Edited version of private ruling

Authorisation Number: 1011696517860

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Ruling

Subject: CGT - property development

Question

Will the proceeds from the sale of your subdivided land be assessable as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question

Will the proceeds from the sale of your subdivided land be assessable under the capital gains tax (CGT) provisions in Part 3-1 of the ITAA 1997?

Answer

Yes

This ruling applies for the following periods:

1 July 2010 - 30 June 2011

1 July 2011 - 30 June 2012

1 July 2012 - 30 June 2013

The scheme commences on:

1 July 2010

Relevant facts and circumstances

A number of years ago you sold your business that included your main residence and acquired a hobby farm including a residence and crop plantation.

You farmed the crops for a number of years. There was not the volume of trees to make it profitable. In one particular year the price of the crop dropped by more than half their average price. In the last few years you have not attempted to harvest.

You have decided to subdivide the property into a small number of blocks. You state the property is too large to maintain and this will allow you to release capital. You will keep your existing home as you have no intentions of moving, as a result the remaining blocks will be sold.

You have no prior history of land or property development.

You are using a consulting surveyor to act as an advisor as well as to survey and deal with local council. You will pay a civil engineer directly for design works. The civil engineer will put the work out for tender, supervise the work being done and authorise payment to the contractor, you will pay the contractors directly. The property will be developed to the level council requires for approval. You are required to provide:

· a shared driveway

· road widening

· some curbing and channelling

· electrical and

· telephone services.

You will deal directly with the real estate agent to sell the blocks.

You will use your own cash funds for costs incurred up to operational works approval from the council.

You do not intend to start subdivision work until you have secured a sale contract on one block.

You plan construction to be completed three to four weeks prior to settlement of the block under contract. As a result additional funding for the subdivision will be required for a month or two.

This funding is planned to come from the sale of an apartment that you own. It is currently on the market for sale.

If this does not sell you will investigate using cash in your self managed super fund if you can legally access this money.

If these options fail you will use a line of credit over your existing home. You have no other loans or mortgages.

The Council Decision Notice provided forms part of the facts.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Part 3-1

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 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 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

Taxation Ruling TR 92/3 sets out the Commissioners view on whether profits made from isolated transactions are ordinary income. '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.

Whether a profit from an isolated transaction is income according to the ordinary concepts and usages of mankind depends very much on the circumstances of the case. However, where a taxpayer who does not carry on a business makes a profit from an isolated transaction, that profit is income if:

(a) the intention or purpose of the taxpayer in entering into the profit-making transaction or operation was to make a profit or gain; and

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

Intention

The relevant intention or purpose of the taxpayer (of making a profit or gain) is not the subjective intention or purpose of the taxpayer. Rather, it is the taxpayer's intention or purpose discerned from an objective consideration of the facts and circumstances of the case.

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.

The taxpayer must have the requisite purpose at the time of entering into the relevant transaction or operation. Where a transaction or operation involves the sale of property, it is usually, but not always, necessary that the taxpayer has the purpose of profit-making at the time of acquiring the land or property.

Carrying out a commercial transaction

Paragraph 13 of TR 92/3 lists factors which may be relevant in considering whether an isolated transaction amounts to a business operation or commercial transaction. Relevant factors include:

· 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;

· 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.

In addition to the above factors, for the purposes of determining whether the activities undertaken in relation to real property and development equate to a profit-making undertaking or scheme, Miscellaneous Taxation Ruling MT 2006/1 aligns itself with TR 92/3 and provides a list of factors which, if present may be an indication that a business or profit-making undertaking or scheme is being carried on. Relevant factors include:

· there is a change of purpose for which the land is held;

· there is a coherent plan for the subdivision of the land; and

· there is a level of development of the land beyond that necessary to secure council approval for the subdivision.

No single factor is determinative rather it will be a combination of factors that will lead to a conclusion as to the character of the activities.

In your case the property has been used as your main residence for a number of years. You will retain your existing main residence on a significant portion of the land and subdivide the remaining land into a small number of lots. The extent of development of each lot will be limited to council development conditions in the approval documentation. There is no prior history of land or property development and the scale of this subdivision is small.

From an objective consideration of the information provided, the subdivision and the sale of land would be considered the mere realisation of a capital asset, carried out in an enterprising manner. The proceeds would not be assessable as ordinary income but instead be assessable as capital gains under Part 3-1 of the ITAA 1997.