Edited version of private ruling

Authorisation Number: 1011590978283

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Ruling

Subject: Land subdivision and capital gains tax - main residence exemption

Issue 1

Question

Are the proceeds of the land subdivision assessable under section 6-5 or section 15-15 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer: No.

This ruling applies for the following periods:

1 July 2010 - 30 June 2011

1 July 2011 - 30 June 2012

The scheme commenced on:

1 July 2010

Issue 2

Question

Is the existing land which you will build your principle residence on considered exempt from capital gains tax?

Answer: No.

This ruling applies for the following periods:

1 July 2010 - 30 June 2011

1 July 2011 - 30 June 2012

The scheme commenced on:

1 July 2010

Relevant facts and circumstances

You acquired a property after 20 September 1985.

You were unable to finance the construction of a permanent residence therefore you constructed temporary accommodation.

You listed the property on the market with a local real estate agent and received no positive feedback or offers.

You were subsequently approached by a potential purchaser advising that they were interested in purchasing the back end of the block (allotment 2).

For this subdivision to occur you must build a road on the property in order to satisfy the shires conditions for subdivision approval.

You are unable to fund the construction of the road therefore the potential purchaser has verbally offered to fund the construction of the road, in order for you to complete the subdivision.

This subdivision would provide you with sufficient funds to construct a new principal residence on the land currently containing the temporary accommodation and create a third block (allotment 3).

You will be minimally involved in the subdivision only to the extent necessary as the landowner to ensure the subdivision is approved.

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 118-110,

Income Tax Assessment Act 1997 Section 118-150 and

Income Tax Assessment Act 1997 Section 118-185.

Reasons for decision

Ordinary Income

Section 6-5 of the Income Tax Assessment Act 1997 (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 97 ATC 5135; (1997) 37 ATR 358 and McCorkell v. FC of T 98 ATC 2199; (1998) 39 ATR 1112 demonstrate that in circumstances where there is an absence of profit making intention when land is acquired, the likelihood of any profit made on the eventual sale of land being income according to ordinary concepts is greatly diminished.

However, profits on the sale of subdivided land can still be income according to ordinary concepts within section 6-5 of the ITAA 1997, or as a profit making undertaking or plan within section 15-15 of the ITAA 1997 if a taxpayer's subdivisional activities have become a separate business operation or commercial transaction. The Commissioner's guidelines in this regard are set out in paragraph 13 of Taxation Ruling TR 92/3.

The factors related to your case are as follows:

· You originally purchased the property after 20 September 1985;

· Due to being unable to finance construction of a permanent residence temporary accommodation was erected on the property;

· After listing the property for sale you received no positive feedback or offers. However a potential purchaser approached you and advised that they would be interested in purchasing a portion of vacant land of the property;

· The purchaser has offered to fund the construction of a road, which is a requirement for the subdivision approval.

· You are not involved in any other business relating to property development;

· In addition to the block provided for the purchaser you would be left with a portion of land and a third block would also be created;

· You will be minimally involved in the subdivision only to the extent necessary as the land owner to ensure the subdivision is approved;

The activities involved in this subdivision and sale of the land do not amount to carrying on a business. There is no indication that your subdivisional activities have become a separate business operation or commercial transaction, or that you are carrying on or carrying out a profit-making undertaking or plan.

As you will have little involvement in the actual redevelopment activities your actions will not constitute a profit-making undertaking under section 15-15 of the ITAA 1997 nor will the proceeds be income under ordinary concepts in accordance with section 6-5 of the ITAA 1997.

The Commissioner accepts that the activities are no more than the mere realisation of a capital asset and will fall for consideration under the capital gains tax provisions.

Main residence exemption

Generally, if you build a dwelling on land you already own, the land does not qualify for exemption until the dwelling actually becomes your main residence.

However, you can choose to treat the land as your main residence for the shorter of:

· four years before the dwelling actually becomes your main residence; or

· the period starting when you acquired your ownership interest in the land and ending when the dwelling became your main residence.

You can only make this choice if the dwelling you build becomes your main residence as soon as practicable after the work is finished and it continues to be your main residence for at least three months.

In your case, you acquired the land more than four years ago and you are yet to build your permanent residence. Therefore the dwelling will not become your main residence within four years of acquiring the land. As a result you cannot choose to treat the land as your main residence for the whole of your ownership period.

Therefore the land which you will build your principle residence on is not considered exempt from capital gains tax.

Note:

Partial main residence exemption

As the period between acquiring the land and building your permanent residence will be greater than 4 years the land is not exempt from capital gains tax. However you may be entitled to a partial main residence exemption on the land providing:

· You move into the dwelling as soon as practicable after it is finished, and

· You continue to use the dwelling as your main residence for at least three months.

If these conditions are met you may be able to treat the land as your main residence for a period up to four years before the dwelling became your main residence.

Your ownership before this time is considered non-main residence days and will not be eligible for the main residence exemption.

Main residence exemption applies to 2 hectares only

The main residence exemption can only be applied to a maximum land area of two hectares.

As your land size will be marginally larger than this, you may choose any two hectares for the main residence exemption to apply to.