Edited version of your private ruling

Authorisation Number: 1012524070300

Ruling

Subject: Land subdivision - assessable income - isolated transaction - capital gain event - pre CGT exemption

Question 1

Will the anticipated profit realised from the sale of the Property by the Taxpayer be assessable income pursuant to section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

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

Answer

No.

Question 3

Will the anticipated profit realised from the sale of the Property by the Taxpayer be assessable income pursuant to section 15-15 of the ITAA 1997?

Answer

No.

Question 4

Will the Property be considered trading stock pursuant to Division 70 of the ITAA 1997?

Answer

No.

Question 5

Will the anticipated gain made from the sale of the Property by the Taxpayer be considered a capital gain event pursuant to Part 3-1 of the ITAA 1997?

Answer

Yes.

Question 6

Will the anticipated gain made from the sale of the Property by the Taxpayer be disregarded under section 104-10(5) of the ITAA 1997?

Answer

Yes.

This ruling applies for the following periods:

Year ending 30 June 2014;

Year ending 30 June 2015;

Year ending 30 June 2016;

Year ending 30 June 2017; and

Year ending 30 June 2018.

The scheme commences on:

16 July 2013.

Relevant facts and circumstances

The Taxpayer purchased the Property in 19XX.

The Taxpayer and their family have continuously resided in the main dwelling since acquisition date.

Some time after the property was acquired; discussions occurred regarding potential subdivision of the property with adjoining property owners. The owner of the neighbouring property was keen to subdivide and it was considered by the Taxpayer that if the neighbour was successful in obtaining permission to subdivide on their own, it would detrimentally impact on the Property. As a result the first rezoning from rural to residential application was made jointly by the Taxpayer and the neighbours but was unsuccessful. The Taxpayer did not expect or want the application to be successful.

A few years later the Council formalised their development plans for the area in a 'vision statement'. The Taxpayer was prompted to again consider rezoning and subdividing the Property as a result of the proposed changes by the Council for the surrounding area due to the impact it may have on the Property.

A third party was engaged by the Taxpayer and the neighbours to undertake the rezoning application. The application was lodged with the council. It took an extended period of time for the application to be considered due to issues identified in the 'vision statement'. The Councill needed to resolve these issues before it could consider the application. The approval was eventually received.

The third party was again engaged by the Taxpayer and the neighbours to lodge a subdivision application and Council issued consent.

On the basis of the successful subdivision application, the Taxpayer is intending to dispose of some of the lots. The Taxpayer is contemplating various alternatives in relation to the sale of the subdivided land and has submitted three different options on how they might proceed.

Option 1: Sale of the Property in its entirety to a developer

· the Taxpayer will incur all costs to obtain the Development Authority including approved engineering designs and service authority requirements;

· the Taxpayer will sell the entire property to the developer and lease back the existing main residence;

· after civil works are completed and subdivision approved, they will buy back the lot comprising the main residence;

· the Taxpayer may acquire a number of other undeveloped lots for investment purposes or to provide for the children.

Option 2: Sale of Part of the Property to a developer

· the Taxpayer will incur all costs to obtain Development Authority approval including approved engineering designs and service authority requirements;

· the Taxpayer will then agree to sell approximately 50% of the land to a developer;

· the Taxpayer will retain the remaining 50% of the land and the main residence;

· the developer would undertake the necessary civil works;

· sufficient lots to fund the Taxpayers costs would be sold;

· the Taxpayer would hold the other undeveloped lots for investment purposes or to provide for the children.

Option 3: Selling all lots in various stages

· the Taxpayer will incur all costs to obtain Development Authority approval including approved engineering designs and service authority requirements;

· the Taxpayer would engage appropriate third parties to undertake the works necessary for subdivision to occur (e.g. connection of services, construction of roads);

· the Taxpayer would engage an agent to sell the subdivided lots;

· the subdivision would proceed in stages, an initial release of 20 lots would occur;

· all lots would be sold as land only (i.e. no building work will be undertaken);

· the Taxpayer would retain the main residence; and

· the Taxpayer would hold the other undeveloped lots for investment purposes or to provide for the children.

The Taxpayer has requested that we consider the six questions for each of the above three options. The Taxpayer will do the minimum possible required to dispose of the land and intend to take a passive role in all of the three options. Which of the options they undertake will depend largely on whether a developer can be found that is prepared to acquire the property on terms acceptable to the Taxpayer.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 25A;

Income Tax Assessment Act 1997 section 6-5;

Income Tax Assessment Act 1997 section 15-15;

Income Tax Assessment Act 1997 Part 3-1;

Income Tax Assessment Act 1997 Part 3-3;

Income Tax Assessment Act 1997 Division 70;

Income Tax Assessment Act 1997 section 104-10;

Income Tax Assessment Act 1997 section 108-5;

Income Tax Assessment Act 1997 section 110-25;

Income Tax Assessment Act 1997 section 112-25.

