Edited version of private ruling

Authorisation Number: 1011690674648

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Ruling

Subject: Sale and subdivision of land

Question 1

If the property in question is ultimately sold as one parcel of land will the sale be assessed as a mere realisation of real property or a profit making undertaking?

Answer

The disposal would be considered a mere realisation of real property.

Question 2

Did the disposal of the land in question constitute a mere realisation of real property or a profit making undertaking?

Answer

The disposal was considered a mere realisation of real property.

Question 3

If the remaining property at that location is ultimately sold as one parcel of land will the sale be assessed as a mere realisation of real property or a profit making undertaking?

Answer

The disposal would be considered a mere realisation of real property.

Question 4

Did the disposal of the land in question constitute a mere realisation of real property or a profit making undertaking?

Answer

The disposal would be considered a mere realisation of real property.

Question 5

Did the disposal of the land in question constitute a mere realisation of real property or a profit making undertaking?

Answer

The disposal would be considered a mere realisation of real property.

Question 6

If the remaining property at that location is ultimately sold as one parcel of land will the sale be assessed as a mere realisation of real property or a profit making undertaking?

Answer

The disposal would be considered a mere realisation of real property.

This ruling applies for the following period:

1 July 2010 to 30 June 2011 and relevant prior years

The scheme commences on:

1 July 2010.

Relevant facts and circumstances

The taxpayer held land at a number of sites. The land was held in each case for many years and used in the conduct of various aspects of its business. Parcels of land were then sold at various points when their use in the business was at an end.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 15-15

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.

Question 1

Section 6-5 includes in your assessable income, where you are an Australian resident, all ordinary income which you derive during an income year. Ordinary income is defined as income according to ordinary concepts.

Ordinary income generally includes income that arises in the ordinary course of a taxpayer's business. However, in certain circumstances proceeds not within the ordinary course of the taxpayer's business may form part of their ordinary income.

The principle has been established that profits arising from an isolated business or commercial transaction will be ordinary income if the taxpayer's purpose or intention in entering into the transaction is to make a profit, even though the transaction may not be part of the ordinary activities of the taxpayer's business (FC of T v. Myer Emporium Ltd 1987 163 CLR 199; 87 ATC 4363; 18 ATR 693) (Myer Emporium). 

Taxation Ruling TR 92/3 discusses the application of the principles outlined in the Myer case and provides guidance in determining whether profits from isolated transactions are ordinary income and therefore assessable under section 6-5.

In the present case, the sale of land is outside the ordinary course of the activities from which the taxpayer derives income. The taxpayer does not operate as a property developer. Therefore, the activity would be best described as an isolated transaction.

According to Paragraph 1 of TR 92/3, the term isolated transactions refers to:

· those transactions outside the ordinary course of business of a taxpayer carrying on a business, and

· those transactions entered into by non business taxpayers. 

Paragraph 8 of TR 92/3 explains that it is not necessary that the intention or purpose of profit-making be the sole or dominant intention or purpose for entering into the transaction. It is sufficient if profit-making is a significant purpose

At paragraphs 56 and 57, TR 92/3 explains that a profit is income where it is made in any of the following situations:

· a taxpayer acquires property with a purpose of making a profit by whichever means prove most suitable and a profit is later obtained by any means which implements the initial profit-making purpose,

· or a taxpayer acquires property contemplating a number of different methods of making a profit and uses one of those methods in making a profit, or

· a taxpayer enters into a transaction or operation with a purpose of making a profit by one particular means but actually obtains the profit by a different means.

Paragraph 15 of TR 92/3 provides that if a taxpayer makes a profit from a transaction or operation, that profit is income if the transaction or operation is not in the course of the taxpayers business but

· the intention or purpose of the taxpayer 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.  Casimaty v FC of T 97 ATC 5135; (1997) 37 ATR 358 (Casimaty) and McCorkell v FC of T 98 ATC 2199; (1998) 39 ATR 1112 (McCorkell) 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.

