Edited version of your private ruling

Authorisation Number: 1012295398380

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Ruling

Subject: Subdivision of land

Question 1:

Will the proceeds from the sale of the subdivided blocks be assessable as ordinary income under section 6-5 or section 15-15 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer:

No

Question 2:

Will the proceeds from the sale of the subdivided blocks be assessable as a capital gain under subsection 104-10(5) of the ITAA 1997?

Answer:

No

This ruling applies for the following period:

Year ended 30 June 2012

Year ended 30 June 2013

Year ended 30 June 2014

Year ended 30 June 2015

The scheme commenced on:

1 July 2011

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 jointly purchased a vacant block of land in Australia before 20 September 1985.

You both bought the land with the intention of building a home for your family.

You subsequently discovered that the land was not suitable for building a house due to engineering and construction issues.

You and your spouse purchased another home for you and your family to live in.

The land has not been used for income producing purposes or been lived on at any time since your ownership.

Over the years you and your spouse have attempted to sell the block but have not been successful.

A few years ago you applied for a permit to subdivide the block into a certain number of lots. A permit to subdivide was issued about a year later with a revised permit in being issued several months later, following drainage work to make the property saleable.

In the 2011-12 income year you invited tenders. The successful tender was appointed.

The engineering and subdivision work commenced in the 2011-12 income year. The work was completed by contractors as you both had no expertise in town planning, design, engineering and construction.

The work done did no more than what was required by the council permit and no more than what was necessary for the council to certify compliance in order for you to register the plan of subdivision with the land titles office.

A real estate agent has been engaged to sell the subdivided blocks. A few of the blocks have been sold and all will be sold before 30 June 2015.

You and your spouse have maintained and will continue to maintain your usual occupations.

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

You and your spouse have not previously subdivided and sold land and have no intention of subdividing and selling land following the sale of the current property.

You and your spouse are not registered for GST.

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 subdivision has been minimal.

· You and your spouse are not registered for GST.

· You and your spouse have maintained and will continue to maintain your usual occupations.

· You and your spouse have not previously subdivided and sold land and have no intention of subdividing and selling land following the sale of the current property.

· The work was completed by contractors as you both had no expertise in town planning, design, engineering and construction.

· A real estate agent has been engaged to 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 is 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 is 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.