Reasons for decision

Option 1 - SALE OF THE PROPERTY IN ITS ENTIRETY TO A DEVELOPER

Question 1

Will the anticipated profit realised from the sale of the Property by the Taxpayer be assessable income pursuant to section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Summary

The Taxpayer's involvement and activities are not indicative of a business of property subdivision. The Taxpayer's activities are not the same nor carried on in a manner similar to those engaging in the trade of property subdivision. The subdivision of the land amounts to a mere realisation of a private capital asset and not a business or profit-making undertaking or scheme. Consequently, the proceeds from the realisation of the Property will not give rise to ordinary income under section 6-5 of the ITAA 1997.

Detailed reasoning

Section 6-5 of the ITAA 1997 provides that the assessable income of an Australian resident includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during an income year. Ordinary income is income according to ordinary concepts, and includes income from carrying on a business.

The proceeds from realising an asset will fall into one of the following situations:

· It gives rise to income according to ordinary concepts under section 6-5 of the Income Tax Assessment 1997 (ITAA 1997); or

· It gives rise to profit from the carrying on or carrying out of a profit-making undertaking or plan under section 25A of the ITAA 1936 if the asset was acquired before 20 September 1985; or

· It gives rise to profit from the carrying on or carrying out of a profit-making undertaking or plan under section 15-15 of the ITAA 1997 if the asset was acquired before 20 September 1985; or

· It gives rise to a gain under capital gains tax (CGT) provisions in Part 3-1 of the ITAA 1997.

Income according to ordinary concepts

As a general principle, if the sale of the land constitutes a business, or part of a business, then the proceeds will be assessable as ordinary income, under section 6-5 of the ITAA 1997. On the other hand, if the sale is a mere realisation of the land, the proceeds will be a capital amount.

The Full High Court made this observation in Federal Commissioner of Taxation v. The Myer Emporium (1987) 163 CLR 199 about the nature of profits from isolated transactions:

It is one thing if the decision to sell an asset is taken after its acquisition, there having been no intention or purpose at the time of the acquisition of acquiring for the purpose of profit making by sale. Then, if the asset is not a revenue asset on other grounds, the profit made is capital because it proceeds from a mere realisation. But it is quite another thing if the decision to sell is taken by way of implementation of an intention or purpose, existing at the time of the acquisition, of profit-making by sale, at least in the context of carrying on a business or carrying out a business operation or commercial transaction.

The Courts and the Administrative Appeals Tribunal (AAT) have also said that the profit on the mere realisation of an investment is not income, even if the taxpayer goes about the realisation in an enterprising way. Gibbs CJ in Federal Commissioner of Taxation v. Whitfords's Beach Pty. Ltd. (1982) 150 CLR 355 made the following observation about the disposal of surplus at CLR 367:

If the taxpayer does no more than realise an asset, the profits are not taxable. It does not matter that the taxpayer goes about the realisation in an enterprising way, so as to secure the best price. As I have said in FCT v Williams (1972) 127 CLR 226 at 249: 'The situation is not altered by the fact that the landowner seeks and acts upon the advice of an expert as to the best method of subdivision and sale or by the fact that he carries out work such as grading, levelling, road building and the provision of reticulation for water and power to enable the land to be sold to its best advantage'

It would appear from the cases involving the subdivision of land and from Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income that the following are the most important factors to consider:

· the intention of the parties at the time of the acquisition of the land (although this appears to be of a lesser importance where the subdivision is on a large scale as would occur with a staged subdivision)

· the intention of the parties at the time of the undertaking to strata/subdivide the land; for example, where attempts have failed to sell the land as one lot, it is less likely the entering into the venture was a business undertaking

· the nature and scale of the activities undertaken; for example, where minimal work is required in the way of road works, earthworks, sewerage, water, etc it is more likely a subdivision and sale would be a mere realisation

· where there is a repetition of transactions and a systematic course of conduct it is more likely the profit will be assessable; for example, the profit on a staged subdivision of land with timed releases to the market will be more likely to be assessable

· the manner in which the subdivision was progressed. Where the owner is heavily involved with the project, it is more likely to be considered a business undertaking and the profit assessable, and

· the nature of the other activities undertaken by the taxpayer.

In Re Lindsay Thomas Statham and Sydney Douglas Bickerton As Trustees of the Estate of Charles Neville Adermann, Deceased v Commissioner of Taxation  [1988] FCA 463 (23 December 1988) (Statham Case), the Full Federal Court confirmed this approach. The court held that the subdivision in question was only a mere realisation and not a profit-making undertaking or scheme. Some of the factors considered were:

· the subdivision and development occurred over a long period of time;

· the work proceeded methodically over this extended period; and

· the size of the subdivision,

were not sufficient to indicate a business venture or profit-making scheme.

The Taxpayer:

§ had no intention of subdividing at time of acquisition;

§ they will attempt to sell the land as a single lot;

§ will undertake minimal work for the subdivision;

§ the land release is on a small scale;

§ will not be heavily involved in the project; and

§ the subdivision is not in the nature of their normal activities.

Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production provides at paragraph 23:

There are no hard and fast rules for determining whether a taxpayer's activities amount to the carrying on of a business of primary production. The facts of each case must be examined. In Martin at CLR 474; AITR 551 Webb J said:

'The test is both subjective and objective: it is made by regarding the nature and extent of the activities under review, as well as the purpose of the individual engaging in them, and, as counsel for the taxpayer put it, the determination is eventually based on the large or general impression gained.'

Paragraph 24 of TR 97/11 then states:

The nature of the activity, the taxpayer's intention and the method of operation help determine whether a business of primary production is being carried on. Many of the relevant indicators are stated in the decision of the Full Federal Court in Ferguson. Bowen CJ and Franki J said in their joint judgment at FLR 314; ATC 4264-4265; ATR 876-877:

'Section 6 of the Income Tax Assessment Act [1936] defines 'business', stating that it includes any profession, trade, employment, vocation or calling, but does not include occupation as an employee. This does not afford much assistance in the present case. It is necessary to turn to the cases. There are many elements to be considered. The nature of the activities, particularly whether they have the purpose of profit-making, may be important. However, an immediate purpose of profit-making in a particular income year does not appear to be essential. Certainly it may be held a person is carrying on business notwithstanding his profit is small or even where he is making a loss. Repetition and regularity of the activities is also important. However, every business has to begin, and even isolated activities may in the circumstances be held to be the commencement of carrying on business. Again, organization of activities in a businesslike manner, the keeping of books, records and the use of system may all serve to indicate that a business is being carried on. The fact that, concurrently with the activities in question, the taxpayer carries on the practice of a profession or another business does not preclude a finding that his additional activities constitute the carrying on of a business. The volume of his operations and the amount of capital employed by him may be significant. However, if what he is doing is more properly described as the pursuit of a hobby or recreation or an addiction to a sport, he will not be held to be carrying on a business, even though his operations are fairly substantial.' (emphasis added)

In the Statham Case, which looked at land development and whether it was considered a profit-making undertaking or scheme, the Court looked at the circumstances where land originally purchased for farming was later subdivided and sold. The decision in this case was that the taxpayer was not in the business of selling land and the profits made did not constitute business income or carrying out of any profit-making undertaking or scheme. Reasons for the Statham Case decision were provided as:

44. These considerations do not, in our opinion, have the effect of pushing a mere realisation of assets over the line into the region of a business venture or a profit-making undertaking or scheme. … The period of time involved seems to us to reflect the fact that the subdivision involved land in a relatively small town. There is no evidence that the owners engaged in some holding exercise, carefully releasing allotments for sale, as one might expect to occur in a business or scheme.

45. We are satisfied, after applying the principles of law to which we have referred above to the established facts that the owners did not enter into the business of selling land. Therefore, the realisation of the land by sale did not result in income being earned by them for the purposes of sub-s.25(1). We are also of the view that this was not a case of profit which arose from the carrying on or carrying out of any profit-making undertaking or scheme. We are satisfied on the facts that what occurred was the mere realisation, by the most advantageous means, of the asset which the owners had on their hands when they abandoned the intention of farming the subject property.

The Property was originally purchased for the sole use of the family and for domestic related purposes. After residing on the land for some years, a decision was made to realise part of the property.

The Taxpayer did not have the intention to carry on a business of selling land when the acquisition took place. The Taxpayer has applied themselves in an enterprising way for the realisation of a private capital asset. There is nothing surprising in the fact that the Taxpayer is going about this realisation in a prudent manner calculated to maximise their receipts. The fact that this occurred does not make the proceeds either profits from an undertaking or scheme, or income from a business.

The Taxpayer's involvement and activities are not indicative of a business of property subdivision. The Taxpayer's activities are not the same, nor carried on in a manner similar to, those engaging in the trade of subdividing property. The Taxpayer will have no businesslike organisation, no manager, no office and no secretary. The Taxpayer plans to attempt to sell the land as a single lot. The sale of the land amounts to a mere realisation of a private capital asset and not a business or profit-making undertaking or scheme.

Consequently, the proceeds from the realisation of the Property will not give rise to ordinary income under section 6-5 of the ITAA 1997.

Question 2

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

Answer

No.

Summary

The anticipated profit realised from the sale of subdivided land will not be assessable income pursuant to section 25A of the ITAA 1936 as the sale will occur after the 1997-98 year.

Detailed reasoning

To be considered to have carried on or carried out a profit-making undertaking or plan under section 25A of the ITAA 1936 the profit making needs to have been conducted prior to 1997-98 year. As the sale of the Property will occur after the 1997-98 year any anticipated profit realised from the sale of the land will not be assessable income pursuant to section 25A of the ITAA 1936.

Question 3

Will the anticipated profit realised from the sale of the Property by the Taxpayer be assessable income pursuant to section 15-15 of the ITAA 1997?

Answer

No.

Summary

The anticipated profit realised from the sale of the subdivided land will not be assessable income pursuant to section 15-15 of the ITAA 1997.

