Edited version of private ruling

Authorisation Number: 1011680820334

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Ruling

Subject: Capital gains tax (CGT) - realisation of asset

Are you liable for CGT instead of income tax on the sale of the property under Part 3-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. CGT will apply.

This ruling applies for the following period:

The year ended 30 June 2011.

The scheme commences on:

1 July 2010

Relevant facts and circumstances

The house and land was bequeathed to you when your mother passed away. You are the sole executor of the estate and the property was bequeathed to you solely. Probate was granted. The property has been vacant since your mother passed away.

When your mother passed away, you contacted a real estate agent to sell the property. You obtained advice in the form of a valuation. They also advised you that because of the size of the property potential buyers would be limited to property developers and builders. You were told that if you had a development application approved it would make the property a lot more attractive. You were advised that an auction would yield a better result.

You obtained development approval to subdivide the property into a number of lots.

At auction there were no viable bids. You took the property off the market.

After being advised that the market had improved, you attempted to auction the property a second time. There were no bids. The property was then listed for sale.

You submitted a new development application to change the subdivision to an amount less than 10 lots. This application was approved.

You are doing the subdivision yourself and work is ongoing.

You are not in the business of property or land development.

Relevant legislative provisions

Income Tax Assessment Act 1997 Part 3-1,

Income Tax Assessment Act 1997 Section 6-5,

Income Tax Assessment Act 1997 Section 102-20,

Income Tax Assessment Act 1997 Section 104-10,

Income Tax Assessment Act 1997 Subsection 104-10(3)

Income Tax Assessment Act 1997 Subsection 118-195(1).

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 of the ITAA 1936 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 of the ITAA 1936, 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

Summary

You acquired the property. You were unable to sell the property within two years of you acquiring the property. You elected to subdivide the property when you were unable to sell it. Your intention was to realise an asset. The transaction was not entered into in the course of carrying on a business or in carrying out a business operation or commercial transaction.

Therefore, this is mere realisation of an asset and not assessable as income under section 6-5 of the ITAA 1997. CGT will apply instead.

Detailed reasoning

Section 102-20 of the ITAA 1997 states that you make a capital gain or capital loss if and only if a CGT event happens.

The disposal of a CGT asset is the most common CGT event and is referred to as CGT event A1 (section 104-10 of the ITAA 1997). A taxpayer disposes of a CGT asset if a change of ownership occurs from the taxpayer to another entity.

Subsection 104-10(3) of the ITAA 1997 describes when the event happens. The time of the event is either when the taxpayer enters into a contract for the 'disposal', or if there is no contract - when the change of ownership occurs.

Assets inherited through a deceased estate are acquired on the date of death. As you have acquired your interest in the dwelling after 20 September 1985, the dwelling is subject to CGT upon its disposal.

Subsection 118-195(1) of the ITAA 1997 allows capital gain or capital loss to be completely disregarded when a CGT event happens to a deceased person's main residence that you acquired as a trustee or beneficiary of a deceased estate after 20 September 1985, if:

· you are an individual and any of the following apply:

o your ownership interest ends within two years of the person's death

o from the deceased's death until your ownership interests ends the dwelling was not used to produce income and it was also the main residence of one or more of the following persons:

§ the spouse of the deceased immediately before death

§ an individual who had a right to occupy the dwelling under the deceased's will, or

§ the individual as a beneficiary if they are disposing of the dwelling as a beneficiary.

In this case, the estate's ownership interest in the dwelling will end more than two years after the date of the deceased's death. As the property has been vacant since your mother passed away, the main residence exemption cannot apply.

Taxation Ruling TR 92/3 discusses whether profits on isolated transactions are income. TR 92/3 states at paragraphs 35 and 36:

A profit from an isolated transaction is therefore generally assessable income when both of the following elements are present:

(a)  The intention or purpose of the taxpayer in entering into the transaction was to make a profit or gain.

(b) The transaction was entered into, and the profit was made, in the course of carrying on a business or in carrying out a business operation or commercial transaction.

The courts have often said that a profit on the mere realisation of an investment is not income, even if the taxpayer goes about the realisation in an enterprising way. The expression 'mere realisation' is used to contradistinguish a business operation or a commercial transaction carrying out a profit-making scheme.

This is further discussed in Miscellaneous Taxation Ruling MT 2006/1 which discusses the meaning of an entity carrying on an enterprise. Example 34 in MT 2006/1 provides further clarification:

A number of years ago Elsie and Karin purchased some acreage on which to keep their horses, which they rode on weekends. Karin now accepts a job overseas and they decide to sell the land.

They put the land on the market with little success. The local real estate agent then advises that it would be easier to sell the land if it was subdivided into smaller lots. They arrange for a development application to be lodged with the local council and obtain approval to subdivide the land into nine lots. Elsie and Karin arrange for the land to be surveyed. The land has a road running along its boundary and has some existing services such as electricity. Only minimal activity is required to subdivide the land.

The sale is not considered to be an enterprise and is the mere realisation of a capital asset.

The property was not acquired for the purposes of carrying out a business operation or commercial transaction and the scale of the subdivision is small.

Accordingly, the activity is considered to be the mere realisation of an asset that will be assessed under the CGT provisions rather than the profits being assessable under section 6-5 of the ITAA 1997.