Edited version of private ruling

Authorisation Number: 1011730887876

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Ruling

Subject: Subdivision of pre-CGT land

Question 1:

Will the proceeds from the sale of the subdivided land be considered assessable income under sections 6-5 or 15-15 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer: No.

Question 2:

Will any capital gain on the sale of the subdivided land be disregarded under paragraph 104-10(5)(a) of the 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 and your former spouse bought land prior to 20 September 1985. You purchased the block so that you and your family could have a spacious and quiet lifestyle.

You operate a business in partnership but the land in question is not used in the business.

After 20 September 1985 you became divorced and you acquired your ex spouse's share of the land under a Family Law Act 1975 (FLA 1975) court order.

Several years ago you were approached by a third party seeking to acquire part of the land and an area of land was subdivided off and sold.

At this time you sought a private ruling from the ATO and were advised in that ruling that the profits would not be assessable income and any capital gain would be disregarded.

You have recently engaged a consultant to review the feasibility of a subdivision of an area of the original land. You are unsure of costs and expected returns at the present time due to recent flooding. You expect that if the subdivision goes ahead there will be a little over 10 blocks.

You will engage the services of a person who will act as a project manager and they will arrange for the subdivision and sale of the blocks from the initial stage with meetings with council officers and to the engagement of appropriate professionals such as surveyors and engineers. You will not take part in the subdivision activity yourself.

You and your family intend to continue living on the remaining land. You have no intention to subdivide the remaining land and you do not own any other land. The reason for the subdivision is to fund your retirement.

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.

Income Tax Assessment Act 1997 Section 126-5.

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

Question 1:

Taxation Ruling TR 92/3 discusses profits on isolated transactions and the application of the principles are outlined in the decision of the Full High Court of Australia in FCT v. Myer Emporium Ltd (1987) 163 CLR 199; 87 ATC 4363; 18 ATR 693 (Myer Emporium). TR 92/3 states that profits on isolated transactions may be income.

Profit from an isolated transaction will be ordinary income when:

· the intention or purpose of a taxpayer in entering into the transaction was to make a profit or gain, and

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

The view of Mason J was accepted by and elaborated on by the Full High Court in Myer Emporium:

Generally speaking, however, it may be said that if the circumstances are such as to give rise to the inference that the taxpayer's intention or purpose is entering into the transaction was to make a profit or gain, the profit or gain will be income, notwithstanding that the transaction was extraordinary judged by reference to the ordinary course of the taxpayer's business. Nor does the fact that a profit or gain is made as a result of an isolated venture or a "one-off' transaction preclude it from being properly characterised as income (FCT v. Whitfords Beach Pty Ltd (1982) 150 CLR 355 at 366-367; 82 ATC 4031 at 4036-4037, 4042; 12 ATR 692 at 695-696, 705).

Taking the comments from the High Court in Myer Emporium into account, we can ascertain that for a transaction to be characterised as a business operation or a commercial transaction, it is sufficient that the transaction is business or commercial in nature.

If a taxpayer acquires an asset with the intention of using it for personal enjoyment but later decides to commit the asset, either as the capital of a business or into a profit-making undertaking with the characteristics of a business operation or commercial transaction, this activity constitutes the carrying on of a business, or a business operation or commercial transaction. The profit from such activity is income even though the taxpayer did not have a purpose of profit-making at the time of acquiring the asset.

Some of the factors to consider when looking at whether an isolated transaction amounts to a business operation or commercial transaction are listed at paragraph 13 of TR 92/3. They are:

(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 an 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.

Profits on the sale of subdivided land can be income according to ordinary concepts with 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, or an isolated profit making venture.

Casimaty v. FC of T 97 ATC 5135; (1997) 37 ATR 358 (Casimaty) considered the sale of farming land. 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 subdivision and sale of the land by the taxpayer was not assessable income under section 6-5 of the ITAA 1997.

The original purpose for the purchase of your property was to provide you and your family with a particular lifestyle that was spacious and quiet. You have owned the land for more than 20 years.

You have previously sold off one block from the original purchase. You had been approached to sell the block and did not actively seek a subdivision of a large scale. The current proposal is for at most between 10 and 20 blocks. You do not intend to subdivide further land and will continue to live on the property. The facts in this case do not indicate that your intention in entering into the relevant transaction was to make a profit from any future sale of the land. You wish to merely realise an asset in order to provide for your retirement.

You will have little involvement in the subdivision as there is only one stage and you will appoint relevant professionals.

The activities involved in the subdivision and sale of the land do not amount to carrying on a business. The transactions do not have the character of business operations or commercial transactions. There is no indication that your subdivisional activities became a separate business operation or commercial transaction, or that you were carrying on or carrying out a profit-making undertaking or plan.

The proceeds are therefore not ordinary income and not assessable under sections 6-5 and 15-15 of the ITAA 1997. They represent a mere realisation of capital assets as per Casimaty, which will fall for consideration under the CGT provisions in part 3-1 of the ITAA 1997.

Question 2

Under paragraph 104-10(5)(a) of the ITAA 1997, a capital gain or loss is disregarded if you acquired the asset before 20 September 1985.

You and your former spouse acquired the asset prior to 20 September 1985 and as a result of a divorce after 20 September 1985, you acquired their share of the land under an FLA 1975 court order.

Under section 126-5 of the ITAA 1997, there is a capital gains tax (CGT) roll-over when an A1 CGT event happens involving a transfer due to a court order under the FLA 1975.

Under subsection 126-5(6) of the ITAA 1997, where the transferor acquired the asset before 20 September 1985, the transferee is taken to have acquired it before that date.

The land to be sold has therefore retained its pre-CGT status and the capital gain on its disposal will be disregarded.