Edited version of private ruling

Authorisation Number: 1011763140611

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Ruling

Subject: Subdivision of land

Questions and answers:

1. Are the proceeds from the subdivision of your land assessable under section 6-5 or section 15-15 of the Income Tax Assessment Act 1997 (ITAA 1997)?

No.

2. Are the proceeds from the subdivision of your land subject to the capital gains tax (CGT) provisions set out in Part 3-1 of the ITAA 1997?

Yes.

This ruling applies for the following periods:

Year ending 30 June 2011

Year ending 30 June 2012

The scheme commenced on:

1 July 2010

Relevant facts and circumstances

You are a builder by trade and operate with a business partner as Company X.

You are not in the business of property development.

You purchased your main residence in Suburb Y several years ago.

As your personal circumstances changed, the dwelling no longer met your requirements and so you decided to renovate and extend the dwelling.

You then, however, determined it would be best for you financially to subdivide the block of land into two blocks, demolish the original dwelling and build a townhouse on each block.

You are going to live in one of the townhouses and sell the second one.

You entered into a contract with Company X to build the townhouses.

All transactions with Company X were made at arms length and market rates were charged by Company X.

The last time you sold a property was in Suburb Z approximately 10 years ago.

The Suburb Z property was originally purchased from a family member at arms length market value.

You lived in the Suburb Z property for over three years.

Due to the size of the land of the Suburb Z property, you decided to subdivide the land and build a unit on the back block.

You renovated the existing dwelling at the Suburb Z property and continued to reside in it.

You intended that your parent would reside in the Suburb Z unit however this did not happen and so the unit was sold.

On no other occasion have you carried out a similar subdivision project.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5.

Income Tax Assessment Act 1997 Section 15-15.

Reasons for decision

Under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997), your assessable income includes the ordinary income you derived directly or indirectly from all sources during the income year.

Additionally, section 15-15 of the ITAA 1997 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 of the ITAA 1997, 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 Income tax: whether profits on isolated transactions are income 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. This ruling states that profits on isolated transactions may be ordinary 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 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: 

· 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

· the nature of an connection between the relevant taxpayer and any other party to the operation or transaction

· 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.

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.

The Federal Court in Casimaty v. FC of T 97 ATC 5135; (1997) 37 ATR 358 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.

In your case you are subdividing the block of land that your main residence is on and building a new townhouse on each of the two new blocks. You are doing this due to a change in your personal circumstances that mean your current main residence dwelling is no longer suitable for you. You are building and then selling the second townhouse to fund the construction of the first townhouse that you will use as your main residence. You have entered into an arms length transaction with Company X, who will build the dwellings, and is charging you market rates.

Although you work as a builder and have built a dwelling and then sold it in the last 10 years, this is not sufficient to show that you are in the business of property development.

Therefore, the facts in your case show that the activities you are undertaking in the subdivision of land and the construction and sale of the townhouse 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 activities are a separate business operation or commercial transaction, or that you are carrying out a profit-making undertaking or plan.

The proceeds are therefore not ordinary income and not assessable under section 6-5 and 15-15 of the ITAA 1997. They represent a mere realisation of capital assets and therefore will be subject to the capital gains tax (CGT) provisions set out in Part 3-1 of the ITAA 1997.

Please note that the main residence exemption will not apply when you sell the townhouse as you are selling the block and townhouse separately to your main residence.