Edited version of private ruling

Authorisation Number: 1011489155472

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Ruling

Subject: Capital gains tax - Subdivision and disposal of dwelling - income or capital

1. Are the proceeds from the disposal of the dwelling on the subdivided land assessable as ordinary income?

No.

2. Is the capital gain made on the disposal of the dwelling on the subdivided land assessable under capital gain tax (CGT) legislation?

Yes.

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts

More than five years ago you and your spouse purchased an investment property (property A).

Property A is still currently being used as an investment property.

The dwelling attached to the land has quite a large parcel of land at the rear of the dwelling.

The tenants were not interested in using or maintaining this area of land.

A year later the original block of land was subdivided into two parcels of approximately equal size.

The new block of land has a separate title (property B).

The purpose of this subdivision was to construct a new investment property at a future date when you and your spouse could afford the construction of this new dwelling.

You and your spouse did not borrow any money for the construction of this dwelling.

The construction of the new dwelling commenced three years later and was completed some 15 months later.

The purpose of the construction of the new dwelling was always that of an investment property.

You and your spouse did not register for GST, as you would not be claiming any input tax credits.

When the dwelling was completed you and your spouse engaged an agent from a property management company to assess the property for renting purposes and to help obtain suitable tenants.

The agent estimated the expected rental income for property B to be approximately $X per week. You and your spouse had budgeted for a rental return of $X per week.

The agent advised you and your spouse that rental returns were down due to the first home owners grant and quality renters in that price range were looking to buy rather than rent.

The agent advised you that he could quickly dispose of property B for a good price with no marketing costs.

At this time you and your spouse were experiencing financial difficulty.

You and your spouse agreed to the agent advertising property B on the internet only

You and your spouse were using this action to gauge interest as to a potential sale price.

You and your spouse's emphasis at the time was to still find tenants at an expectable rental return of $X per week.

Within a couple of days of property B being listed on the internet a number of offers were made.

One of the offers made was higher than expected and given you and your spouse's financial circumstances the offer was accepted.

The Contract for Sale was signed a week later.

You and your spouse have always been property investors and are not property developers.

The construction of the dwelling at property B

· was a one-off occurrence

· was done in a 'non-business like manner'

· was undertaken by a builder who was contracted to build an investment property

· there was no site office

· there was no specific business structure

· you and your spouse did not take time off from your main salary/wage occupations, and

· no on-site works were performed by you and your spouse.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 15-15

Income Tax Assessment Act 1997 Section 102-5

Income Tax Assessment Act 1997 Section 104-10

Reasons for decision

Taxation Ruling TR 92/3 discusses profits on isolated transactions and the application of the principles are outlined in the decision of the Full High Court of Australia in Federal Commissioner of Taxation v. Myer Emporium Ltd (1987) 163 CLR 199; 87 ATC 4363; (1987) 18 ATR 693 (Myer Emporium). This ruling states that profits on isolated transactions may be income.

Profit from an isolated transaction will be ordinary income when:

· 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 or in carrying on a business operation or commercial transaction.

Generally speaking, however, it may be said that if the circumstances are such as to give rise to the inference that the taxpayer's intention or purpose is entering into the transaction was to make a profit or gain, the profit or gain will be income, notwithstanding that the transaction was extraordinary judged by reference to the ordinary course of the taxpayer's business. Nor does the fact that a profit or gain is made as a result of an isolated venture or a one-off transaction precludes it from being properly characterised as income.

Taking the comments from the High Court in Myer Emporium into account, we can ascertain that for a transaction to be characterised as a business operation or a commercial transaction, it is sufficient that the transaction is business or commercial in nature.

If a taxpayer acquires an asset with the intention of using it for personal enjoyment but later decides to commit the asset, either as the capital of a business or into a profit-making undertaking with the characteristics of a business operation or commercial transaction, this activity constitutes the carrying on of a business, or a business operation or commercial transaction. The profit from such activity is income even though the taxpayer did not have a purpose of profit-making at the time of acquiring the asset.

Some of the factors to consider when looking at whether an isolated transaction amounts to a business operation or commercial transaction are listed at paragraph 13 of TR 92/3. They are:

(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.

Profits on the disposal of subdivided land can be income according to ordinary concepts, if the taxpayer's subdivisional activities have become a separate business operation or commercial transaction, or an isolated profit making venture.

The facts in this case do not indicate that you and your spouse's intention in entering into the subdivision and construction of a dwelling was to make a profit from the disposal of property B. You and your spouse undertook the above in a 'non business like manner' and it was a one-off transaction. You and your spouse were merely realising an investment property as it could not be rented out at $X per week and its disposal would improve your financial situation.

The activities involved in the subdivision and disposal of property B do not amount to carrying on a business. The transaction does not have the character of a business operation or commercial transaction.

Therefore, the proceeds received are not ordinary income they represent a mere realisation of capital assets which falls under the CGT provisions.