Edited version of private ruling

Authorisation Number: 1011853698453

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Ruling

Subject: Income - land subdivision

Question

Will the proceeds from the sale of your subdivided land be assessable under the capital gains tax (CGT) provisions under Part 3-1 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

The scheme commences on:

1 July 2010

Relevant facts and circumstances

You and your relative jointly own a parcel of land, made up of a number of allotments. This land was originally acquired several decades ago by your father, who built a family home which was used as his main residence from the date of its construction to the date of his death.

Prior to 1985, two further parcels of land were acquired by your father. One was used for non commercial purposes, the other for primary production purposes. The entire land was several hectares in size.

Your father passed away after 1985 and the land was transferred to you and your relative, however your mother acquired a life interest in the block of land which contained the house and was used as her main residence until she passed away.

After your father passed away you were approached by a real estate agent with a view to selling the surplus land. A subdivision plan was prepared, excluding the block containing the house which remained the main residence of your mother. These allotments required little or no improvement to be able to be sold as they fronted an existing street, infrastructure was already in place. These lots were sold over a period of several years and were assessed under the Capital Gains Tax (CGT) provision.

Following the death of your mother, it was decided to subdivide the remaining parcel of land into a further number of allotments. You have engaged consultants to manage the process. An application for approval was made in relation to the subdivision of these allotments. Approval was granted. Council requirements for the subdivision involve the provision of a road, sewerage, mains water and electricity to the allotments.

You are the managing director and owner of a business which you describe as a fulltime occupation. You also own and operate a farming operation. Your relative has no occupation though they have had no involvement at all in the subdivision process, other than being a passive owner.

You provided the council planning documents which form part of the facts for the ruling:

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Subsection 128-15(4)

Income Tax Assessment Act 1997 Part 3-1

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 (ITAA 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

Unless otherwise stated, all legislative references in the following Reasons For Decision relate to the Income Tax Assessment Act 1997 (ITAA 1997).

Acquisition of property by a beneficiary

Under subsection 128-15(4), for a beneficiary who acquired an asset from a deceased estate, the first element of the CGT asset's cost base and reduced cost base is the market value of the CGT asset on the date of death if the deceased acquired the CGT prior to 20 September 1985.

Ordinary Income

Section 6-5 includes in your assessable income, where you are an Australian resident, all ordinary income which you derive during an income year. Ordinary income is defined as income according to ordinary concepts.

Ordinary income generally includes income that arises in the ordinary course of a taxpayer's business. In respect of the disposal of a taxpayer's assets, the proceeds from the mere realisation of an asset do not constitute income. However, if the capital asset is ventured into a business operation or isolated profit making transaction the profit may be assessable income under the ordinary concepts of income.

Isolated profit making transaction

Taxation Ruling TR 92/3 sets out the Commissioner's view on whether profits made from isolated transactions are 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.

Whether a profit from an isolated transaction is income according to the ordinary concepts and usages of mankind 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.

Intention

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.

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 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.

Carrying out a commercial transaction

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. Relevant factors include:

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

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

· 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

The following facts considered together indicate that the activities are no more than the realisation of a capital asset:

· The length of time the asset has been held; you and your relative acquired the land from your father on his death and have held the land for a number of years.

· The time taken to carry out the subdivision plan; the entire subdivision has been undertaken over a number of years, during this time you have carried on your existing full time business and employment activity.

· The scale and degree of development of the activity; the extent of development of each lot will be limited to council development conditions in the approval documentation.

From an objective consideration of all of the facts it can be concluded that you did not have a profit-making purpose at the time you acquired the property and that the subsequent planned transaction carried out in the proposed way does not have the character of a business operation or commercial transaction.

Proceeds from the subdivision would represent a mere realisation of capital assets and would fall for consideration under the CGT provisions in Part 3-1.