section 15-15 of the ITAA 1997?

Answer 2

No.

Question 3

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

Answer 3

Yes.

Question 4

Will you be making a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) when you sell the vacant land?

Answer 4

No.

Question 5

Can you apportion the cost base of the vacant land based on the percentage of market value of the vacant land compared to the total market value of the subdivided main residence (main residence block) and the vacant land?

Answer 5

Yes.

Question 6

Will all of the subdivision costs form part of the fourth element of the CGT cost base of the vacant land?

Answer 6

No.

Question 7

Will the capital gain made on the sale of the vacant land be a discount capital gain?

Answer 7

Yes.

This ruling applies for the following periods:

Year ending 30 June YYYY

Year ending 30 June YYYY

Year ending 30 June YYYY

The scheme commenced on:

DDMMYYYY

Relevant facts and circumstances

You and your spouse purchased a property (your property) as joint tenants with 50 percent ownership each. You and your spouse raised your children there and you lived in the property as your main residence for a long time.

A few years ago, the local council, re-zoned the land in your area. The pre-subdivision zoning meant that the minimum block size was a certain size. The post subdivision zoning meant that block sizes could be less.

The council undertook the re-zoning due to the demand for residential land and housing shortage in your area.

You and your spouse decided to subdivide your property by dividing it in two, to fund your self-funded retirement.

You and your spouse commenced the subdivision of your property a few years ago by having an initial consultation with a town planner.

The subdivision of your property was finalised about a year later. This was the title date for the two separate blocks.

The subdivision resulted in two properties, one containing your main residence (main residence block) and the other a vacant block of land, (vacant land).

You and your spouse sold the main residence block and claimed a full main residence exemption in relation to that CGT event.

You and your spouse funded the subdivision from personal savings held in the joint names of you and your spouse and withdrawals from personal superannuation.

The total subdivision costs were a certain amount and included the following categories. Town Planner, Surveying, Bushfire Management, Civil Engineer, Commercial Plumbers, Consulting Engineer - for Energy & NBN, Solicitors, Retaining Wall, Repairs to Shared Fencing, Lodgement fee for sub-division application, Water & Drainage permit, Lodgement of Plan Sealing and Infrastructure fees.

You and your spouse plan to sell the vacant land but have not placed it on the market for sale, whilst you wait for this private ruling to issue.

You and your spouse have been provided with a 'wide' estimate of the expected sale price for the vacant land from real estate agents. You are expected to make a profit.

The subdivision was a one off, and you have no intention to subdivide any further properties. You have not been involved in any property developments in the past. You and your spouse have been PAYG employees for all of your working lives.

Your and your spouse's motivation for doing the subdivision was to merely realise in the most economical and beneficial way the property and to assist and aid in your retirement.

You and your spouse had minimal involvement in the subdivision, and you engaged professionals who did no more than what was necessary to facilitate the subdivision of the property.

Relevant legislative provisions

Income Tax Assessment Act 1997 6-5

Income Tax Assessment Act 1997 Section 6-10

Income Tax Assessment Act 1997 Section 15-15

Income Tax Assessment Act 1997 Section 100-35

Income Tax Assessment Act 1997 Section 102-5

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 108-5

Income Tax Assessment Act 1997 Section 112-25

Income Tax Assessment Act 1997 Division 115

Income Tax Assessment Act 1997 Section 995-1

A New Tax System (Goods and Services Tax) Act 1999 Section 9-5

A New Tax System (Goods and Services Tax) Act 1999 Section 9-40

A New Tax System (Goods and Services Tax) Act 1999 Subsection 9-20(1)

A New Tax System (Goods and Services Tax) Act 1999 Subsection 9-20(2)

Tax Administration Act 1953 Schedule 1, Section 14-250

Reasons for decision

Question 1

Will the proceeds from the sale of the vacant land be treated as ordinary income under section 6-5 of the ITAA 1997?

