Edited version of private ruling

Authorisation Number: 1011765143085

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Ruling

Question

Will any profits or gains from the sale of the subdivided land be assessable under subsection 6-5(1) of the Income Tax Assessment Act 1997(ITAA 1997), or the capital gains tax provisions under Part 3-1 of the ITAA 1997?

Answer

No.

This ruling applies for the following period

Year ending 30 June 2011

Year ending 30 June 2012

The scheme commenced on

1 July 2010

Relevant facts.

You purchased property before September 1985 and used it for your business.

You intend to keep one lot from the proposed development which will remain as your principal residence. The development consists of a further x lots ranging in size.

The council rezoned the land and the rates have increased dramatically. The council are also undertaking the sealing of the road fronting the property at a substantial cost which has been met by you.

You have sought to sell the land in broad acres; however this has been complicated by your desire to remain in the family home. Part of the property was subdivided and sold previously to clear debt.

You currently earn your income as a partner in a business and have no business organisation or structure.

No borrowings will be sourced to fund the proposal which is estimated to cost up to $x.

The development will be completed in one stage.

The land will only be developed to the minimum level required by Council.

There will be no site office or other buildings erected on the land during the development.

You will not be involved in the actual process of the development. You intend to engage the services of a surveyor and engineer to conduct the necessary works.

You will have no involvement in the sale process.

You will continue operating your existing business during the development.

You maintain your own books of account.

No other developments apart from the subdivision of one lot mentioned above, have been undertaken by you.

The overall proposal is not large nor is it complex.

Additional Facts provided with new application.

You intend to keep one lot from the proposed development which will remain as your principal residence which will leave a remaining x blocks for sale.

X blocks of land were purchased which was x acres in total.

Part of the property was subdivided and sold to clear debt. This was a small block of land which sold under an existing title.

A government authority took x acres of the land for drainage provisions, which left a remainder of x acres.

You have been unable to operate your business due to suffering a serious illness; therefore you are required to enter into a borrowing arrangement. You will borrow money to fund the balance of the costs to be incurred in this arrangement.

The development costs are estimated to be $x, you have paid the council $x as a contribution to open space and further costs for the sewer.

A large proportion of the work has been completed to date with regard to planning and permits and it is expected that the subdivided lots would be available for sale within a few months.

No other developments apart from the subdivision, mentioned above, have been undertaken by you.

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 108-5

Income Tax Assessment Act 1997 Section 108-70

Income Tax Assessment Act 1997 Section 15-15

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.

Reasons for decision

Unless otherwise stated, all legislative references in the following Reasons for Decision are from the Income Tax Assessment Act 1997(ITAA 1997).

Summary

Providing you satisfy the requirements of subsection 108-70(2) any gains or losses you make on the subdivided lots will be disregarded in accordance with subsection 104-10(5).

The proceeds represent the mere realisation of an asset carried out in an enterprising way so as to secure the best price.

From the information provided you acquired the land prior to September 1985. The main purpose of acquiring the land was for farming. Since the farming has ceased the council has rezoned the land and since that date the rates have increased dramatically.

In order to secure the best return you have decided to subdivide the land. Therefore it is considered that the subdivision of the property and the later sale of the blocks wound not constitute ordinary income under section 6-5 as it does not arise as a result of your normal business activities.

Profits on the sale of subdivided land can still be income according to ordinary concepts within section 6-5, or as a profit making undertaking or plan within section 15-15 if 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 Taxation Ruling TR 92/3.

The factors related to your case are as follows:

· The intended sale of the subdivided land by you is due to an increase in rates.

· The land was acquired by you pre CGT 20 September 1985 and used initially for your business.

· You have subdivided the property into x lots, retaining one as your principal place of residence.

· You are not in the business of property development even though part of the property was subdivided and sold previously.

· The marketing and sale of the blocks are to be carried out by a local real estate agent.

· The subdivided blocks will be available for sale within a few months.

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

On the basis of the above discussion it is considered that the proceeds of the subdivision would not constitute ordinary income in terms of section 6-5, nor would they be assessable under section 15-15 as they are not considered to be a profit or gain arising from the carrying on or carrying out of a profit making undertaking or plan.

Are improvements separate CGT assets?

Land, or an interest in land, is a Capital Gains Tax (CGT) asset section 108-5. The sale of CGT asset will be a disposal which will give rise to CGT event A1 under section 104-10. If CGT event A1 happens to a CGT asset which was acquired before 20 September 1985 (pre-CGT), the capital gain or loss will be disregarded , as provided in subsection 104-10(5).

However, any post CGT capital improvements to pre-CGT land, such as those relating to the subdivision, may be subject to CGT in certain circumstances.

Subsection 108-70(2) states that a capital improvement to a CGT asset that you acquired before 20 September 1985 is taken to be a separate CGT asset if its cost base when a CGT event happens in relation to the original asset exceeds:

(a) the improvement threshold for the income year in which the event happened; and

(b) the improvement asset is more than 5% of the capital proceeds from the event.

CGT Determination TD7 has direct relevance to your case and confirms that where pre-CGT land is subdivided after 19 September 1985 the land will maintain its pre-CGT acquisition date as no CGT event has happened. However, the capital improvement made to each block of land will be treated as a separate post-CGT assist if the expenditure exceeds the amounts set out in section 108-70.

Taxation Determination TD 2010/16 provides the improvement threshold for the 2010-2011 income year; the improvement threshold is $x.

The improvement thresholds for future years will be advised in a taxation determination in each year, and are not known at the time of this ruling. Therefore the costs of the subdivision will need to be apportioned to each block at the time of disposal to determine whether section 108-70 is satisfied.

Accordingly, if the capital improvement expenditure applicable to each subdivided block is less than both the improvement threshold for the relevant year, and 5% of the capital proceeds then, for the purposes of any subsequent disposal by you of the blacks of land, the capital improvement is not taken to be a separate CGT asset.

If you fail any of the tests associated with subsection 108-70(2) then there would be capital gains tax on the proportion of the net sale of the block attributed to the disposal of the post CGT improvements.

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 particular circumstances. Having regard to the length of time that the property has been held and the use to which it has been put throughout the period of ownership, the evidence is consistent with the taxpayer not being in the business of property development. The details of the subdivision are also consistent with a finding that the taxpayer did not enter into the enterprise with the intention of making a profit through an isolated transaction.

At the same time, the costs of the subdivision are quite substantial and the taxpayer has taken out considerable borrowings in order to meet those costs. Those facts are not inconsistent with the possibility that the transaction is more than mere realisation of an existing asset.