Detailed reasoning

Section 15-15 of the ITAA 1997 includes in assessable income any profit from the carrying on or carrying out of a profit-making undertaking or plan and is applicable when an asset was acquired before 20 September 1985 and the profit arises after 1997-98 year.

TR 92/3 states at paragraph 35 that when a taxpayer makes a profit from an isolated transaction other than in the course of carrying on a business, the amount will be income where:

(a) The intention or purpose of the taxpayer in entering into the transaction was to make a profit or gain.

(b) 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.

For a transaction to be characterised as a business operation or commercial transaction, it is sufficient if the transaction is business or commercial in character.

As discussed under question 1, case law has concluded that the mere realisation of a capital asset which was not acquired for the purpose of profit making by sale does not constitute a profit-making undertaking or scheme within meaning of section 15-15 of the ITAA 1997, even though the realisation is effected in the most advantageous manner.

TR 92/3 discusses whether there must be a purpose of profit-making by the very means by which the profit was in fact made. This issue was considered in Westfield Limited v Federal Commissioner of Taxation 91 ATC 4234 (Westfield case) where it was found that the profit from the sale of land was not assessable income.

In the Westfield case, Hill J (with whom Lockhart and Gummow JJ agreed) said at 32:

'...where a transaction occurs outside the ordinary scope of the business activities, so as not to be a part of that business, it will be necessary to find, not merely that the transaction is 'commercial' but also that there was, at the time it was entered into, the intention or purpose of making relevant profit.

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. In the Myer case, the Full High Court said the following about the nature of profits from isolated transactions and the purpose of profit-making at the time of acquisition:

It is one thing if the decision to sell an asset is taken after its acquisition, there having been no intention or purpose at the time of acquisition of acquiring for the purpose of profit-making by sale. Then, if the asset be not a revenue asset on other grounds, the profit made is capital because it proceeds from a mere realisation. But it is quite another thing if the decision to sell is taken by way of implementation of an intention or purpose, existing at the time of acquisition, of profit-making by sale, at least in the context of carrying on a business or carrying out a business operation or commercial transaction.

In general, whether a profit from an isolated transaction is income according to ordinary concepts depends very much on the individual circumstances of the case. Matters listed in TR 92/3, which are relevant in considering whether an isolated transaction amounts to a business operation or commercial transaction include:

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.

The Taxpayer:

· had no intention of subdividing at time of acquisition;

· they will attempt to sell the land as a single lot;

· they will undertake minimal work for the subdivision;

· the land release is of a small scale; and

· the subdivision is not in the nature of their normal activities.

The activities involved in the subdivision and sale of the subdivided blocks do not amount to the carrying on of a business. The Taxpayer had no profit-making purpose at the time they acquired the property, and the subsequent transactions do not have the character of business operations or commercial transactions. The sale of the subdivided land amounts to the realisation of a private capital asset and does not constitute a business or profit-making undertaking or scheme. From this information it is considered that the anticipated profit to be realised from the sale of subdivided land will not be assessable income pursuant to section 15-15 of the ITAA 1997.

Question 4

Will the Property be considered trading stock pursuant to Division 70 of the ITAA 1997?

Answer

No.

Summary

The Taxpayer did not acquire the land for the purpose of making a profit by its sale. Taking all the factors into account, we do not regard the Taxpayer as having ventured into a new business of profit making through subdivision of land. Whilst the Taxpayer has sought to realise an asset in the most advantageous way (subdivision), this does not preclude the undertaking from being the realisation of a private capital asset. As such it is considered that the Taxpayer is not in the business of subdivision of land and the land is not considered to be trading stock.

Detailed reasoning

Section 70-10(1) of the ITAA 1997 provides the meaning of trading stock as:

(a) anything produced, manufactured or acquired that is held for purposes of manufacture, sale or exchange in the ordinary course of a business; and

(b) livestock.

Taxation Determination TD 92/124 Income tax: property development: in what circumstances is land treated as trading stock states at paragraph 1 that land is treated as trading stock for income tax purposes if:

· it is held for the purpose of resale; and

· a business activity which involves dealing in land has commenced.

Both the required purpose and the business activity must be present before land is treated as trading stock. The business activity is taken to have commenced when a taxpayer embarks on a definite and continuous cycle of operations designed to lead to the sale of the land. It is not necessary that the acquisition of land be repetitive. A single acquisition of land for the purpose of development, subdivision and sale by a business commenced for that purpose would lead to the land being treated as trading stock.

For the Property to be considered trading stock, the land would need to be held for the purpose of sale or exchange in the ordinary course of business. While TR 97/11 is about carrying on a business of primary production, the indicators in that ruling which have been developed by the courts of law are used for all cases about the carrying on of a business. Paragraph 18 of TR 97/11 lists the following indicators:

· a significant commercial activity;

· the taxpayer has more than an intention to engage in business;

· a purpose and intention of profit from the activity;

· repetition and regularity of the activity;

· the activity is carried on in a similar manner to that of the ordinary trade in that line of business;

· the activity is planned, organised and carried on in a business like manner;

· size, and scale of the activity;

· not a hobby, recreation or a sporting activity;

· a business plan exists;

· the taxpayer has knowledge or skill of subdividing land.

