Edited version of private ruling

Authorisation Number: 1011912573639

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Ruling

Subject: CGT - land subdivision

Question

Would the proceeds from the sale of the subdivided land be assessable under the capital gains tax provisions in the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

This ruling applies for the following period:

1 July 2011 - 30 June 2012

1 July 2012 - 30 June 2013

The scheme commences on:

1 July 2011

Relevant facts and circumstances

The taxpayer acquired the subject property a number of years ago as a rental property investment.

The property contained an older style residential building on a relatively large block.

The property has derived rental income from the existing building since acquisition and has been managed by a real estate property manager.

The taxpayer also owns another rental property which was acquired around the same time as the subject property which contained a single residential property.

This additional property is also situated on a larger block. This allowed the taxpayer to construct another new property. It has also been managed by a real estate property manager and has been deriving residential rental income since completion.

When purchasing the subject property, it was the taxpayer's intention to retain it as a passive rental property and derive rental income, with a view to possibly constructing another property on the land in the future to increase the rental return. As the land has two street frontages the potential to increase the rental income by the construction of a separate property in the future to defray loan interest was anticipated.

Due to difficulties maintaining current loan repayment obligations the taxpayer is unable to comfortably further borrow to proceed with the construction of a second building. As part of reassessing their investment options, the taxpayer proposes to sell the property and wishes to maximise the return on the sale of their asset.

To do this they propose to demolish the older style building currently on the land, subdivide the block into a number of separate lots, each with its own street frontage, and sell shortly after. It is anticipated that this additional preparation will produce a better capital return for the sale of the property as a whole, as opposed to selling the property in its current state.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 6-5(2)
Income Tax Assessment Act 1997 Part 3-1
Income Tax Assessment Act 1997 Part 3-3

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 subsection 6-5(2) of the ITAA 1997 the assessable income of a resident taxpayer includes the ordinary income derived directly or indirectly from all sources. Generally, income is derived periodically from activities or investments of the recipient. However, in some circumstances, the profit from an isolated transaction may be regarded as the income of the recipient.

Taxation Ruling TR 92/3 sets out the Commissioners 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 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.

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

You have held the subject property for a number of years, it has been used during this time to generate rental income. The size and scale of the activity will be limited to demolition of the dwelling, subdivision of the property into a number of lots and the subsequent disposal of the land. There is no prior history of land subdivision and sale and no buildings will be erected on the land

From a consideration of the factors above it can be concluded that the proposed activity would amount to the mere realisation of a capital asset, carried out in an enterprising manner. The proceeds would be assessable as capital gains under Part 3-1 of the ITAA 1997.

As the disposal would amount to the mere realisation of a capital asset, the proceeds would not be assessable under subsection 6-5(2) of the ITAA 1997.