Edited version of your private ruling

Authorisation Number: 1012134818281

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Ruling

Subject: Land subdivision

Question 1

Would the profits from the sale of the subdivided land lots be considered assessable income from an isolated profit making transaction under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Would the profits from the sale of the subdivided land lots be considered assessable income from a profit-making undertaking or plan/scheme under either section 15-15 of the ITAA 1997 or section 25A of the Income Tax Assessment Act 1936?

Answer

No.

Question 3

Would any capital gain on disposal of that part of the land acquired by the Taxpayer before 20 September 1985 be ignored under Part 3-1 of the ITAA 1997?

Answer

Yes, by virtue of subsection 104-10(5) of the ITAA 1997 and section 118-20 of the ITAA 1997.

Question 4

Would any capital gain in respect of the remainder of the land be assessable to the Taxpayer in accordance with Parts 3-1 and 3-3 of the ITAA 1997?

Answer

No, by virtue of section 118-20 of the ITAA 1997.

Question 5

Would the fees payable by the Taxpayer to the Developer pursuant to the Development Agreement be included in the Taxpayer's cost base of the land under either section 110-25(3) or section 110-25(5) of the ITAA 1997?

Answer

Not applicable. As any capital gain will be disregarded under section 118-20 of the ITAA 1997, the calculation of the cost base is not relevant.

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

1 July 2015 - 30 June 2016

1 July 2016 - 30 June 2017

1 July 2017 - 30 June 2018

The scheme commences on:

1 July 2010

Relevant facts and circumstances

The Taxpayer is the registered proprietor of a large property. The property has been in the family for many decades and the land has been used continuously for farming purposes.

The Taxpayer originally acquired part of the land prior to 1985 and the remaining amount after 1985.

The land is a significant parcel of land in a growing area. Over the years, the Taxpayer has been approached on a number of occasions to sell the land. The Taxpayer currently farms the land.

Over time, the neighboring land on two sides of the Taxpayer's land has been converted to residential use.

Some time ago the Taxpayer was approached by a large broad acre land developer with a proposal to develop the Taxpayer's land. Discussions between the Taxpayer and the Developer ensued and a formal agreement, being the Development Agreement was executed.

The Developer has proposed that the land be developed into a master planned community comprising a large amount of residential lots, a town centre incorporating land set aside for commercial and retail activities, primary schools and public open space.

The Taxpayer and the Developer have entered into a Development Agreement. The Developer is responsible for procuring development and planning approval for the subdivision of the land, sales and marketing and is also responsible for all related costs. The Developer is authorised to obtain approvals and execute contracts with the purchasers in respect of the sale of the subdivided lots, without the further involvement of the Taxpayer.

The Taxpayer, as owner, will receive the sale proceeds from the sales of the individual lots, but will be obliged to use part of the sale proceeds to repay an initial loan from the Developer and pay the development fee to which the Developer will be entitled to compensate it for undertaking the development of the land, including bearing the costs and risks of doing so.

The development of the land by the Developer, at its own cost, is expected to involve the construction of roads and the provision of infrastructure such as water, sewerage, gas and power in respect of the subdivided lots. No preparatory work or any other work has been conducted on the land and the land is currently being used by the Taxpayer to conduct farming operations. It is proposed that the land will continue to be used for farming purposes during the planning stages of the development and will also continue during the development. The farming activity will however, be progressively wound down as each stage of the development is completed.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 subsection 104-10(5)

Income Tax Assessment Act 1997 section 118-20

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 the ordinary income you derived directly or indirectly from all sources, during the income year. 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 discusses profits on isolated transactions and the application of the principles outlined in the decision of the Full High Court of Australia in FC of T v. Myer Emporium Ltd (1987) 163 CLR 199; 87 ATC 4363; (1987) 18 ATR 693. This ruling states that profits on isolated transactions can be 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 carrying on a business makes a profit from a transaction or operation, that profit is income if the transaction or operation is not in the course of the taxpayer's business, but:

(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 or 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.