Question 2

Will the proceeds from the sale of the vacant land be treated as ordinary income under section 15-15 of the ITAA 1997?

Question 3

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

Summary - Questions 1,2 and 3

On the facts provided, the Commissioner is satisfied that the subdivision of your property into two, and the subsequent sale of the main residence block and the proposed sale of the vacant land is not the carrying on of a business of property development and will not be assessable income under section 6-5 of the ITAA 1997 or section 15-15 of the ITAA 1997 as a result of a profit-making undertaking or plan. The subdivision and sale of the main residence block and the vacant land is considered to be the mere realisation of a capital asset and therefore the net capital gain from the sale of the vacant land will be included in your assessable income in accordance with subsection 6-10(1) of the ITAA 1997.

Detailed reasoning

Taxation treatment of land subdivisions

Broadly, there are three ways proceeds from a land subdivision can be treated for taxation purposes:

(1)        As assessable income under section 6-5 of the ITAA 1997, being ordinary income, you earn as a result of carrying on a business of property development.

(2)        The net profit may be included as assessable income under section 15-15 of the ITAA 1997, being a profit made from a profit-making undertaking or plan.

(3)        Under the CGT rules in Part 3-1 and Part 3-3 of the ITAA 1997, on the basis that the disposal of the subdivided lots is the mere realisation of a capital asset.

Income

Section 6-5 of the 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 an income year. Ordinary income includes income from carrying on a business.

Profits or gains arising from the carrying on or carrying out of a profit-making undertaking or plan may also be included in assessable income of a taxpayer under as ordinary income under either section 6-5 or 15-15 of the ITAA 1997.

On the other hand, the mere realisation of a capital asset is not assessable as ordinary income, and any gain or loss on the disposal will be subject the capital gains tax rules in Part 3-1 and 3-3 of the ITAA 1997.

Section 995-1 of the ITAA 1997 defines 'business' as including any profession, trade, employment, vocation or calling. It does not include occupation as an employee.

Are you carrying on a business of property development?

Guidance on whether a taxpayer is carrying on a business is found in Taxation Ruling TR 97/11, which sets out the following indicators:

•                     does the person carrying on the activity have an intention to carry on a business and make a profit from the activity?

•                     whether the activity is or will be profitable.

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

•                     whether there is repetition and regularity of the activity.

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

•                     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.

•                     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.

No one indicator will be decisive in determining that a business is being carried on. Whether a business is being carried on depends on the overall impression gained' after considering all the relevant factors in relation to the activity as a whole.

Application to your circumstances

On the facts provided, you are not carrying on a business of property development.

As the Commissioner is satisfied you are not carrying on a business of property development, any gains made on the sale of the subdivided block of vacant land will not be assessable as ordinary income under section 6-5 of the ITAA 1997 as income from carrying on a business.

Isolated business transactions

Profits arising from an isolated transaction as a result of entering into a profit-making undertaking or plan will generally be ordinary income under section 6-5 of the ITAA 1997, (FC of T v. Myer Emporium Ltd 1987 163 CLR 199; 87 ATC 4363; 18 ATR 693 (Myer Emporium)).

Taxation Ruling TR 92/3 - Income tax: whether profits on isolated transactions (TR 92/3) discusses the application of the principles outlined in the Myer Emporium case and provides guidance in determining whether profits from isolated transactions are ordinary income and therefore assessable under section 6-5. It refers to isolated transactions' as:

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

•                     those transactions entered into by non-business taxpayers.

TR 92/3 notes that in accordance with the principle set out in Myer Emporium that profits from an isolated transaction will be income when:

•                     the intention or purpose 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 out a business operation or commercial transaction.

Profit-making does not need to be the sole or dominant purpose for entering into the transaction. A profit-making purpose must exist at the time the transaction or operation was entered into. Whether an isolated transaction is business or commercial in character will depend on the circumstances of each case.

You are not in the business of property development, to decide if any profit made is ordinary income, we need to consider if the transactions are made in a commercial manner.

