Edited version of private ruling

Authorisation Number: 1011471460288

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Ruling

Subject: Capital gains tax - Subdivision

Question 1

Are the proceeds of the sale of the new dwelling on land subdivided from your main residence assessable as an isolated transaction or assessable as the proceeds of carrying on a business?

Answer

No.

Question 2

Is the consideration received from of the sale of the new dwelling on land subdivided from your main residence to be treated as capital proceeds?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 2009

The scheme commences on:

1 July 2008

Relevant facts and circumstances

During the 200X financial year, you contracted to purchase a residential property with the intention to occupy it as your main residence.

The land area of the property is two hectares or less.

During the 200X financial year, the contract to purchase the property settled.

Your name only appears on the title deed.

The property was tenanted at the time of purchase and you could not occupy the property for a number of months due to this tenancy.

You occupied the property immediately the tenancy ceased and nominated the property as your main residence.

After some months circumstances necessitated you move.

While you recuperated, you rented out your property for Y eleven months.

The property was not available for rent for a month after the tenants vacated.

You then returned to your property for a period until circumstances again necessitated you move.

You rented out your property for some months.

You decided to build an additional dwelling at the rear of the property with the intention to hold the new dwelling as an investment property and derive rental income from it.

You did not intend to make a profit when you started this development.

You have not previously sub-divided property and are not in the business of property or land development. You derive you income from employment as a factory storeman.

You engaged professional surveyors, builders and building inspectors in the land subdivision and construction of the single storey new dwelling.

During the relevant financial year, you applied for a planning permit and were granted it in the following financial year.

Later a building permit for the new dwelling was issued.

At the completion of the development, you were issued an occupancy permit.

A civil works permit was received a few months later, for stormwater drainage works.

You took out an additional loan to fund the land subdivision and construction of the new dwelling.

Due to circumstances, you were unable to work full time and you found it difficult meeting your loan obligations and had no option but to sell the new dwelling to repay the loan.

Later you contracted to sell the new dwelling.

A number of months later, settlement of the contract to sell the new dwelling occurred.

Relevant legislative provisions:

Income Tax Assessment Act 1997 Section 6-1.
Income Tax Assessment Act 1997 Section 6-5.
Income Tax Assessment Act 1997 Section 6-10.
Income Tax Assessment Act 1997 Section 108-5
Income Tax Assessment Act 1997 Section 104-10.
Income Tax Assessment Act 1997 Section 995-1.

Reasons for decision

Assessable income

A taxpayer is liable to tax on their taxable income derived during the income year. Taxable income is calculated by subtracting allowable deductions from the taxpayer's assessable income.

Under section 6-1 of the Income Tax Assessment Act 1997 (ITAA 1997), assessable income is made up of ordinary income and statutory income. Exempt income is not included in assessable income, even if it is ordinary or statutory income.

Ordinary income

Under subsection 6-5(1) of the ITAA 1997, ordinary income means income 'according to ordinary concepts'. This phrase is not defined under the legislation, but a large body of case law has developed to identify the factors that indicate if an amount is income according to ordinary concepts. Each fact situation must be examined to determine if the particular payment can be characterised as income according to ordinary concepts.

An amount which is not assessable under section 6-5 of the ITAA 1997 may be assessable under section 15-15 of the ITAA 1997 if the profit arises from the carrying on or carrying out of a profit making undertaking or plan.

In Federal Commissioner of Taxation v. Myer Emporium Ltd (1987) 163 CLR 199; 87 ATC 4363; (1987) 18 ATR 693 (Myer Emporium), the Full High Court expressed the view that profits made by a taxpayer who enters into an isolated transaction with a profit making purpose can be assessable income.

Taxation Ruling TR 92/3 discusses profits on isolated transactions and the application of the principles outlined in Myer Emporium. According to paragraph 1 of TR 92/3, the term isolated transaction refers to:

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

- those transactions entered into by non business taxpayers.

Paragraph 6 of TR 92/3 provides that a profit from an isolated transaction will generally be income when both 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.

According to paragraph 7 of TR 92/3, your relevant intention or purpose is to be discerned from an objective consideration of the facts and circumstances of the case. Further, paragraph 8 of TR 92/3 indicates that a profit making purpose need not be the sole or dominant purpose for entering into the transaction. It is sufficient if profit making is a significant purpose.

Paragraph 9 of TR 92/3 indicates that you must have the requisite purpose at the time of entering into the relevant transaction or operation. If the transaction involves the sale of property, it is usually necessary that you have the purpose of profit making at the time of acquiring the property.

However, paragraph 42 of TR 92/3 provides that if you acquire an asset with the intention of using it for personal enjoyment, but later decide to venture the asset into a profit making undertaking with the characteristics of a business operation or commercial transaction, the profit from the activity will be income although you did not have the purpose of profit making a the time of acquiring the asset.

In determining whether an isolated transaction amounts to a business operation or commercial transaction, paragraph 13 of TR 92/3 outlines a number of factors which must be considered, including:

(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 or the various steps in the transaction.

Application to your circumstances

You initially purchased the property with the intention to live in it as your principal place of residence. The property at this stage was a single dwelling on an non-subdivided block, so there would appear to have been no intention of making a profit.

You are not a property developer and have no other business relating to property development.

You decided to subdivide the block, construct a second dwelling, hold it as an investment property and derive rental income from it. You did not intend to make a profit when you started this development.

You engaged professional surveyors, builders and building inspectors in the land subdivision and construction of the single storey new dwelling.

Your subdivision, when compared to other land developments, is relatively small and uncomplicated.

The facts in you case are similar to the facts in Casimaty v. FC of T (1997) 97 ATC 5135, 37 ATR 358 where the proceeds were held not to be income according to ordinary concepts, but rather constituted the mere realisation of a capital asset , carried out in an enterprising way so as to secure the best price.

Therefore, the profit on the sale of the subdivided land and the new dwelling is not considered to be ordinary income under section 6-5 of the ITAA 1997.

Additionally, the action to subdivide, develop and hold onto the new dwelling to gain rental income lacks the features of a profit-making plan or carrying on a business. The acquisition of your main residence and the later subdivision was not with the intention of reselling at a profit.

Therefore, the profit on the sale of the subdivided land and new dwelling is not assessable under section 15-15 of the ITAA 1997.

The proceeds will represent a mere realisation of a capital asset and will fall for consideration under the CGT provisions in Parts 3-1 and 3-3 of the ITAA 1997.

You have stated that you are not carrying on the business of property development.

Statutory income

An amount is statutory income if it is not ordinary income and it is included in assessable income by virtue of a specific provision of the tax law.

Under section 6-10 of the ITAA 1997 amounts are included as assessable income where a provision of the tax law makes them assessable income. These amounts are included even where they are not ordinary income.

As the profit from the sale of the new dwelling is not ordinary income it may be assessed as statutory income under Part 3-1 of the ITAA 1997.

Section 100-10 of the ITAA 1997 indicates that if you are involved with subdivided land, you may have capital gains tax (CGT) liability as land is considered to be a CGT asset under subsection 108-5 of the ITAA 1997. Therefore, any consideration received from the sale of the subdivided land would be treated as capital proceeds in accordance with Part 3-1 of the ITAA 1997 and used to determine any capital gain or loss on the disposal of the of the new dwelling.