From the information provided by the Taxpayer it indicates that:

· the Taxpayer had no intention of subdividing at time of acquisition;

· the Taxpayer has no purpose or intention to engage in business of land subdivision;

· the land release is on a small scale;

· there will be no repetition or regularity of the activity;

· the Taxpayer only has only a purpose of realisation in a manner calculated to maximise their receipts;

· the Taxpayer's activities will not be carried out in the same manner as a normal land subdivision business;

· the Taxpayer's trading activities would not be better described as a hobby, form of recreation or a sporting activity;

· the Taxpayer has not developed a business plan;

· the Taxpayer has no experience in the business of subdividing land.

The Taxpayer acquired the land for family use and domestic related purposes. They did not acquire the land for the purpose of making a profit by its sale. Taking the above factors into account, we do not regard the Taxpayer as having ventured into a new business of profit making through subdivision of land. Whilst the Taxpayer has sought to realise the asset in the most advantageous way (subdivision), this does not preclude the undertaking from being the realisation of a capital asset. As such it is considered that the Taxpayer is not in the business of subdivision of land and the land is not considered to be trading stock.

Question 5

Will the anticipated gain made from the sale of the Property by the Taxpayer be considered a capital gain event pursuant to Part 3-1 of the ITAA 1997?

Answer

Yes.

Summary

When the land is subdivided and a vacant block of land is sold, a CGT event A1 will occur as you are disposing of a CGT asset.

Detailed reasoning

The CGT provisions are found in ITAA 1997 Part 3-1 and Part 3-3. A capital gain or a capital loss may arise if a capital gains tax event (CGT event) happens to a capital gain tax asset (CGT asset). Section 108-5 of the ITAA 1997 provides that a CGT asset is any kind of property, or a legal or equitable right that is not property. Section 104-10(1) of the ITAA 1997 provides that a CGT event A1 happens if you dispose of a CGT asset. Section 104-10(2) provides that you dispose of a CGT asset if a change in ownership occurs from you to another entity, whether because of some act or event or by operation of law. However, a change of ownership does not occur if you stop being the legal owner of the asset but continue to be its beneficial owner.

Taxation Determination TD 97/3 Income tax: capital gains: if a parcel of land acquired after 19 September 1985 is subdivided into lots (blocks), do Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 treat a disposal of a block of subdivided land as the disposal of part an asset or the disposal of an asset in its own right (TD 97/3) answers the question if a parcel of land is subdivided into lots (blocks) do Part 3-1 and 3-3 of the ITAA 1997 treat the disposal of a block as an asset in it own right. The disposal of a subdivided block is treated as the disposal of an asset in its own right and not as a disposal of part of an asset (the original parcel of land). The subdivided and the newly created blocks are treated as separate assets under the capital gains provisions.

Paragraph 4 of TD 97/3 states that when an original parcel of land is split into two or more blocks, and you are the beneficial owner of the original land and each of the new blocks, section 112-25(2) of the ITAA 1997 provides that each element of the cost base and reduced cost base of the original asset is apportioned in a reasonable way and included in the corresponding element of the cost base and reduced cost base of each new asset. When the land is subdivided and a vacant block of land is sold, a CGT event A1 will occur as you are disposing of a CGT asset and a change in ownership will occur. A capital gain will occur from the anticipated gain from the sale of the vacant block of land.

Question 6

Will the anticipated gain made from the sale of the Property by the Taxpayer be disregarded under section 104-10(5) of the ITAA 1997?

Answer

Yes.

Summary

Any capital gain from the sale of the sub-divided land will be disregarded as the Property was acquired prior to 20 September 1985.

Detailed reasoning

A capital gain or a capital loss may arise if a CGT event happens to a CGT asset. Section 108-5 of the ITAA 1997 provides that a CGT asset is any kind of property, or a legal or equitable right that is not property.

CGT Determination Number 7 Capital Gains: What are the CGT consequences of sub-dividing pre-CGT land states in paragraph 1 that where pre-CGT land is sub-divided after 19 September 1985 the land will maintain its pre-CGT acquisition date because no CGT event has happened. The subdividing of the land is not in itself a CGT event - section 112-25 of the ITAA 1997.

Section 104-10(5) of the ITAA 1997 provides the following information:

(5) A capital gain or loss you make is disregarded if:

(a) you acquired the asset before 20 September 1985.

As the Property was acquired in 1982, any capital gain from the sale of the sub-divided land will be disregarded as the Taxpayer's property was acquired prior to 20 September 1985.

Option 2 - SALE OF PART OF THE PROPERTY TO A DEVELOPER

Question 1

Will the anticipated profit realised from the sale of the Property by the Taxpayer be assessable income pursuant to section 6-5 of the ITAA 1997?

Answer

No.

