Edited version of your private ruling

Authorisation Number: 1012313941650

This edited version of your ruling will be published in the public register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.

Ruling

Subject: CGT and land subdivision

Question:

1. Will the proceeds from the development of your property constitute a mere realisation of a capital asset and subject to the capital gains tax (CGT) provisions in Part 3-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer:

Yes.

Question:

3. Will you qualify for the 50% CGT discount?

Answer:

Yes.

This ruling applies for the following period

Year ending 30 June 2012

Year ending 30 June 2013

Year ending 30 June 2014

The scheme commenced on

1 July 2011

Relevant facts

You and your spouse purchased approximately less than 10 acres of residential land almost ten years ago.

Your intention at the time of purchase was to build your own home and retain the land for yourselves, your children, and family member's personal use and enjoyment as a semi-rural property indefinitely.

You subsequently built a house on the property and moved in shortly after and have resided there since then.

The property has never been used to derive any form of income and no additional land has been acquired.

Your intention was never to sell any or all of the property. However, due to an unprecedented surge in residential development in the area recently, you were approached by a developer with a plan to subdivide approx 5 acres of land into lots.

You entered into a 'Development Agreement', which includes the following:

· The Developer has been appointed to conduct the project on behalf of the land owners.

· That you are not conducting a business jointly with the Developer and that ownership of the land remains with you until the time of sale(s).

· That funding for the project will be secured by a mortgage over the land.

· That you are not required to be involved in the development.

· The Developers will maintain all records.

Neither you nor your spouse have subdivided or developed any other properties.

You do not have a business plan in relation to this project and all projected cash flows are to be prepared by the Developer.

You and your spouse will have minimal involvement in selling the blocks.

You will not be using any other entity, and all aspects or the development will be done in your own names.

No buildings have been erected on the land.

No applications have been made to local government to date and no approvals or permits have been granted.

Relevant legislative provisions

Income Tax Assessment Act 1997 - Section 6-5

Income Tax Assessment Act 1997 - Section 104-10

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. 

In FC of T v The Myer Emporium (1987) 163 CLR 199; 87 ATC 4363; (1987) 18 ATR 693 (Myer Emporium), the Full High Court expressed the view that profits made by a taxpayer who enters into an isolated transaction with a profit making purpose can be assessable income.

Taxation Ruling TR 92/3 considers the assessability of profits on isolated transactions in light of the principles outlined in Myer Emporium. According to Paragraph 1 of TR 92/3, the term 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.

Paragraph 6 of TR 92/3 provides that a profit from an isolated transaction will generally be income when both the following elements are present:

· your intention or purpose in entering into the transaction was to make a profit or gain, and

· the transaction was entered into, and the profit was made, in the course of carrying on a business or in carrying out a business operation or commercial transaction.

Additionally, if a taxpayer acquires an asset with the intention of using it for personal enjoyment but later decides to commit the asset, either:

· as the capital of a business or  

· into a profit-making undertaking with the characteristics of a business operation or commercial transaction,  

· this activity constitutes the carrying on of a business, or a business operation or commercial transaction. The profit from such activity is income even though the taxpayer did not have the purpose of profit-making at the time of acquiring the asset.

Some of the factors to consider when looking at whether an isolated transaction amounts to a business operation or commercial transaction are listed at paragraph 13 of TR 92/3. They are: 

(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 involves 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.

Profits on the sale of subdivided land can therefore be income according to ordinary concepts within section 6-5 of the ITAA 1997 if the taxpayer's subdivisional activities have become a separate business operation or commercial transaction, or an isolated profit making venture.  

In contrast, paragraph 36 of TR 92/3 notes that the courts have often said that a profit on the mere realisation of an investment is not income, even if the taxpayer goes about the realisation in an enterprising way. However, if a transaction satisfies the elements set out above it is generally not a mere realisation of an investment.

In your case, the property was originally purchased, almost ten years ago, to be used as your main residence and has never been used for income producing purposes. Neither you nor your spouse have subdivided or developed any other properties and you will have minimal involvement in the subdivision of the land. Therefore, any proceeds will represent a mere realisation of a capital asset which will fall for consideration under the CGT provisions in Part 3-1 of the ITAA 1997.

Discount capital gains

CGT event A1 in section 104-10 of the ITAA, relating to the disposal of a CGT asset, will happen when you dispose of the subdivided lots. You will make a capital gain if the capital proceeds from the disposal are more than the cost base. You will make a capital loss of those capital proceeds are less than the reduced cost. 

You will be eligible for the discount capital gains where:

· you are an individual

· the CGT event happened after 21 September 1999

· the capital gain must be calculated without any reference to indexation of the cost base; and

· the CGT asset was acquired more than 12 months the CGT event.

The discount percentage is 50%.

Where a capital gain meets these requirements, that capital gain is a discount capital gain. Generally, the discount percentage is applied to the discount capital gain, to arrive at your net capital gain.

Based on the facts, you will be eligible for the discount capital gains of 50%.