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

For a transaction to be characterised as a business operation or a commercial transaction, it is sufficient if the transaction is commercial in character. Paragraph 13 of TR 92/3 lists factors which are 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; and

· if the transaction involves the acquisition and disposal of property, the nature of that property

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 circumstances

There is an intention to make a profit

From an objective consideration of the facts it can be concluded that the Taxpayer's primary purpose for entering into the development agreement with the Developer was profit-making as opposed to merely realising the asset to best advantage. The following facts are noted:

· There was a significant period of planning and negotiation between the parties.

· Under the agreement there will be a master planned community development of a large number of residential lots on the land. The development is designed to maximise the number of lots and sale proceeds.

· The taxpayer will be required to pay the Developer a development fee. A revenue split between the parties has been agreed upon.

· It is proposed that the land stages will be released over time. In entering into the development agreement the Taxpayer has committed to an agreement which will span a significant period of time to completely realise the asset.

· From an objective consideration of the facts it can be concluded that there is a demonstrated intention to profit.

The transaction is commercial in nature

The factors in determining whether a transaction is commercial in nature are listed in Paragraph 13 of TR 92/3, 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; and

· if the transaction involves the acquisition and disposal of property, the nature of that property.

These factors in relation to this case are discussed below:

· The nature of the entity undertaking the transaction is an individual taxpayer. The taxpayer has entered into a development agreement with the Developer.

· The nature of the development activity is discussed in relation to profit intention above. The taxpayer currently farms the land, has done so for decades and will continue to farm those parts of the land not required for the development activity until required.

· The amount of money involved in the activities is significant.

· The complexity of the activity is high. The scale of the activity is large. The following facts are noted:

o Under the agreement the taxpayer will retain ownership of the land and will be required to pay a developer fee for all disposals

o Under the agreement the taxpayer is required to give the developer a mortgage of the land

o Under the agreement the taxpayer will be loaned a sum on execution of the agreement, and

o Under the agreement the taxpayer granted the Developer power of attorney for the purpose of development approvals and sale contracts.

.In relation to the carrying out of the development activity, the following facts are noted:

· Under the agreement the taxpayer is able to review sale forecasts.

· Under the agreement the parties agree to meet for periodic project meetings

· Under the agreement the taxpayer is entitled to their entitlement on the disposal of each lot.

In summary, the taxpayer will be required to maintain a relationship with the Developer over the entire course of the development. And the development will be carried out by a group in the business of broad acre land development.

The nature of the property is farming land with development approval. The taxpayer has taken steps in the past to increase the readiness of the land for subdivision and development.

From a consideration of the facts above it is clear that the transaction is commercial in nature.

Summary

The disposal of the land under the development agreement would be beyond that of a mere realisation of a capital asset and would amount to an isolated profit making transaction. There is a demonstrated intention to profit and the transaction will be carried out in a commercial manner.

Accordingly, the proceeds will be considered ordinary assessable income under section 6-5 of the ITAA 1997.

Note

Section 15-15

Section 15-15 provides that the assessable income of a taxpayer includes the profit arising from the carrying on or carrying out of a profit-making undertaking or plan. The section does not apply to a profit that is assessable as ordinary income under section 6-5.

Accordingly section 15-15 only applies if a profit is not ordinary income assessable under section 6-5 and the profit arises from either a profit-making undertaking or plan which does not involve the sale of property, or a profit-making undertaking or plan which involves the sale of pre-CGT property whether or not acquired with a profit-making intention.

In this case, had the development relating to the pre CGT land not been assessable under section 6-5, section 15-15 would operate to assess any resulting profit.

Section 118-20

To ensure that there is no double taxation under the income and CGT provisions, section 118-20 of the ITAA 1997 reduces the capital gain by the amount that is included as assessable income under another provision of the ITAA 1997. In this case, as the profits from the sale of the subdivided land lots are assessable under section 6-5 of the ITAA 1997, the CGT component would be effectively reduced to nil.