TR 92/3 lists the following factors which are relevant in determining 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

h.            the timing of the transaction and the various steps in the transaction.

In contrast, paragraph 36 of TR 92/3 notes that the courts have often said that a profit on the mere realisation of an investment is not ordinary 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.

Paragraphs 41 and 42 of TR 92/3 outline that where a taxpayer acquires an asset with the intention of using it for personal enjoyment but later decides to venture or commit the asset into a profit-making undertaking or scheme with the characteristics of a business operation or commercial transaction, the activity of the taxpayer constitutes the carrying on of a business operation or commercial transaction carrying out a profit-making scheme, as the case may be. The profit from the activity is income even though the taxpayer did not have the purpose of profit-making at the time of acquiring the asset.

Numerous cases have considered the assessability of profits or proceeds from the sale of land including the following cases:

Case E20, 73 ATC 160, which involved two builders, claimed that certain properties were purchased out of the funds of the partnership as an investment to derive rents and that other properties were acquired to build houses thereon and let them. These claims were rejected, and it was held that the profits from the sale of properties sold pursuant to a forced sale were assessable. The properties were acquired with the intention of committing them to whatever profit-making purpose commended itself to the taxpayers at the appropriate time so that the profit was assessable as ordinary income.

Statham & Anor v. FC of T 89 ATC 4070 20 ATR 228 (Statham's case) where the property was subdivided and sold after a business of raising cattle had failed. The taxpayer relied on the local council to carry out the subdivision work and the local real estate agents handled the advertising and sale of the lots. The Full Federal Court held that what occurred was the realisation, by the most advantageous means, of the asset which the owners had on their hands when they abandoned the intention of farming the subject property.

Casimaty v FC of T 97 ATC 5135; (1997) 37 ATR 358 (Casimaty's case) where due to the growing debt and the ill health of the taxpayer, primary production land was progressively subdivided and sold off over a period of XX years. There was no coherent plan conceived for the subdivision of the whole property. The taxpayer had acquired and had continued to hold and use the residence and conduct the business of a primary producer on the property. Therefore, there was no change of purpose of object for which the property had been held. In his judgment, Ryan J in the Federal Court held that the profits resulted from the mere realisation of a capital asset and as such the profits were not assessable as ordinary income.

Richardson v FC of T 97 ATC 5098, in which the taxpayer was an engineer who operated a building and project management business through a company (XX Pty Ltd). The company was also the trustee of a family trust of which the taxpayer was a beneficiary. As part of the construction of a building for another company, XX Pty Ltd (as trustee of the family trust) sold a parcel of land and purchased another for the same consideration. The parcel of land was then used as a rental property until sold. The profit made on disposal was ordinary income of the trust as the family trust had a purpose or intention of profit-making when entering into the relevant transactions and the acquisition was made as part of the trust's business of deal making.

McCurry & Anor v FC of T 98 ATC 4487, in which two brothers bought a block of land in 19YY for $XX,000. They subsequently borrowed $XX,000 to enable them to construct three townhouses. They could not sell the townhouses and, in mid-19YY, they and members of their family moved into two of the townhouses. The third townhouse was used partly as a storeroom for a news agency business purchased by the family and partly as accommodation for visitors. The townhouses were sold in December 19YY, but the family remained in two of them as tenants. The court found that profit-making by sale (rather than the receiving of rental income) was the dominant factor. Accordingly, the net profit arising from sale of the property was ordinary income.

As displayed in the above cases, a taxpayer can embark on a profit-making scheme after property was acquired for a different purpose.

Application to your circumstances

You are not in the business of property development. It is therefore necessary to examine whether the sale of the vacant land resulting from the subdivision is considered an isolated profit-making transaction.

At the time of purchasing your property, your intention was that the property be your main residence and used to raise your family. It was only a few years ago when the council re-zoned the area where you reside that you decided to subdivide the property into two and sell both the main residence block and the vacant land.

