Edited version of your private ruling

Authorisation Number: 1012483877394

Ruling

Subject: Land subdivision

Questions

Will the anticipated profit realised from the sale of Lot 1 be assessable income pursuant to section 6-5 or section 15-15 of the Income Tax Assessment Act 1997 (ITAA 1997)

Answer:

No

Will the anticipated profit realised from the sale of Lot 1 be assessable income pursuant to section 25A of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer:

No

Will Lot 1 be subject to the trading stock provisions contained in Division 70 of the ITAA 1997?

Answer:

No

Will any capital gain realised from the sale of Lot 1 be a disregarded gain under section 104-10(5) of the ITAA 1997?

Answer:

Yes

This ruling applies for the following period

Year ended 30 June 2014

The scheme commenced on

1 July 2013

Relevant facts

You do not carry on a business of property development.

You acquired Lot 1 prior to 20 September 1985.

Lot 1 is vacant land, unsuitable for farming. The land has an easement which enabled your sibling to bring livestock to graze from their property adjacent to Lot 1.

You have received planning permission to subdivided Lot 1 into X, Y hectare blocks which will be sold.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 102-5

Income Tax Assessment Act 1936 section 25A

Income Tax Assessment Act 1997 section 104-10(5)

Income Tax Assessment Act 1997 Division 70

Income Tax Assessment Act 1997 Part 3-1

Reasons for decision

There are three ways profits from a land sub-division can be treated for taxation purposes:

(1) As ordinary income under section 6-5 of the ITAA 1997, on revenue account, as a result of carrying on a business of property development, involving the sale of land as trading stock.

(2) As ordinary income under section 6-5 of the ITAA 1997, on revenue account, as a result of an isolated business transaction entered into by a non-business taxpayer or outside the ordinary course of business of a taxpayer carrying on a business, which is the commercial exploitation of an asset acquired for a profit making purpose.

(3) As statutory income under the capital gains tax (CGT) legislation, (sections 10-5 and 102-5 of the ITAA 1997), on the basis that a mere realisation of a capital asset has occurred.

The proceeds from the mere realisation of an asset are not ordinary income, even though the realisation is carried out in an enterprising way so as to secure the best price. However, an isolated business transaction entered into with a view to making a profit may give rise to income according to ordinary concepts. This would also apply if a capital asset is ventured in an undertaking or scheme which involves more than the mere realisation of the asset.

Profit arising from the sale of property acquired prior to 20 September 1985 is assessable under the provisions of section 25A of the Income Tax Assessment Act 1936 (ITAA 1936) if the property was acquired for the purpose of profit making by sale. Profits arising from a profit-making undertaking or plan may also be assessable under section 15-15 of the ITAA 1997.

Carrying on a business of property development

The Commissioners view on whether a taxpayer is carrying on a business is found in Taxation Ruling TR 97/11, which uses the following indicators to determine whether a taxpayer is carrying on a business:

· whether the activity has a significant commercial purpose or character

· whether there is repetition and regularity of the activity

· whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business

· whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit

· the size, scale and permanency of the activity

· whether the activity is better described as a hobby, a form of recreation or a sporting activity.

Isolated business transactions

The Commissioners view on whether profits from isolated transactions are assessable as ordinary income is found in Taxation Ruling TR 92/3. The term 'isolated transactions' refers to:

· those transactions outside the ordinary course of business of a taxpayer carrying on a business

· those transactions entered into by non-business taxpayers.

TR 92/3 states profits on an isolated transaction will be ordinary income when:

· the intention or purpose of a taxpayer in entering into the transaction was to make a profit or gain

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

For a one-off land subdivision to be considered to be of a business or commercial nature, it is usually necessary that a taxpayer has the purpose of profit-making at the time of acquiring the property.

Trading Stock

If a taxpayer is considered to be carrying on a business of property development or conducting an isolated business transaction, land and property may be considered trading stock under section 70-10(a) of the ITAA 1997. Any proceeds from sale are then treated as ordinary income, and the business enterprise may be required to register for GST. This could happen even for a one-off transaction.

Application to the current circumstances

Based on the facts provided, the proposed sale of Lot 1 would not be considered to be income for the purposes of section 6-5 of the ITAA 1997. You are not considered to be carrying on a business of subdividing and/or selling the land. They will not undertake the subdivision and only sought planning approval in the hope to maximise their returns from the sale of the property which had been vacant unused land for over 30 years.

The proposed sale of the Lot 1 is also not considered to be income under the provisions of section 25A of the ITAA 1936 or section 15-15 of the ITAA 1997. The land was not acquired for the purposes of profit making by sale as demonstrated by the continued use of the property for commercial purposes. As such Lot 1 will not be subject to the trading stock provisions contained in Division 70 of the ITAA 1997.

The proposed sale is more akin to the mere realisation of a capital asset in the most advantageous form.  

Capital gains tax (CGT)

A capital gain or capital loss you make is disregarded if you acquired the CGT asset prior to 20 September 1985 under paragraph 104-10(5)(a) of the ITAA 1997. Therefore the proceeds from the sale of Lot 1 will be disregarded.