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Ruling

Subject: Subdivision of land

Question 1

Are the proceeds from the sale of the subdivided land assessable as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

Are the proceeds from the sale of the subdivided land assessable as income under section 15-15 of the ITAA 1997?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 2013

Year ended 30 June 2014

Year ended 30 June 2015

Year ended 30 June 2016

The scheme commences on:

1 July 2012

Relevant facts and circumstances

The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:

· the application for private, and

· the documents provided with the application for private ruling.

You and your spouse acquired land after 20 September 1985.

Other than some area surrounding a residence located on the property, all the land has always been used to run a business.

The land was rezoned and consequently residential development has occurred in the area.

As a result of this, you and your spouse are becoming increasingly concerned that you will lose the exemption from land tax.

Council rates have also increased due to the increased market value of the land.

Should the exemption from land tax be lost, the business will be unsustainable as you and your spouse will be unable to meet this additional expense.

Consequently, you and your spouse feel compelled to dispose of the property.

You and your spouse are considering disposing of most of the property by granting the developer rights to develop, advertise and sell the property as set out in the property development agreement.

Under the proposed agreement, the developer would solely undertake the property development and also assume all risks associated with the development.

The developer will be responsible for the advertising and sale of the land in the form of vacant lots.

No community facilities or parks are proposed, however an existing large waterway will be retained as a feature.

No houses will be constructed on the lots prior to their disposal.

Marketing for the sale of the lots will be the sole responsibility of the developer.

You will not be connected to the property development in any way other than by contributing the land for sale.

As you and your spouse's only contribution to the development and sale will be the land, no funds will be borrowed to finance the subdivision.

There will be no site office on the land.

There will be no business organisation, manager, secretary or letter head.

You and your spouse will not engage any contractors to carry out any of the work.

You and your spouse have never been involved in the subdivision of land.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5 and

Income Tax Assessment Act 1997 section 15-15.

Reasons for decision

Summary

The proceeds of the subdivision will not constitute ordinary income in terms of section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997). Section 15-15 of the ITAA 1997 will not apply as the interests in the property were acquired after 20 September 1985.

Detailed reasoning

As a general principle, if the sale of the land constitutes a business, or part of a business, then the proceeds will be assessable as ordinary income, under section 6-5 of the ITAA 1997. On the other hand, if the sale is a mere realisation of the land, the proceeds will be a capital amount.

The Full High Court made this observation in Federal Commissioner of Taxation v. The Myer Emporium (1987) 163 CLR 199 about the nature of profits from isolated transactions:

It is one thing if the decision to sell an asset is taken after its acquisition, there having been no intention or purpose at the time of the acquisition of acquiring for the purpose of profit making by sale. Then, if the asset is not a revenue asset on other grounds, the profit made is capital because it proceeds from a mere realisation. But it is quite another thing if the decision to sell is taken by way of implementation of an intention or purpose, existing at the time of the acquisition, of profit-making by sale, at least in the context of carrying on a business or carrying out a business operation or commercial transaction.

The Courts and the AAT have also said that the profit on the mere realisation of an investment is not income, even if the taxpayer goes about the realisation in an enterprising way. Gibbs CJ in Federal Commissioner of Taxation v. Whitfords's Beach Pty. Ltd. (1982) 150 CLR 355 made the following observation about the disposal of surplus at CLR 367:

If the taxpayer does no more than realise an asset, the profits are not taxable. It does not matter that the taxpayer goes about the realisation in an enterprising way, so as to secure the best price. As I have said in FCT v Williams (1972) 127 CLR 226 at 249: 'The situation is not altered by the fact that the landowner seeks and acts upon the advice of an expert as to the best method of subdivision and sale or by the fact that he caries out work such as grading, levelling, road building and the provision of reticulation for water and power to enable the land to be sold to its best advantage'

It would appear from the cases involving the subdivision of land and from Taxation Ruling TR 92/3 that the following are the most important factors to consider:

· the intention of the parties at the time of the acquisition of the land (although this appears to be of a lesser importance where the subdivision is on a large scale as would occur with a staged subdivision)

· the intention of the parties at the time of the undertaking to strata/subdivide the land; for example, where attempts have failed to sell the land as one lot, it is less likely the entering into the venture was a business undertaking

· the nature and scale of the activities undertaken; for example, where minimal work is required in the way of road works, earthworks, sewerage, water, etc it is more likely a subdivision and sale would be a mere realisation

· where there is a repetition of transactions and a systematic course of conduct it is more likely the profit will be assessable; for example, the profit on a staged subdivision of land with timed releases to the market will be more likely to be assessable

· the manner in which the subdivision was progressed. Where the owner is heavily involved with the project, it is more likely to be considered a business undertaking and the profit assessable, and

· the nature of the other activities undertaken by the taxpayer.

Application to your circumstances

In this case, you and your spouse acquired land to carry out your farming business. When the land was rezoned by the Council, there was concern that the primary producer exemption from land tax may be lost. If this occurred the farming business would be unsustainable.

You and your spouse are not involved in the property development in any way other than providing the land for sale. The property developer will be relied on to undertake the marketing, sale and all other activities associated with the subdivision. You and your spouse have never been involved in the subdivision of land prior to this undertaking.

Accordingly it is considered that the proceeds of the subdivision would not constitute ordinary income in terms of section 6-5 of the ITAA 1997

Question 2

Section 15-15 of the ITAA 1997 provides that a taxpayer's assessable income includes the profit from the carrying on or carrying out of a profit making undertaking or plan. However, section 15-15 of the ITAA 1997 does not apply if:

a) the profit is assessable as ordinary income, or

b) the property was acquired on or after 20 September 1985.

In this case, both interests in the property were acquired after 20 September 1985. Therefore, section 15-15 of the ITAA 1997 does not apply.