Summary

As with Option 1, in Option 2 the Taxpayer's involvement and activities are not indicative of the business of subdividing property. The Taxpayer's activities are not the same nor carried on in a manner similar to those engaging in the trade of subdividing property. The subdivision of the land amounts to a mere realisation of a private capital asset and not a business. Consequently, the proceeds from the sale of part of the Property will not give rise to ordinary income under section 6-5 of the ITAA 1997.

Detailed reasoning

Option 2 is similar to Option 1, with the main difference being that the Taxpayer plans to retain approximately 50% of the Property rather than sell the entire property to a developer. However the Taxpayer still intends to attempt to sell the land as a single lot. Consideration is still required as to whether the anticipated proceeds from the sale of part of the Property will be ordinary income under section 6-5 of the ITAA 1997.

As discussed under Option1 it would appear from cases involving the subdivision of land and from TR 92/3 that the following are the most important factors to consider:

· the intention of the parties at the time of the acquisition of the land (although this appears to be of a lesser importance where the subdivision is on a large scale as would occur with a staged subdivision)

· the intention of the parties at the time of the undertaking to strata/subdivide the land; for example, where attempts have failed to sell the land as one lot, it is less likely the entering into the venture was a business undertaking

· the nature and scale of the activities undertaken; for example, where minimal work is required in the way of road works, earthworks, sewerage, water, etc it is more likely a subdivision and sale would be a mere realisation

· where there is a repetition of transactions and a systematic course of conduct it is more likely the profit will be assessable; for example, the profit on a staged subdivision of land with timed releases to the market will be more likely to be assessable

· the manner in which the subdivision was progressed. Where the owner is heavily involved with the project, it is more likely to be considered a business undertaking and the profit assessable, and

· the nature of the other activities undertaken by the taxpayer.

TR 92/3 at paragraph 9 states that when a transaction or operation involves the sale of property, it is usually necessary that the taxpayer has the purpose of profit-making at the time of acquiring the property. The Taxpayer's property has been owned for over thirty years and has always had the purpose of being the main residence and for personal use.

The Taxpayer:

· had no intention of subdividing at time of acquisition;

· they will attempt to sell the land as a single lot;

· will undertake minimal work required for the subdivision;

· the land release is on a small scale;

· will not be heavily involved in the project; and

· the subdivision is not in the nature of their normal activities.

With Option 2 the Taxpayer plans to sell approximately 50% of the Property with all other factors remaining the same as with Option 1. As such it is considered that the sale of the land amounts to a mere realisation of a private capital asset and not a business or profit-making undertaking or scheme.

It is therefore considered that the proceeds from the sale of part of the Property will not give rise to ordinary income under section 6-5 of the ITAA 1997.

Question 2

Will the anticipated profit realised from the sale of the Property by the Taxpayer be assessable income pursuant to section 25A of the ITAA 1936?

Answer

No.

Summary

The answer to this question remains the same as for question 2 under Option 1 that the anticipated profit realised from the sale of part of the subdivided land will not be assessable income pursuant to section 25A of the ITAA 1936 as the sale will occur after the 1997-98 year.

Question 3

Will the anticipated profit realised from the sale of the Property by the Taxpayer be assessable income pursuant to section 15-15 of the ITAA 1997?

Answer

No.

Summary

As with Option 1, in Option 2 the Taxpayer's involvement and activities are not considered to be a profit-making undertaking or scheme. The anticipated profit realised from the sale of part of the subdivided land will not be assessable income pursuant to section 15-15 of the ITAA 1997.

Detailed reasoning

As stated under Option 1 - question 3, section 15-15 of the ITAA 1997 includes in assessable income all profit from the carrying on or carrying out of a profit-making undertaking or plan and is applicable when an asset was acquired before 20 September 1985 and the profit arises after 1997-98 year.

Option 2 is similar to Option 1 with the only difference being that the Taxpayer will retain approximately 50% of the Property rather than sell the entire property to a developer. Case law has concluded that the mere realisation of a capital asset which was not acquired for the purpose of profit making by sale does not constitute a profit-making undertaking or scheme within meaning of section 15-15 of the ITAA 1997, even though the realisation is effected in the most advantageous manner.

With Option 2 the facts are very similar in that the Taxpayer:

· had no intention of subdividing at time of acquisition;

· they will attempt to sell the land as a single lot;

· they will undertake minimal work required for the subdivision;

· the land release is on a small scale;

· they will not be heavily involved in the project; and

· the subdivision is not in the nature of their normal activities.

It therefore does not constitute a profit-making undertaking or scheme and it is considered that the anticipated profit realised from the sale of part of the subdivided land will not be assessable income pursuant to section 15-15 of the ITAA 1997.

Question 4

Will the Property be considered trading stock pursuant to Division 70 of the ITAA 1997?

Answer

No.

Summary

As stated under Option 1 - question 4, the Taxpayer has sought to realise the asset in the most advantageous way (subdivision), this does not preclude the undertaking from being the realisation of a private capital asset and as such it is considered that the Taxpayer is not in the business of subdivision of land and the land is not considered to be trading stock.

