Edited version of your private ruling

Authorisation Number: 1012410173278

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Ruling

Subject: Income or capital

Questions:

1. Will the subdivision and sale of your current residential block, as part of a larger development, be considered a 'mere realisation' of a capital asset for income tax purposes?

Answer:

No.

2. Will the proceeds received from the subdivision and sale of your current residential block, as part of a larger development, be assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) as part of a profit making enterprise?

Answer:

Yes.

This ruling applies for the following period

Year ending 30 June 2013

Year ending 30 June 2014

Year ending 30 June 2015

Year ending 30 June 2016

Year ending 30 June 2017

The scheme commenced on

1 July 2012

Relevant facts

You and your spouse initially acquired a parcel of land more than 20 years ago, after 1985, exclusively for domestic or family use and it has never been used for any income producing purpose.

When the property was first occupied, the surrounding properties were farms and there were very few houses in the area. The area has now been identified as a growth area and has been rezoned Residential 1, permitting smaller lot sizes.

You became the sole owner of the property under a Family Law Agreement.

Due to significant health issues you are unable to work full time and you now intend to sell the property to provide for your maintenance and retirement and for the maintenance, education and wellbeing of your children.

You have, through consultation, been considering the best way to 'realise the capital asset' and you have decided to subdivide the land into less than 80 lots.

The development will be completed in stages; a minimum of two and a maximum of four.

You intend to borrow the funds necessary to complete stage one, a maximum of $ X million, and you expect the development to be self funding after that.

You intend to carryout the minimum amount of clearing and earthworks as required by the statutory bodies.

There will be no buildings of any type constructed as part of the development. The only buildings will be the family home and outbuildings.

You intend to appoint a project manager to engage and organise all contractors. You will have minimal, if any, involvement in the development.

You intend to list the lots for sale with two local real estate agents. You will not be actively involved in the sale or marketing of the lots.

No permits or approvals have been applied for or granted as yet.

You have never undertaken any subdivision or development activities in the past.

Due to access issues associated with your land, your self managed superfund (SMSF) has purchased additional land that will also be subdivided into several lots.

Your SMSF purchased the additional land in the 2012-13 financial year on advice from the project manager as this will assist you in obtaining the necessary approvals required for the development.

You are also considering purchasing additional land through a related entity, possibly a family trust, to comply with the council's 'green space' requirements as part of the development. This land will also be subdivided into several lots.

Relevant legislative provisions

Income Tax Assessment Act 1997 - Section 6-5

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 initially acquired solely for domestic or family use and it has never been used for any income producing purpose. You became the sole owner of the property under a Family Law Agreement.

Under the proposal, the block will be subdivided into less than 80 lots. Additional land purchased through your self managed super fund, and other related entities, such as a family trust, for the sole purpose of sub-dividing form part of the same development. The total development will result in less than 100 lots, roads and green spaces. The development will be completed in stages and you intend to borrow the funds, a maximum of $X million, necessary to complete stage one.

While you are not a business entity and have not undertaken any subdivision or development activities in the past, the financial risk you propose to undertake in a land subdivision of this scale, both personally and through related entities, is akin to a normal business activity. Although your involvement in the development will be minimal, you intend to appoint a project manager and have the lots listed for sale with two local real estate agents as a commercial arrangement.

On balance, it would seem that the project you propose is an undertaking of sufficient scale to take it well beyond the realms of a mere realisation of an asset and characterize it as a commercial undertaking.

Therefore, the proceeds from the sale of all the subdivided land, including your residential block, will be assessable under section 6-5 of the ITAA 1997 as ordinary income.