The present case can be compared to both Casimaty and McCorkell. In Casimaty, the conclusion was primarily influenced by the fact that the taxpayer acquired and continued to hold his property for use as a residence and the conduct of primary production for more than twenty years. Apart from the activities necessarily undertaken to obtain approval from time to time for subdivision of parts of the property, there was nothing to suggest a change in the purpose or object with which the property was held, namely primary production. In McCorkell, the property had been in the family and used for primary production purposes at least as far back as the taxpayer's birth in 1917.

In the present case, it is necessary to weigh the various facts to determine whether any profit made upon disposal would represent ordinary income. The land in question has been held for many years. The taxpayer has employed the land in a business operation. It is the intention of the taxpayer to sell the land as one parcel rather than subdivide it. Subdivision cannot in any case be undertaken for certain reasons before a certain date in the future.

On the basis of those facts, the sale of the land is likely to be a single transaction for the purpose of disposing of part of the company's property which had originally been acquired for employment in its industrial activities. As such, it would represent the realisation of real property and not a profit-making undertaking.

Question 2

The land that was sold was acquired with the intention of relocating certain of the company's operations but that did not eventuate and the property was used for another purpose. The sub-division and sale of the land was outside the ordinary course of the activities from which the taxpayer derived income.

However, as discussed above, 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 the 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 TR 92/3.

Paragraph 13 lists the following factors:

a)      the nature of the entity undertaking the operation or transaction 

b)      the nature and scale of other activities undertaken by the taxpayer

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

d)      the nature, scale and complexity of the operation or transaction

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

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

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

h)      the timing of the transaction or the various steps in the transaction.

In the present case, the relevant facts have been considered in light of the factors discussed in paragraph 13 of TR 92/3. It is typically difficult to apply a blanket rule to sub-division cases and, as a consequence, each case needs to be decided on its own facts. In the present case, the taxpayer acquired the property and utilised it in a business-related manner, albeit a different one to that originally intended. The land was then sold after being held for many years.

Given the length of time which the land was held and the use to which it was put, its sale would not be held to be a profit-making undertaking but rather constituted the mere realisation of a capital asset, carried out in an enterprising way so as to secure the best price. The gross proceeds were significant but that fact when viewed in the context of the other facts of the case is not determinative. Consequently, the profit derived from the subdivision and sale of the land by the taxpayer is not assessable income under section 6-5 of the ITAA 1997.

Question 3

The facts in respect of the disposal of the remaining parcel at this site are not materially different to the facts in Casimaty where 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 sale of the land by the taxpayer would not be assessable income under section 6-5 of the ITAA 1997.

Question 4

The property was acquired and used in the business throughout the years of its ownership. On the basis of those facts, its disposal can be characterized as the mere realisation of an asset and not a profit-making undertaking.

Question 5

The sub-division and sale of the land is outside the ordinary course of the activities from which the taxpayer derives income. The property was acquired for use in the business. A factory was subsequently built on the site.

Applying the considerations discussed above, the disposal of the lots would be considered a mere realisation of real property. Consequently, the profit derived from the subdivision and sale of the land by the taxpayer is not assessable income under section 6-5 of the ITAA 1997.

Question 6

The balance of the land is still utilized as part of the business. Its treatment will be similar to that of the remaining land discussed in Question 3: if it is disposed of in one lot, it will also be considered to constitute the realisation of real property not a profit-making undertaking.

Summary

It could be argued that even if each disposal viewed in isolation is not a profit-making undertaking taken together the entirety of the transactions could constitute a pattern of regularity which transforms the whole into a profit-making exercise. However, in the absence of other significant facts suggesting that a business of property development had been entered into, the fact that much of the land was acquired many years ago, used in some form within the business, then not disposed of until many years later, would lend itself to a conclusion that no significant profit-making intent is involved.

As a result, the proceeds from the various sales of land, viewed individually and together, will be considered to be the mere realisation of real property and therefore not assessable income with the exception of the subdivision at one property.