Detailed reasoning

As previously discussed under Option 1 - question 4, section 70-10(1) of the ITAA 1997 provides the meaning of trading stock as:

(a) anything produced, manufactured or acquired that is held for purposes of manufacture, sale or exchange in the ordinary course of a business; and

(b) livestock.

As discussed in the detailed reasoning under Option 1 - question 4, it is considered that the Taxpayer is not in the business of subdivision of land and as such the land is not considered to be trading stock.

Question 5

Will the anticipated gain made from the sale of the Property by the Taxpayer be considered a capital gain event pursuant to Part 3-1 of the ITAA 1997?

Answer

Yes.

Summary

The decision for Option 2 remains the same as for Option 1 in that when the land is subdivided and a vacant block of land is sold, a CGT event A1 will occur as you are disposing of a CGT asset.

Question 6

Will the anticipated gain made from the sale of the Property by the Taxpayer be disregarded under section 104-10(5) of the ITAA 1997?

Answer

Yes.

Summary

As previously discussed under Option 1 - question 6, any capital gain from the sale of sub-divided land will be disregarded if the land was acquired prior to 20 September 1985. As the Taxpayer acquired the Property in 1982, the result will be any capital gain from the sale of the sub-divided land will be disregarded as the land was acquired prior to 20 September 1985.

Option 3 - SELLING THE LOTS IN VARIOUS STAGES

Question 1

Will the anticipated profit realised from the sale of the Property by the Taxpayer be assessable income pursuant to section 6-5 of the ITAA 1997?

Answer

No.

Summary

The Taxpayer's involvement and activities are not indicative of a business of subdividing property. The Taxpayer's activities are not the same nor carried on in a manner similar to those engaging in the trade of subdividing property. The subdivision of the land amounts to a mere realisation of a private capital asset and not a business or profit-making undertaking or scheme. Consequently, the proceeds from the realisation of the Property will not give rise to ordinary income under section 6-5 of the ITAA 1997.

Detailed reasoning

Option 3 still has some similarities to Option 1 with the main difference being that the ownership of the land will remain with the Taxpayer during the disposal of the subdivided land and the Taxpayer will release the land in stages. As a consequence further analysis is required of the effect of section 6-5 of the ITAA 1997.

As previously referred to under Option 1 - question 1, the Statham Case looked at land development and whether it was considered a profit-making undertaking or scheme. The Court looked at the circumstances where land was originally purchased for farming and was later subdivided and sold. The decision in that case was that the taxpayer was not in the business of selling land and the profits made did not constitute business income or carrying out of any profit-making undertaking or scheme. Reasons for the Statham Case decision were provided as:

44. These considerations do not, in our opinion, have the effect of pushing a mere realisation of assets over the line into the region of a business venture or a profit-making undertaking or scheme. … The period of time involved seems to us to reflect the fact that the subdivision involved land in a relatively small town. There is no evidence that the owners engaged in some holding exercise, carefully releasing allotments for sale, as one might expect to occur in a business or scheme.

45. We are satisfied, after applying the principles of law to which we have referred above to the established facts that the owners did not enter into the business of selling land. Therefore, the realisation of the land by sale did not result in income being earned by them for the purposes of sub-s.25(1). We are also of the view that this was not a case of profit which arose from the carrying on or carrying out of any profit-making undertaking or scheme. We are satisfied on the facts that what occurred was the mere realisation, by the most advantageous means, of the asset which the owners had on their hands when they abandoned the intention of farming the subject property.

The Commissioner's view on whether a taxpayer is carrying on a business is found in TR 97/11, paragraph 18 lists the following indicators:

· a significant commercial activity;

· the taxpayer has more than an intention to engage in business;

· a purpose and intention of profit from the activity;

· repetition and regularity of the activity;

· the activity is carried on in a similar manner to that of the ordinary trade in that line of business;

· the activity is planned, organised and carried on in a business like manner;

· size, and scale of the activity;

· not a hobby, recreation or a sporting activity;

· a business plan exists;

· the taxpayer has knowledge or skill.

The information provided by the Taxpayer indicates that:

· the Taxpayer had no intention of subdividing at time of acquisition;

· the Taxpayer has no purpose or intention to engage in business of land subdivision;

· the land release is on a small scale;

· there will be no repetition or regularity of the activity;

· the Taxpayer only has only a purpose of realisation in a manner calculated to maximise their receipts;

· the Taxpayer's activities will not be carried out in the same manner as a normal land subdivision business;

· the Taxpayer's trading activities would not be better described as a hobby, form of recreation or a sporting activity;

· the Taxpayer has not developed a business plan;

· the Taxpayer has no experience in the business of subdividing land.

As previously discussed, the Property was acquired for family use and domestic related purposes. The Taxpayer did not acquire the land for the purpose of making a profit by its sale. The Taxpayer did not have the intention to carry on a business of selling land when the acquisition took place. The Taxpayer has applied themselves in an enterprising way for the realisation of a private capital asset. There is nothing surprising in the fact that the Taxpayer is going about this realisation in a prudent manner calculated to maximise their receipts. The fact that this occurred does not make the proceeds either profits from an undertaking or scheme, or income from a business.

