Edited version of your private ruling

Authorisation Number: 1012487960014

Ruling

Subject: Land subdivision

Questions

1. Will the sale of lots subdivided from Block 1 and Block 2 be assessable to the Rulee on capital account as the mere realisation of an asset and therefore assessable as a capital gain under section 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997)

Answer:

No

2. Will the profit from the sale of lots subdivided from Block 1 and Block 2 be assessable to the Rulee on revenue account from an isolated business transaction under section 6-5 of the ITAA 1997?

Answer:

Yes

3. If the Rulee is carrying on a business in respect of the subdivision when will the land owned by the Rulee become trading stock for the purposes of section 70-30 of the ITAA 1997?

Answer:

Not applicable as the Rulee is not considered to be carrying on a business

This ruling applies for the following period

Year ended 30 June 2013

Year ended 30 June 2014

Year ended 30 June 2015

Year ended 30 June 2016

The scheme commenced on

1 July 2003

Relevant facts

The Rulee carried out a subdivision over two blocks of land.

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

The proceeds from the sale of the subdivided land will be income according to ordinary concepts, and therefore assessable under section 6-5 of the ITAA 1997 as an isolated business transaction.