Edited version of private ruling

Authorisation Number: 1011504986944

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Ruling

Subject: Land sub-division

Are the proceeds from pre capital gains tax (CGT) farmland assessable income pursuant to subsection 6-5 or 15-15 of the Income Tax Assessment Act 1997 (ITAA 1997) after sub-division?

No.

Relevant facts

The original farm land was purchased pre CGT. The farm was on several different titles and a farming business was carried on in partnership by the taxpayers. Income was derived mainly from pig farming with some beef cattle and crops.

The taxpayers resided on the property.

The proposed sub-division is XXX hectares (on its own title), to be split into numerous blocks which will vary in size.

Approval has been granted by the local shire authority. Power will be supplied to each block. Access roads and the sealing of some existing gravel roads will be undertaken by arms length contractors.

The taxpayers will not create a new entity to undertake the sub-division. The sub-division works will be performed by contractors. The blocks will be marketed by a real estate agent. It is unlikely that a site office will be set up on the property as it is intended to sell blocks as soon as they are ready to fund the remainder of the sub-division.

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 104-10.

Income Tax Assessment Act 1997 Subsection 104-10(5).

Reasons for decision

Section 6-5 of the ITAA 1997 provides that assessable income includes income according to ordinary concepts. This is called ordinary income.

An amount which is not assessable as ordinary income under section 6-5 of the ITAA 1997 may be included in assessable income 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.

The decisions in Casimaty v. FC of T (1997) 97 ATC 5135, 37 ATR 358 (Casimaty) and McCorkell v. FC of T 98 ATC 2199; (1998) 39 ATR 1112 (McCorkell), demonstrate that if a taxpayer does not intend to make a profit when he or she acquires farming land then the likelihood that any profit made on the eventual sale of land is ordinary income is greatly diminished.

The Commissioner accepts that where the activities are no more than the realisation of a capital asset as per the Casimaty and McCorkell cases, any realised gain on the transaction will be a capital gain for the purposes of subsection 104-10(4) of the ITAA 1997.

However, profits made on the sale of subdivided land can still be ordinary income, or a profit making undertaking or plan, if the activities become a separate business operation or commercial transaction.

For example, in Case W59 89 ATC 538; (1989) 20 ATR 3728 Deputy President Mr I.R. Thompson considered the appellant was carrying on a business of subdividing, developing and selling land. This was because the appellant had a significant degree of personal involvement in planning, negotiating with local councils and other bodies, obtaining finance, employing contractors, and selling the blocks. In addition to this the subdivision and development was substantial (the land had been divided into over 180 small blocks).

The Commissioner considers that the following matters (listed at paragraph 13 of Taxation Ruling TR 92/3) may be 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 or the various steps in the transaction.

In this case:

i. the taxpayers originally purchased the land pre CGT , to conduct a farming business

j. the land was farmed in partnership for 25 years deriving income from pigs, beef cattle and crops

k. the taxpayer has not been involved in any other business relating to property development

l. the subdivision, when compared to other land developments, will be relatively small, uncomplicated and inexpensive

m. the taxpayers will not perform any of the subdivision work themselves

n. all work involved in the development is to be undertaken by third parties

o. the blocks will be marketed by a real estate agent

p. the taxpayer's will not create a new entity to undertake the development, and

q. there won't be a site office set up on the property.

The facts in this case are materially similar to the facts in Casimaty where the proceeds were held to not 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.

Accordingly, it is considered that the proceeds of the subdivision would not constitute ordinary income in terms of section 6-5 of the ITAA 1997, nor would they be assessable under section 15-15 of the ITAA 1997 as they are not considered to be a profit or gain arising from the carrying on or carrying out of a profit making undertaking or plan.

They represent a mere realisation of capital assets which will fall for consideration under the CGT provisions of the ITAA 1997.

Capital gains tax

As discussed above, the subdivision of the land is a realisation of capital assets, and therefore the proceeds from the land subdivision will fall for consideration under the CGT provisions in Part 3-1 of the ITAA 1997.

In this case, the taxpayers purchased the property approximately 30 years ago. The property was their main residence.

Subdivision of land is not considered to be a CGT event as outlined in section 104-10 of the ITAA 1997 as subdividing the land does not change ownership of the subdivided blocks. However, the taxpayers will make a capital gain or capital loss when they sell the subdivided blocks.

Generally, the taxpayer can disregard any capital gain or capital loss made on an asset acquired before 20 September 1985 (pre-CGT) under section 104-10 of the ITAA 1997.

In regards to the taxpayer's interest acquired approximately 30 year ago, any capital gain or capital loss made on the sale of her half of the property is disregarded under section 104-10 of the ITAA 1997 as it was acquired before 20 September 1985 (a pre-CGT asset).