Edited version of private ruling

Authorisation Number: 1011739155288

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Ruling

Subject: Capital gains tax - subdivision of land - income or capital

Question 1

Are the proceeds from the subdivision of your property assessable under section 6-5 or section 15-15 of the Income Tax Assessment Act 1997?

Answer

No

Question 2

Is the profit from the subdivision of your property subject to the capital gains tax (CGT) provisions in Part 3-1 of the ITAA 1997 and will any capital gain or capital loss you make on the disposal of each subdivided block will be disregarded for CGT purposes?

Answer

Yes.

This ruling applies for the following periods:

1 July 2011 to 30 June 2012

1 July 2012 to 30 June 2013

1 July 2013 to 30 June 2014

1 July 2014 to 30 June 2015

The scheme commences on:

1 July 2008

Relevant facts and circumstances

You own some land, on which your house is located.

You decided to sell the property.

You contracted someone to rezone the land for subdivision, and they applied for a rezoning of the whole property. An application was made for a subdivision of fewer blocks.

You did not make much profit from the sales.

The following events occurred in relation to the land:

Before 20 September 1985 you purchased the land for the purposes of living on it.

You later moved into a residence on the land, and lived in it continuously with your family.

You were approached by a land agent, who offered you a contract on the property. The buyer wanted to obtain the property for the purposes of subdividing.

You made enquiries about subdividing the land. You decided to make application for rezoning because it would increase the value of the block, whether or not it was to be sold as a whole or by subdivision.

Surveyors and Town Planners made an application on your behalf to have the block rezoned and subdivided several blocks.

You received works approval for a subdivision of fewer blocks. You decided that you would subdivide the property into the fewer blocks, rather than sell your property as a whole.

You signed with a sub-contractor to provide all the works for the subdivision.

The subdivision works were completed.

You had no organised marketing process for the blocks. People tended to approach you.

At some later time, you applied for a subdivision of the original number of blocks. The rezoning and sub-division requirements have already been approved.

The property was originally acquired for the purpose of being your main residence, and for no other purpose.

You have no ABN or GST registration, and there are no entities such as companies or trusts involved. There are no marketing plans or cash flow projections. There are no special record- keeping systems for the disposal of the land, other than you have kept all your documents. You do not have any separate bank accounts for the land.

You have never been in the business of land development, and you have no plans for any future subdivisions. You have no office, employees, manager, letterheads or formal record keeping system.

You used consultants and contractors as you did not have the knowledge or the time to perform the council applications, or the supervision of the works which included widening of the front road, and the construction of a small section of road.

You have had no significant personal involvement in this project. You Surveyors and Town Planners organise the council approvals. You contracted construction companies to do the work. You used Engineers to manage the works, and you basically continued to work at your business on a daily basis.

You intend to sell the remaining blocks as soon as possible. As you are in full time employment and not knowledgeable in this area, you request the ruling to be extended to 30 June 2015 to cover possible further delays.

The remaining blocks will be organised and disposed of in the same manner as stated in other Private Rulings.

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 15-15,

Income Tax Assessment Act 1997 Section 104-10 and

Income Tax Assessment Act 1997 Subsection 104-10(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 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.

All legislative references contained herein refer to the Income Tax Assessment Act 1997 unless otherwise stated.

Question 1

Summary

The proceeds are not ordinary income and not assessable under sections 6-5 and 15-15, or any other income tax provision. The proceeds represent a mere realisation of capital assets.

Detailed reasoning

Under section 6-5, your assessable income includes the ordinary income you derived directly or indirectly from all sources, during the income year. Additionally, section 15-15 includes profit arising from the carrying on or carrying out of a profit-making undertaking or plan. However, this provision does not apply to a profit that is assessable as ordinary income under section 6-5, or which arises in respect of the sale of property acquired on or after 20 September 1985.

Although the legislation does not define 'income according to ordinary concepts', a substantial body of case law has evolved to identify various factors that indicate the nature of ordinary income.

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

If a transaction or operation involves the sale of property, it is usually necessary that the taxpayer has the purpose of profit-making at the time of acquiring the property.

The view of Mason J was accepted by and elaborated on by the Full High Court in Myer Emporium at 163 CLR 209-210, 87 ATC 4366-7, 18 ATR 697:

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 in 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 the result of an isolated venture or a "one-off" transaction preclude it from being properly characterized as income (Whitfords Beach 150 CLR 355 at 366-367; 82 ATC at 4036-4037, 4042; 12 ATR at 695-696, 705). The authorities establish that a profit or gain so made will constitute income if the property generating the profit or gain was acquired in a business operation or commercial transaction for the purpose of profit-making by the means giving rise to the profit.

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.

Additionally, 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 the 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 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.

Profits on the sale of subdivided land can therefore be income according to ordinary concepts within section 6-5, or as a profit making undertaking or plan within section 15-15, 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 not to 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.

Applying the above guidelines to your circumstances

The relevant facts to be applied to the above guidelines in this case are:

You have never been in the business of land development and you have no plans for any future subdivisions.

There is no other entity, such as a company or trust, involved in the subdivision.

The scale of the activity is relatively small

You have no ABN or GST registration.

You originally purchased the property for the purpose of being your main residence, and not for any other purpose. You have held the land since before 20 September 1985, and it has been your main residence for an extended period.

You used contractors to organise council approvals, do the work, and manage the work. You continued to work at your motor repair business on a daily basis.

Your motive for the subdivision and sale was personal rather than business in nature. The proceeds of the sale will be applied to the purchase of land further away.

You have no marketing plans or cash flow projections. People tended to approach you to buy the land. There are no special record keeping systems for the disposal of the land other than you have kept all your documents. You do not have any separate bank accounts for your land.

Conclusion

The activities involved in the subdivision and sale of the subdivided blocks do not amount to carrying on a business. You had no profit-making purpose at the time you acquired the property, and the subsequent transactions do not have the character of business operations or commercial transactions. There is no indication that your subdivisional activity has become 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, or any other income tax provision. The proceeds represent a mere realisation of capital assets as per the Casimaty case, which will fall for consideration under the CGT provisions in Part 3-1.

Question 2

Summary

Disposal of your subdivided property would be CGT event A1. However any capital gain or capital loss you make on the disposal of each subdivided block will be disregarded for CGT purposes.

Detailed reasoning

CGT event A1 in section 104-10, relating to the disposal of a CGT asset, will happen when you dispose of each subdivided block. You will make a capital gain if the capital proceeds from the disposal of the block are more than the cost base of the block. You will make a capital loss if those capital proceeds are less than the reduced cost base of the block.

Subsection 104-10(5), however, contains an exception, where any capital gain or capital loss made is disregarded if the asset was acquired before 20 September 1985. Where a block of land is subdivided, the date you acquired the subdivided blocks is the date you acquired the original parcel of land.

In your case, you acquired the original parcel of land before 20 September 1985, and the subdivided blocks will therefore also have been acquired before 20 September 1985. Any capital gain or capital loss you make on the disposal of each subdivided block will therefore be disregarded for CGT purposes.