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Authorisation Number: 1012293751463

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Ruling

Subject: Sale of subdivided blocks

Questions and answers:

Will the proceeds from the sale of the subdivided blocks be assessable as ordinary income?

No

Will the proceeds from the sale of the subdivided blocks be assessable as a capital gain?

No

This ruling applies for the following period:

Year ended 30 June 2013

Year ended 30 June 2014

The scheme commenced on:

1 July 2012

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You and your spouse acquired a property before 20 September 1985 with the original intention that it would be your main residence.

The property has been used for livestock grazing since acquisition.

The local council produced a Development Plan for the area in which your property is located which has since been adopted as the basis for the future development of the area.

The Council decided to rezone the property from rural to residential.

You and your spouse have reached an in principle agreement with an independent property developer for the disposal of the property subsequent to subdivision.

The property developer will conduct and manage the land subdivision, including the provision of all the necessary services and engagement of all the relevant parties.

The property developer will be responsible for:

· a feasibility study

· construction of roads

· connection of services

· engagement of engineers and surveyors

· arranging funding for the development

· acting as selling agent to market and sell the subdivided blocks

This has been documented in a Property Development Agreement (PDA).

You have provided a copy of the PDA.

The developers are arm's length parties to you and your spouse, are not otherwise associated and were not known to you prior to this project.

You and your spouse will maintain your original occupations.

You and your spouse are not in the business of property development.

You and your spouse have not advertised or promoted the land for sale.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 6-5.

Income Tax Assessment Act 1997 Subsection 6-10.

Income Tax Assessment Act 1997 Subsection 15-15.

Income Tax Assessment Act 1997 Subsection 102-5.

Income Tax Assessment Act 1997 Subsection 102-20.

Income Tax Assessment Act 1997 Subsection 104-10.

Income Tax Assessment Act 1997 Subsection 104-10(5).

Income Tax Assessment Act 1997 Subsection 108-5.

Reasons for decision

Assessable Income

Subsection 6-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that your assessable income includes the ordinary income derived by you. Section 6-10 of the ITAA 1997 points out that some amounts (called statutory income) that are not ordinary income are included in your assessable income by provisions of the ITAA 1997.

The term ordinary income is defined in subsection 6-5(1) of the ITAA 1997 to mean income according to ordinary concepts. Ordinary income includes income that arises in the normal course of a persons business and some that arises from isolated transactions.

Since you and your spouse are not in the business of subdividing land any profits you make from the sale of your subdivided blocks will not be income made in the ordinary course of a business.

Assessable income arising from an isolated transaction

The decisions from various court cases demonstrated that the involvement of the taxpayer was a significant factor in determining whether the transaction was a business or commercial nature.

Decisions in cases such as Casimaty v FC of T 97 ATC 5135; (1997) 37 ATR 358 and McCorkell v. FC of T 98 ATC 2199; (1998) 39 ATR 1112 (McCorkell's Case) demonstrate that in circumstances where there is an absence of profit making intention when farming land is acquired, the likelihood of any profit made on the eventual sale of land being income according to ordinary concepts is greatly diminished.

Profits on the sale of land can still be income according to ordinary concepts within section 6-5 of the ITAA 1997, or as a profit making undertaking or plan within section 15-15 of the ITAA 1997 if the taxpayer's activities have become a separate business operation or commercial transaction.

Taxation Ruling TR 92/3 provides guidance in determining whether profits from isolated transactions are ordinary income and therefore assessable under section 6-5 of the ITAA 1997. Paragraph 1 of TR 92/3 defines the term isolated transactions as 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 13 outlines a number of factors which must be considered in determining whether an isolated transaction amounts to a business operation or commercial transaction including:

(a) the nature of the entity undertaking the operation or transaction;

(b) the nature and scale of other activities undertaken by the taxpayer;

(c) the amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained;

(d) the nature, scale and complexity of the operation or transaction;

(e) the manner in which the operation or transaction was entered into or carried out;

(f) the nature of any connection between the relevant taxpayer and any other party to the operation or transaction;

(g) if the transaction involved the acquisition and disposal of property, the nature of that property; and

(h) the timing of the transaction or the various steps in the transaction.

We have considered the above factors and the following:

· You and your spouse are not in the business of property development.

· You and your spouse's intention at the time of acquisition was not to subdivide.

· Both of your involvement in the planned subdivision will be minimal.

· You and your spouse have not advertised or promoted the land for sale.

· You and your spouse will maintain your original occupations.

You both have entered into an agreement with a property developer who will conduct and manage the land subdivision, including the provision of all the necessary services and engagement of all the relevant parties. The property developer will be responsible for:

· a feasibility study

· construction of roads

· connection of services

· engagement of engineers and surveyors

· arranging funding for the development

· acting as selling agent to market and sell the subdivided blocks.

Having regard to above we have concluded that the proceeds from the subdivision of land will not be income according to ordinary concepts, as they represent the mere realisation of a capital asset, carried out in an enterprising way so as to secure the best price.

Section 15-15 of the ITAA 1997 does not apply to this case as there is no evidence that the original land was acquired by you for the purpose of profit-making by sale, or from the carrying on or carrying out of any profit-making undertaking or plan.

Capital Gains Tax

Effect of the subdivision

Land, or an interest in land, is a CGT asset (section 108-5 of the ITAA 1997). The sale of a CGT asset will be a disposal which will give rise to CGT event A1 under section 104-10 of the ITAA 1997.

Section 112-25 of the ITAA 1997 states that the subdivision of land into a number of lots is not, in itself, a CGT event (Capital Gains Tax Determination TD 7). The original block of land will be deemed to have been split into a number of new assets as a result of the subdivision (Tax Determination TD 97/3). The acquisition date of each of the new subdivided blocks will be the same as the original block.

In this case, as the land was acquired before 20 September 1985, any capital gain or capital loss is disregarded under subsection 104-10(5) of the ITAA 1997.