Edited version of private ruling

Authorisation Number: 1011822981849

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Ruling

Subject: Income - land subdivision

Question

Will any profit from the sale of the subdivided land be assessable as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (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

1 July 2013 - 30 June 2014

1 July 2014 - 30 June 2015

The scheme commences on:

1 July 2010

Relevant facts and circumstances

The Applicants purchased the property after September 1985.

The property was purchased as a farm with a residence. The Applicants have resided on the property since acquisition and carry on a business there.

The business has not been profitable.

To help transition into and fund their retirement, the Applicants propose to conduct a subdivision of the property into a number of lots, which will be sold as residential lots.

The Applicants intend to retain and continue to live on the lot that contains their current residence.

The Applicants may also retain some of the lots adjoining their residence until such time as those lots need to be sold.

A number of council requirements were imposed in order to gain approval for the subdivision. One requirement was that near by land must be acquired and a number of works completed on it.

The Applicants are in the process of acquiring the additional land.

The Applicants will not make a profit from purchasing the additional land and performing the works required. However, the Applicants are unable to proceed with the subdivision of their existing property without purchasing this land and performing the works.

The Applicants intend to stop carrying on the business.

The Applicants have not subdivided property in the past and have not sold any land at all since acquiring the property.

The Applicants will not build anything on the land or perform any works beyond the amount necessary to satisfy council's planning conditions.

The Applicants have no formal business plan or timeline for completing the subdivision works and selling the subdivided lots. The Applicants are likely to sell the lots in stages to pay down debt and then according to their retirement needs.

The Applicants have no business organisation for the subdivision. There is no office, no secretary and no letterhead in relation to the subdivision activities.

The Applicants intend to use consultants and contractors to perform the subdivision activities.

The Applicants will need to borrow funds to finance the subdivision activities.

The Applicants intend to advertise the land for sale through local real estate agents.

The Applicants have not claimed any expenses in relation to the current subdivision as deductions for income tax purposes.

The Applicants have not claimed any input tax credits in relation to the subdivision for GST purposes.

Supporting documents were provided which form part of the facts of the ruling.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

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

Under section 6-5 of the ITAA 1997 your assessable income includes income according to ordinary concepts, which is called ordinary income.

The ITAA 1997 does not provide a definition of ordinary income, so the phrase is interpreted according to normal usage and case law. Taxation Ruling TR 92/3 provides guidance on when profits from isolated transactions are considered to be 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.

Paragraph 35 of the ruling explains that whether a profit from an isolated transaction is income according to ordinary concepts 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.

Paragraph 8 of the ruling explains that 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 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.

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.

For a transaction to be characterised as a business operation or a commercial transaction, it is sufficient if the transaction is business or commercial in character.

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. If several of these factors are present it may be an indication that a business or an adventure or concern in the nature of trade is being carried on. These factors are as follows:

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

· additional land is acquired to be added to the original parcel of land;

· the parcel of land is brought into account as a business asset;

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

· there is a business organisation - for example a manager, office and letterhead;

· borrowed funds financed the acquisition or subdivision;

· interest on money borrowed to defray subdivisional costs was claimed as a business expense;

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

· buildings have been erected on the land.

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.

Application to your situation

As described in your ruling application, the proposed plan is to subdivide the property to enable the owners to fund their retirement. The site will be subdivided into a number of lots, which will be sold as residential lots, with the owners to retain and continue to live on the lot that contains their residence.

The following facts tend to indicate that the subdivision of the property would amount to a profit making undertaking:

· significant value adding will occur as a result of the undertaking given:

· the estimated market value of the property with approved zoning and DA , and

· the estimated cost of the subdivision

· borrowed funds will finance the subdivision

· significant outlays have been committed to in order to fulfil council requirements for the subdivision:

· you must acquire additional land and perform a number of works to the site

· you have negotiated a price for the additional land that factored in the value of the land and compensation for previous uses

· there is a coherent plan to subdivide the entire property

The following facts tend to support the claim that the subdivision of the property is the mere realisation of the asset:

· you have not previously subdivided land

· you have owned the land for a long period

The following are also relevant facts:

· The business activity conducted on the property has been unprofitable to date

· You put forward the proposal to council for the rezoning of the property

In weighing up the objective facts, it does not appear that the subdivision is the mere realisation of a capital asset.

Based on the financial information provided, the net profit expected to be generated from the carrying out of the transaction represents significant value adding to the original asset and indicates that a significant purpose in entering into the transaction is to make a profit or gain.

From the facts provided the activities appear planned, organised and coherent.

Given the magnitude of profit projected and the amount of capital that would be risked to carry out the project the transaction is commercial in character.

On a weighing of the facts of your case we find that this transaction will be entered into, and any profits made, in the course of carrying out an isolated profit making transaction. As a result, any profits will be considered ordinary assessable income under section 6-5 of the ITAA 1997.