The activity is small scale, of low complexity and only minimal works were undertaken to meet council requirements for subdivision. You and your spouse had little involvement. Although a profit is likely to be made on the sale of the vacant land, from an objective consideration of the facts and circumstances we consider that the activity you have undertaken to subdivide your property in two, does not have the characteristics of an isolated commercial transaction with a view to profit. In this case, we consider your activities amount to the mere realisation of the asset.

Conclusion

The proceeds are therefore not ordinary income and not assessable under either Sections 6-5 or 15-15 of the ITAA 1997. The proceeds will be a mere realisation of a capital asset, which will fall for consideration under the CGT provisions in Part 3-1 of the ITAA 1997.

Capital gains tax

Under section 6-10 of the ITAA 1997, assessable income also includes statutory income. Capital gains are included as assessable income under section 102-5 of the ITAA 1997.

Section 102-20 of the ITAA 1997 states that a capital gain or capital loss is made only if a CGT event happens to a CGT asset.

The sale of the vacant land will be a disposal of a CGT asset which gives rise to CGT event A1 (subsection 104-10(2) of the ITAA 1997.

Goods and Services Tax (GST)

Question 4

Will you and your spouse make a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) when you sell the vacant land?

Summary

You will not be making a taxable supply when you sell the vacant land because all of the requirements under section 9-5 of the GST Act are not satisfied.

You are not carrying on an enterprise; therefore, you will not be liable for GST on the sale of the vacant land.

Reasons for decision

Section 9-40 of the GST Act requires you to pay GST on any taxable supply you make.

Section 9-5 of the GST Act provides that you make a taxable supply if:

a)            you make the supply for consideration

b)            the supply is made in the course or furtherance of an enterprise that you carry on

c)            the supply is connected with the indirect tax zone (Australia), and

d)            you are registered, or required to be registered, for GST.

You and your spouse want to sell the vacant land to assist funding your retirement. The sale of the vacant land will amount to a supply. You will therefore satisfy the requirements of paragraphs 9-5(a) and 9-5(c) of the GST Act as you will make a supply of vacant land in Australia for consideration.

In order for the sale of the vacant land to be a taxable supply, it must meet all of abovementioned conditions of a taxable supply under section 9-5 of the GST Act. This leaves two issues for consideration:

•                     whether the sale of the vacant land is being made in the course or furtherance of an enterprise that you carry on, and if so

•                     as you are not currently registered for GST, whether you are required to be registered for GST.

Enterprise

The term 'enterprise' is defined in subsection 9-20(1) of the GST Act to include, among other things, an activity or series of activities, done:

•                     in the form of a business, or

•                     in the form of an adventure or concern in the nature of trade; or...

Assessment must be made to determine if the act of subdividing the property amounts to an enterprise of dealing with the property either as a series of activities in the form of a business or in the form of an adventure in the nature of trade where the frequency of transactions is low or sporadic.

The Commissioner in Miscellaneous Taxation Ruling MT 2006/1 (MT 2006/1) The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number provides guidance on the meaning of the term 'enterprise' for GST purposes.

MT 2006/1 provides examples of subdivisions of land that are not enterprises. You and your spouse's subdivision of your property is similar to example 33 in MT 2006/1.

'Example 33

291. Person A and Person B live on a 2.5 hectare lot that they have owned for 30 years.

292. They decide to sell part of the land and apply to subdivide the land into two 1.25 hectare lots. The survey and subdivision are approved. They retain the subdivided lot containing their house and the other is sold.

293. Ursula and Gerald are not carrying on an enterprise and are not entitled to an ABN in respect of the subdivision as the subdivision and sale are a way of disposing of some of the land on which their home is situated. It is the mere realisation of a capital asset.'

GST Conclusion

We consider that you are not carrying on an enterprise of subdividing your property and the facts viewed as a whole indicate that you are selling the vacant land to provide you with the best outcome in realising the asset for your retirement.

