Edited version of your private ruling

Authorisation Number: 1012473266145

Ruling

Subject: Subdivision of land

Question

Will the subdivision and sale of your current residential block be considered a mere realisation of a capital asset for income tax purposes?

Answer

Yes.

This ruling applies for the following periods:

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 commences on:

1 July 2012

Relevant facts and circumstances

You and your former spouse acquired a property after 20 September 19XX.

You became the 100% owner of said land under a Family Law Agreement.

The land has been used wholly and exclusively for domestic purposes from the date of acquisition and is still (to this day) used for said purpose. It has never been used to produce income.

You intend to sell the land to provide for your maintenance and retirement and for the maintenance, education and wellbeing of your children.

You have never had any connection or involvement with any property development previously.

You have considered selling the broad acreage but the amount the raw land would realise is very low and as such unacceptable.

You intend to subdivide the land, retain a lot as your principal residence and sell the remaining lots.

You intend to acquire part of another property to be used as a second access to the subdivision.

You would not realise any financial gain if this is pursued and would more likely incur a financial loss. If the property was purchased it could be surrendered as road reserve.

You own the land and it is your tax agent's advice that from a risk management perspective, you should borrow the minimum amount required and stage the development of the land.

It is also their advice to minimise the stages due to additional costs. It is expected that the project will be completed in two to four stages.

You do not have a business plan. All that you have used when completing projections is per lot estimates provided by surveyors.

You have no business organisation, no manager, no office, no secretary and no letterhead.

It is your intent to carry out the absolute minimum amount of clearing and earth works as required by the statutory bodies. There will be no buildings/structures of any type constructed by you.

There is not a site office or any other buildings erected on the land, other than the family home and its outbuildings which you intend to retain.

You intend to appoint an entity to project manage the total development. They will be responsible for engaging and organising all contractors and you will have minimal involvement.

The number of anticipated lots is less than 70.

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

You have not taken time off from your normal activities to work on the development.

You do not intend to undertake any further developments of this nature in the future.

No lots have been realised as yet, as no permits or approvals have been applied for or granted.

You are the entity undertaking the project in your own name.

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 originally purchased with your then spouse to be used as your main residence. You became the sole owner of the property under a Family Law Agreement and now intend to subdivide the land. You also intend to purchase a separate block to be used as an entrance to the subdivision. You have never subdivided or developed any other properties and you will have minimal involvement in the subdivision of the land. The property has never been used to produce income.

Having regards to your circumstances and the factors outlined above, we consider that any proceeds from the sale of the subdivided land will represent a mere realisation of a capital asset.