Edited version of private ruling

Authorisation Number: 1011679167231

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: Subdivision of land

Question

Will the proceeds from the sale of the subdivided land be considered a capital gain and therefore assessable under section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer: Yes.

This ruling applies for the following periods:

1 July 2010 to 30 June 2011.

The scheme commences on:

1 July 2010

Relevant facts and circumstances

You acquired vacant land with the intention of building a home. However, you remained in your existing residence and merely retained the property in its original state, with a view to possibly building in the future.

You state that over time the boundaries of a nearby high density suburb have been expanding. Most of the area surrounding your property has now changed from semi rural to higher density development with various subdivisions being completed. You state that this encroachment was not envisaged 20 years ago when your property was first purchased.

Your current income earning activities do not involve property development, and you state that you have never had any previous involvement in subdividing land or property development.

You stated that whilst not your initial intention, you were approached by a neighbour who owns adjacent properties and is planning to subdivide. You are entering into a joint venture agreement with that neighbour to subdivide the properties. The total holdings of the neighbour are considerably larger than your own.

Your neighbour would be responsible for the day to day management of the project. The joint venture will agree upon a set budget and plan.

Specialist sub contractors will be engaged for the consulting (approvals and engineers), physical work (road building etc) and selling, although the neighbour may have some involvement with contractors and potential purchasers. You will not personally have involvement in the day to day operation of the joint venture in seeking approvals, carrying out work or the subsequent sale of properties. There will be regular reports and meetings; however the neighbour will be responsible for implementation of all decisions agreed upon.

The work carried out will be no more than is required by council regulations and to enhance the individual lots for sale. The subdivision would be completed in stages over several years, depending on the speed of land sales, until all allotments are sold.

You would be responsible for the funding of expenses relating to your share of the subdivision. The proceeds from sales would be paid directly to whoever previously owned that parcel of land. There will be no site office or equivalent building.

The development of the land could not start until the land had been rezoned and subdivided. Approval for rezoning and subdivision has been granted. Delays in the approval process were due to complaints regarding the loss of vegetation on the vacant land.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5 and

Income Tax Assessment Act 1997 Section 104-10 .

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA of the ITAA 1936 to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part. If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

Unless otherwise stated, all legislative references in the following Reasons for Decision are to the Income Tax Assessment Act 1997.

Summary

It is considered that the proceeds of the subdivision do not constitute ordinary income in terms of section 6-5. Instead the proceeds represent the mere realisation of a capital asset to its best advantage and are assessable as capital gains under subsection 104-10.

Detailed reasoning

Section 6-5 includes in a taxpayer's assessable income, where the taxpayer is an Australian resident, all ordinary income derived by the taxpayer both in and out of Australia during an income year. Ordinary income is defined as income according to ordinary concepts.

However, a profit which is not assessable under section 6-5 may be assessed as a capital gain under section 104-10 if it relates to an asset which was acquired after 19 September 1985. Taxation Ruling TR 92/3 addresses the treatment of profits on isolated transactions, and the relevant factors to be considered when determining the treatment of these profits are contained within paragraph 13.

A number of taxation cases have addressed the question of whether profits on sale of subdivided land are considered ordinary income or capital. Some of the leading cases which have deemed the profit capital include Casimaty v. FC of T (1997) 151 ALR 242, 97 ATC 5135, 37 ATR 358; 97 ATC 5135 (Casimaty), AAT Case 13,136; McCorkell v FC of T Re 39 ATR 1112; 98 ATC 2199 (McCorkell) and Statham v FC of T (1988) 16 ALD 723; 20 ATR 228; 89 ATC 4070 (Statham). FC of T v Whitfords Beach P/L (1982) 39 ALR 521; 12 ATR 692; (1982) 150 CLR 355; (1982) 56 ALJR 240; 82 ATC 4031 (Whitfords Beach) concluded that profits were assessable as ordinary income.

The direction provided within TR 92/3 and the above cases indicates that profits in this context are more likely to be considered ordinary income if they are made in the ordinary course of carrying on a business. Further, ordinary income may be derived from an isolated transaction which becomes commercial in nature, or as a result of profits on a transaction in which the initial intention was to make a profit on sale.

The circumstances of your case relevant to these findings are as follows:

- the land was purchased post 19 September 1985. Your intention was to build a family home, however for personal reasons that never eventuated and you have decided to remain in your current residence;

- you have never previously had any involvement in subdividing and selling land. Income has been derived from a commercial fishing operation;

- the sale of the subdivided land was prompted by an approach from a neighbour who owns adjacent land and is intending to subdivide and sell. Your decision to subdivide was also influenced by the fact that most of the area surrounding your property has now changed from semi rural to higher density development with various subdivisions having been completed. This encroachment was not envisaged when the property was first purchased;

- the scale of the activity is relatively small. Your neighbour's holdings are much larger. The work to be done on the land will only extend to that required to secure approval from the relevant authorities for the subdivision application;

- the project will proceed as a joint venture and expenses will be met from a joint bank account to which you will contribute as required. Your involvement will be limited to an initial agreement regarding the overall budget and plan, attendance at meetings to discuss progress, and approval of expenditure over an agreed level;

- you will have no direct involvement in the rezoning application, seeking approvals, organising contactors or any actual work undertaken on the properties;

- you will have no involvement in advertising, promoting or negotiating sales of the lots. Your neighbour will engage a real estate agent for that purpose. There will be no site office.

Those facts indicate that you have not at any time prior to, or during this venture been involved in the carrying on of a business related to acquiring, subdividing and selling land. Further, this particular isolated transaction is not considered commercial in nature, and you have shown that your intention when acquiring the property was other than to make a profit on sale.

Accordingly it is considered that the proceeds of the subdivision do not constitute ordinary income in terms of section 6-5. Instead the proceeds represent the mere realisation of a capital asset to its best advantage and are assessable as capital gains under subsection 104-10. Note that the findings of this ruling do not apply to subsequent ventures of such a nature.