As you are not making a supply in the course of an enterprise, you are not required to be registered for GST and the sale of the vacant land will not be a taxable supply.

Additionally, you do not have any obligation to provide notice to any prospective purchaser under section 14-250 of Schedule 1 of the Taxation Administration Act 1953 as the recipient will not be in receipt of a taxable supply of residential land.

Cost Base

Question 5

Can you apportion the cost base of the vacant land based on the percentage of the market value of the vacant land compared to the total market value of the main residence block and the vacant land?

Summary

Yes, the cost base of the vacant land and main residence block will be apportioned on a reasonable basis between the two subdivided lots. No CGT event occurred when the property was subdivided into two lots.

Detailed reasoning

Subdivision of land

When a block of land is subdivided, the original land parcel is split into two or more separate assets under paragraph 112-25(1)(a).

Subdivision itself is not considered to be a CGT event as subdividing does not change ownership of the subdivided lot with the acquisition date of each subdivided lot being the same acquisition date as that of the original land. Therefore, a capital gain or capital loss is not made at the time of the subdivision.

However, the original cost base needs to be apportioned between the new assets, being the subdivided lots, on a reasonable basis.

Taxation Determination TD 97/3 Income tax: capital gains: if a parcel of land acquired after 19 September 1985 is subdivided into lots ('blocks'), do Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 treat a disposal of a block of the subdivided land as the disposal of part of an asset (the original land parcel) or the disposal of an asset in its own right (the subdivided block)? provides that the Commissioner will accept any reasonable method of apportioning the cost base between the new lots on an area basis if all the land is of a similar size and market value or on a relative market value basis if this is not the case.

Application to your situation

Your property was subdivided into two lots, resulting in a main residence block and a vacant land block. Each subdivided lot is a separate CGT asset, that were each acquired when your property was acquired a long time ago for CGT purposes.

The cost base of the property at the time the subdivision occurred will be apportioned between the two subdivided lots on a reasonable basis in accordance with TD 97/3.

Question 6

Will all of the subdivision costs form part of the fourth element of the CGT cost base of the vacant land?

Summary

No, not all of the costs of the subdivision can be allocated to the cost base of the vacant land.

The subdivision costs form part of the fourth element of the cost base of the original property and should be divided between the subdivided blocks on a reasonable basis.

Detailed Reasoning

The costs of subdivision should be apportioned between the lots. If the lots are of unequal market value the Commissioner considers that costs such as survey, legal fees and application fees associated with the subdivision should be apportioned in accordance with relative market value of the lots.

However, any sub-division costs solely related to either sub-divided lot should be attributed to that lot, such as the costs of connecting electricity and water to the lot, should be attributed solely to that lot.

Question 7

Will the capital gain made on the sale of the vacant land be a discount capital gain?

Summary

Yes, any capital gain made on the sale of the vacant land will be a discount capital gain.

Detailed Reasoning

Discount capital gain

Broadly, you have a capital gain when a CGT event happens to a CGT asset and the capital proceeds exceed the asset's cost base (section 100-35 of the ITAA 1997).

When an Australian tax resident individual has a capital gain that arises from the disposal of property that they have owned for more than 12 months, the capital gain can, subject to some exclusions, be reduced by 50%. This is referred to as a 'discount capital gain' or 'CGT discount' (Division 115 of the ITAA 1997).

Land is a CGT asset (section 108-5 of the ITAA 1997). When you sell land, CGT Event A1 happens (section 104-10 of the ITAA 1997).

For CGT purposes, when you subdivide land, each new lot becomes a separate asset and the date you are considered to have acquired each lot is the date that you acquired the original land (section 112-25 of the ITAA 1997).

As you are an Australian resident for tax purposes, and you acquired your ownership interest in the property more than 12 months ago, and none of the exclusions apply to you, you can reduce any capital gain you make on the sale of the vacant land by 50%.

Visit quick code 66042 Subdividing and Combining Land at ato.gov.au for further information.

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