Edited version of your private ruling

Authorisation Number: 1012518643846

Ruling

Subject: Subdivision of land

Question 1

Are the proceeds from the sale of the subdivided land assessable as profits from an isolated transaction?

Answer

No.

Question 2

Are the proceeds from the sale of the subdivided land considered a mere realisation of a capital asset for income tax purposes?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 2014

The scheme commences on:

1 July 2013

Relevant facts and circumstances

You and your spouse received compensation.

In the 199X financial year, you and your spouse used these funds to purchase land that was zoned as residential land.

You and your spouse decided to investigate with the local council the possibility of subdividing the property.

The council gave permission to subdivide but a short time later your spouse passed away.

In the 199Y financial year, you returned to dealing with the subdivision of the property.

Part of the vacant land was easily subdivided into two blocks as there were minimal council requirements.

Lots 1 and 2 were registered and sold. The proceeds from both of these sales were dealt with under the capital gain tax provisions.

The development of Y lots began with available funds from the sale of lot 2.

Work was undertaken to install water lines and power poles.

During the 200Z financial year all works required by council were complete and you received the certificate of subdivision.

At this point in time you did not register the subdivision with the land titles office.

You decided that you would register the lots and make them available for sale.

In the relevant financial year you received registration of the subdivision of the individual lots from the land titles office.

You are not in the business of developing land. You have no business plan and keep your own records.

You have not subdivided land previously.

You did not borrow any money to undertake the subdivision.

You have engaged the services of a real estate agent to sell the blocks.

Relevant legislative provisions

Income Tax Assessment Act 1997 6-5

Reasons for decision

Profits arising from an isolated business or commercial transaction will be ordinary income if the taxpayer's purpose or intention in entering into the transaction is to make a profit, even though the transaction may not be part of the ordinary activities of the taxpayer's business (FC of T v. Myer Emporium Ltd 1987 163 CLR 199; 87 ATC 4363; 18 ATR 693) (Myer Emporium). 

Taxation Ruling TR 92/3 considers the principles outlined in the Myer Emporium case and provides guidance in determining whether profits from isolated transactions are assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) as ordinary income.

If a taxpayer makes a profit from a transaction or operation, that profit is income if the transaction or operation is not in the course of the taxpayers business but:

· the intention or purpose of the taxpayer in entering into the profit-making transaction or operation was to make a profit or gain, and

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

Whether an isolated transaction is business or commercial in character will depend on the circumstances of each case. Where a taxpayer's activities have become a separate business operation or commercial transaction, the profits on the sale of subdivided land can be assessed as ordinary income within section 6-5 of the ITAA 1997. TR 92/3 lists the following factors to be considered:

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.

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.

Miscellaneous Taxation Ruling MT 2006/1 provides a list of specific factors relevant to isolated transactions and sales of real property. If several of the factors are present, it may be an indication that a business or an adventure or concern in the nature of trade is being carried on. These factors are as follows:

§ there is a change of purpose for which the land is held;

§ additional land is acquired to be added to the original parcel of land;

§ the parcel of land is brought into account as a business asset;

§ there is a coherent plan for the subdivision of the land;

§ there is a business organisation - for example a manager, office and letterhead;

§ borrowed funds financed the acquisition or subdivision;

§ interest on money borrowed to defray subdivisional costs was claimed as a business expense;

§ there is a level of development of the land beyond that necessary to secure council approval for the subdivision; and

§ buildings have been erected on the land.

No single factor is determinative; rather it will be a combination of factors that will lead to a conclusion as to the character of the activities.

Application to your circumstances

In your case, the property was originally purchased in the199X financial year with your spouse. You were granted permission to subdivide the land by the local council. You have not subdivided or developed any other properties and you have had minimal involvement in the subdivision of the land over a long period of time.

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 which will fall for consideration under the capital gains tax provisions of the ITAA 1997.