Edited version of private ruling

Authorisation Number: 1011633434726

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Ruling

Subject: Capital gains tax - subdivision of land

Question 1

Will the proceeds from the sale of subdivided land that was acquired before 20 September 1985 be assessable income under section 6-5 or section 15-14 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

Are gains realised from the sale of subdivided farming land by the rulees a capital gain pursuant to section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes, however any gains may be disregarded as the land was acquired before 20 September 1986, subject to the capital improvement threshold in section 108-70 of the ITAA 1997. However it should also be noted that if dwellings are created on some of the blocks this will be a creation of a separate CGT asset with regard to those particular blocks under section 108-55 of the ITAA 1997 and therefore they will be subject to the capital gains tax provisions

This ruling applies for the following period<s>:

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

Year ended 30 June 2014

The scheme commences on:

1 July 2010

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

As tenants in common, the rulees purchased xxxx acres of farming land prior to 1985 with the intention of running a primary production business on the land.

At a later date, xx acres were sold for a number of reasons.

The remaining block is comprised of a number of lots.

In relation to the farming component of the land, the rulees have been running livestock since the time of acquisition of the property and this has included musters and branding.

Throughout the ownership period, the rulees have undertaken a number of activities to maintain the income producing capacity of the land to ensure the pastures are able to support livestock:

They have built structures on the land to assist their primary production goals..

The rulees also acquired plant and equipment to operate on a viable basis. The rulees engaged contractors to do jobs for which they did not have equipment.

It is intended that a number of lots will be subdivided and sold as residential property. The subdivision will occur in stages, depending on demand. The rulees may retain some blocks (approximately one in ten) with the intention of constructing residential properties that will be rented out.

The rulees will be appointing external consultants, including engineers and surveyors, to undertake the subdivision. The rulee's involvement in the process has been minimal. They wish to realise the asset they jointly own to help finance their retirement.

The rules had previously received two private rulings suggesting that the sale of the subdivided land would be on the capital account.

Since the private rulings were issued the rulees have attempted to make progress with the subdivision process.

At the current date the rulees have obtained subdivision development approvals. However, it is unlikely actual development works will begin in the near future.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 15-15

Income Tax Assessment Act 1997 Paragraph 104-10(5)(a)

Income Tax Assessment Act 1997 Section 108-70

Income Tax Assessment Act 1997 Subsection 108-70(3)

Income Tax Assessment Act 1997 Section 108-85

Income Tax Assessment Act 1997 Section 112-25

Detailed reasoning

Under subsection 6-5(2) of the ITAA:

If you are an Australian resident, your assessable income includes the ordinary income you derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

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

Casimaty v FC of T 97 ATC 5135; 37 ATR 358 (Casimaty's case) and McCorkell v FCT (1998) 39 ATR 1112; 98 ATC 2199 demonstrate that in circumstances where there is an absence of profit making intention when farming land is acquired, the likelihood of any profit made on the eventual sale of land being income according to ordinary concepts is greatly diminished.

Taxation Ruling TR 92/3 discusses profits on isolated transactions and the application of the principles outlined in the decision of the Full High Court of Australia in FCT 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

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

· the nature of the entity undertaking the operation or transaction

· the nature and scale of other activities undertaken by the taxpayer

· the amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained

· the nature, scale and complexity of the operation or transaction

· the manner in which the operation or transaction was entered into or carried out

· the nature of any connection between the relevant taxpayer and any other party to the operation or transaction

· if the transaction involves the acquisition and disposal of property, the nature of that property, and

· the timing of the transaction or the various steps in the transaction.

Profits on the sale of subdivided land can 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 the taxpayers subdivisional activities have become a separate business operation or commercial transaction, or an isolated profit making venture.

Casimaty's case considered the sale of farming land. 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. Consequently, the profit derived from the subdivision and sale of the land was not assessable income under section 6-5 of the ITAA 1997.

Applying the above to your circumstances

The land is being subdivided to provide funds to enable you to finance your retirement.

The land was originally purchased to run a primary production business on it.

The work done on the land will be limited to those things necessary to get council approval.

You have not set up any business structure or any other entity for the project.

You are not in the business of property development. You sold XX acres in the particular year for various reasons.

