Edited version of private ruling

Authorisation Number: 1011656706898

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Ruling

Subject: Capital gains tax - Subdivision of land acquired prior to 20 September 1985

Question 1: Will the proceeds from the subdivision and subsequent disposal of your land be assessable as ordinary income?

Answer: Yes.

Question 2: Will the proceeds from the subdivision and subsequent disposal of your land be subject to capital gains tax (CGT)?

Answer: No.

This ruling applies for the following period

Year ended 30 June 2011

Year ended 30 June 2012

The scheme commenced on

1 July 2010

Relevant facts

You acquired a property which exceeds 2 hectares (the property) prior to 20 September 1985.

The only improvements to the property have been the family home.

The property has been your main residence for more than 30 years.

The property has never been used for business or commercial purposes.

The property has recently come into the urban growth boundary.

You believe the current value of the property is approximately $X.

A developer has approached you to develop the property along the following lines:

· the title of the property will remain under your name during the development

· the developer to pay all subdivision, establishment costs, statutory charges and all GST involved

· the developer intends to apply for the subdivision under your name and have the titles to the new blocks registered under your name, and

· the developer will dispose of the blocks to the prospective buyers and pay you a specified amount per block on the passing of the title from you to the individual purchasers.

You expect that there will be more than 70 blocks of land.

The plans of the subdivision have not yet been drawn up. You are unable to provide details of the costs expected to be incurred by the developer.

You could receive up to $X over a period of several years.

You will make a profit on the disposal of the subdivided blocks of land.

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(5)

Income Tax Assessment Act 1997 Section 118-20

Reasons for decision

As an Australian resident, assessable income includes all ordinary income which you derive during an income year. Ordinary income is defined as income according to ordinary concepts.

In certain circumstances profits from isolated transactions are considered to be ordinary income.

Taxation Ruling TR 92/3 provides guidance in determining whether profits from isolated transactions are ordinary income and therefore assessable as ordinary income. 

The term isolated transaction refers to: 

· those transactions outside the ordinary course of business of the individual carrying on a business; and

· those transactions entered into by non-business individual. 

· If an individual not carrying on a business makes a profit from an isolated transaction or operation, that profit is assessable income if both of the following elements are present:

· the intention or purpose of the individual in entering into the profit-making transaction or operation was to make a profit or gain, and

· the transaction or operation was entered into, and the profit was made, in carrying out a business operation or commercial transaction.

Whether an isolated transaction is business or commercial in character will depend on the circumstances of each case. TR 92/3 lists the following factors which may be relevant in determining whether an isolated transaction amounts to a business operation or commercial transaction:

· the nature of the entity undertaking the operation or transaction 

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

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

An individual must have the requisite purpose at the time of entering into the relevant transaction or operation. If a transaction or operation involves the disposal of land, it is usually necessary that the individual has the purpose of profit making at the time of acquiring the property. However, that is not always the case.

An individual who acquires an asset, such as land with the intention of using it for personal enjoyment but later decides to venture or commit the asset either:

· as the capital of a business, or

· into a profit-making undertaking or scheme with the characteristics of a business operation or commercial transaction,

· the activity of the individual constitutes the carrying on of a business or a business operation or commercial transaction carrying out a profit making scheme, as the case may be. The profit from the activity is income although the individual did not have the purpose of profit-making at the time of acquiring the asset.

How this applies to your circumstances

Even though you had no intention to subdivide the land at the time of purchase, you used the land as your main residence since you acquired it prior to 20 September 1985 and you will have no personal involvement in this subdivision as the developer will undertake any work required.

The facts indicate that your intention in entering into the activity is to make a profit from the future subdivision and the subsequent disposal of the blocks of land through the developer. The activity that will be undertaken will amount to more than the mere realisation of an asset to its best advantage. There will be a change of purpose for which the land is held, there is a coherent plan that will take place to carry out a sequence of actions that will result in a profit.

The activity involves the subdivision of your land which will result in excess of 70 blocks of land and you have the potential to receive proceeds of up to $X from the developer. The sale proceeds could potentially be received over a number of many years.

The development work that will be undertaken such as roads, street lighting, parks, sewers, electricity supply etc is on a large scale and as such it is considered to be a large development. Although you have not been able to disclose the cost of these works, they would be considered significant considering the size of the development. This is in contrast to disposing of the property with no or minimal additional preparation prior to disposal.

We consider your future subdivision activities do have the character of a commercial transaction and there is an indication that your activities do have the character of a profit making undertaking or plan.

Therefore, it is considered that you are carrying on a commercial transaction in respect of the development and the income derived from the subdivision will be ordinary income for taxation purposes.

The subdivision is more than an isolated profit making scheme and is not the mere realisation of a capital asset.

Capital gains tax

As the land was acquired prior to 1985, CGT will not be applicable by virtue of subsection 104-10(5) of the Income Tax Assessment Act 1997 (ITAA 1997).

In any event, CGT would not be applicable as section 118-20 of the ITAA 1997 reduces any capital gain by the extent to which it is treated as assessable income.