You will be relying on external consultants to undertake the subdivision, and upon completion, the subdivision will be marketed by local real estate agents.

The facts in your case are similar to that of Casimaty. The activities involved in the subdivision of land do not amount to the carrying on of a business based on the particular facts of your situation. The transactions do not have the character of business operations. There is no indication that your subdivisional activities have become a separate business operation or commercial transaction, or that you were carrying out a profit making undertaking or plan.

The proceeds are therefore not ordinary income and not assessable under sections 6-5 and 15-15 of the ITAA 1997. The proceeds represent a mere realisation of capital assets as per the Casimaty case, which will fall for consideration under the Capital Gains Tax provisions in Part 3-1 of the ITAA 1997.

Capital Gains Tax (CGT)

A capital gain or capital loss you make is disregarded if the CGT asset was acquired before 20 September 1985 under paragraph 104-10(5)(a) of the ITAA 1997.

However, any post CGT capital improvements, such as subdivision costs, may be subject to CGT in certain circumstances.

CGT Determination Number 7 (TD 7) states:

Where pre CGT land is subdivided after 19 September 195 the land will maintain its pre CGT acquisition date because no CGT event has happened.

When a CGT asset (the original asset) is split into two or more assets (the new assets), such as when land is subdivided, the subdivision of the land into subdivided blocks is not a CGT event, according to subsection 112-25(2) of the ITAA 1997. If the original land was acquired before 20 September 1985, then each new block retains its pre-CGT status (see TD 7).

The subdivision of land in itself is not a GCT event under subsection 112-25(2) of the ITAA 1997. Under Tax Determination TD 97/3 the original block is deemed to have been split a number of new assets as a result of the subdivision. Subsection 112-25(3) of the ITAA 1997 contains the method statement for working out the cost base and reduced cost base for each new asset. Each element of the asset's cost base or reduced cost base is determined at the time the original asset is split. When the split of the original asset occurs, each element of the cost base or reduced cost base is apportioned in a reasonable way to each new asset.

Under subsection 108-70(3) of the ITAA 1997, capital improvements to a pre-CGT asset that are related to each other may be treated as a separate CGT asset if the total of their cost bases when a CGT event (for example a disposal) happens in relation to the asset, is

a) more than the improvement threshold for the relevant income year, and

b) more than 5% of the capital proceeds from the event.

CGT Determination Number 8 (TD 8) discusses the amalgamation of two adjoining titles, and states that the amalgamation of the two titles does not involve any change in ownership of the land. In example (ii)

If one property was acquired pre CGT and the other after 19 September 1985, there are no CGT consequences on the amalgamation but the land acquired after 19 September 1985 remains subject to the CGT provisions and the pre - CGT land remains exempt.

Application to your circumstances

In your case, the total subdivision and land development costs are considered related to each other in accordance with section 108-80 of ITAA 1997. The total costs of these improvements is to be allocated over all the subdivided blocks.

Accordingly, if the capital improvement expenditure applicable to each subdivided block is less than the improvement threshold for the relevant year and 5% of the capital proceeds then, for the purposes of any subsequent disposal by you and any of the blocks of land, the capital improvement is not taken to be a separate CGT asset.

Where a building is constructed after 20 September 1985 on land acquired before 20 September 1985, it is a separate CGT asset under subsection 108-55(2) of the ITAA 1997, if a balancing adjustment applies to it, as it is not part of the land. A separate capital gain calculation will be worked out on the land on which you build residential property. Taxation Determination TD 98/24 provides an example for working out the separate capital gain calculation.

The capital improvement threshold for each year is listed under section 108-85 of the ITAA 1997. Taxation Determination TD 2010/116 states that the improvement threshold for the 2011 Income Tax year is $126,619. As per section 108-70 of the ITAA if the capital improvement expenditure applicable to each subdivided block is less than the improvement threshold for the relevant year and 5% of the capital proceeds then, for the purposes of any subsequent disposal by you of any of the blocks of land, the capital improvement is not taken to be a separate CGT asset.

Given that your ruling request relates to future years neither the improvement threshold or sales proceeds figures are known at this time. Provided that the requirements of section 180-70 of the ITAA 1997 are satisfied any gains or losses you make on the subdivided lots will be disregarded under subsection 104-10(5) of the ITAA 1997