The Taxpayer's involvement and activities are not indicative of a business of property subdivision. The Taxpayer's activities are not the same, nor carried on in a manner similar to those engaging in the trade of subdividing property. The Taxpayer will have no businesslike organisation, no manager, no office and no secretary. The Taxpayer will engage the necessary third parties to undertake the work required for the subdivision and sale of part of the property (this is anticipated to initially be approximately 20 blocks). We are satisfied, after applying the law established from cases involving subdivision of land to the established facts that the Taxpayer will not conducting a business of selling land. The anticipated gains will therefore not be ordinary income and not assessable under section 6-5 of the ITAA 1997.

Question 2

Will the anticipated profit realised from the sale of the Property by the Taxpayer be assessable income pursuant to section 25A of the ITAA 1936?

Answer

No.

Summary

The answer to this question remains the same as for question 2 under Option 1 and Option 2 in that the anticipated profit realised from the sale of subdivided land will not be assessable income pursuant to section 25A of the ITAA 1936 as the sale will occur after the 1997-98 year.

Question 3

Will the anticipated profit realised from the sale of the Property by the Taxpayer be assessable income pursuant to section 15-15 of the ITAA 1997?

Answer

No.

Summary

The Taxpayer had no profit-making purpose at the time they acquired the property, and the subsequent transactions do not have the character of business operations or commercial transactions. There is no indication that any subdividing activity will become a separate business operation or commercial transaction, or that the Taxpayer will be carrying on or carrying out a profit-making undertaking or plan. The anticipated profit realised from the sale of the subdivided land will not be assessable income pursuant to section 15-15 of the ITAA 1997.

Detailed reasoning

The Commissioner's 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:

a) those transactions outside the ordinary course of business of a taxpayer carrying on a business; and

b) those transactions entered into by non-business taxpayers.

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

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

b) 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. In the Myer case, the Full High Court said the following about the nature of profits from isolated transactions and the purpose of profit-making at the time of acquisition:

It is one thing if the decision to sell an asset is taken after its acquisition, there having been no intention or purpose at the time of acquisition of acquiring for the purpose of profit-making by sale. Then, if the asset be not a revenue asset on other grounds, the profit made is capital because it proceeds from a mere realisation. But it is quite another thing if the decision to sell is taken by way of implementation of an intention or purpose, existing at the time of acquisition, of profit-making by sale, at least in the context of carrying on a business or carrying out a business operation or commercial transaction.

In general, whether a profit from an isolated transaction is income according to ordinary concepts depends very much on the individual circumstances of the case. Matters listed in TR 92/3, which are relevant in considering whether an isolated transaction amounts to a business operation or commercial transaction include:

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.

Casimaty v. Federal Commissioner of Taxation 97 ATC 5135; (1997) 37 ATR 358 (Casimaty Case) considered the sale of farming land. The proceeds were held to not be income according to ordinary concepts, but rather constituted the mere realisation of a capital asset, carried out in an enterprising way so as to secure the best price. Consequently, the profit derived from the subdivision and sale of the land by the taxpayer was not assessable income.

In the Taxpayer's situation, we are satisfied proceeds from the sale of the subdivision will not be those from an isolated business transaction and will not be assessable as ordinary income for the following reasons:

· - the Taxpayer's purpose for the acquisition of the land was for personal and domestic use;

· - the event that has prompted the intention to sell the land is the changes to the Council town plan and the impending encroachment of the town on the Taxpayer's property;

· - the Taxpayer is not in the business of property development;

· - the land was acquired by the Taxpayer pre CGT 20 September 1985;

· - third parties will be engaged for work associated with the development, subdivision and sale of the land;

· - the land will be sold in small stages and a real estate agent will be responsible for the sale and marketing of the land and no improvements to the property will be undertaken; and

· - the Taxpayer is not registered for GST.

· The activities involved in the subdivision and sale of the subdivided blocks do not amount to the carrying on of a business. The Taxpayer had no profit-making purpose at the time they acquired the property, and the subsequent transactions do not have the character of business operations or commercial transactions. There is no indication that any subdividing activity will become a separate business operation or commercial transaction, or that the Taxpayer will be carrying on or carrying out a profit-making undertaking or plan.

Question 4

Will the Property be considered trading stock pursuant to Division 70 of the ITAA 1997?

Answer

No.

Summary

As discussed under Option 1 and Option 2 - question 4, the Taxpayer did not acquire the land for the purpose of making a profit by its sale. Taking all the factors into account, we do not regard the Taxpayer as having ventured into a new business of profit making through the subdivision of land. As such it is considered that the Taxpayer is not in the business of land subdivision and the land is not considered to be trading stock.

Detailed reasoning

Section 70-10(1) of the ITAA 1997 provides the meaning of trading stock as:

(a) anything produced, manufactured or acquired that is held for purposes of manufacture, sale or exchange in the ordinary course of a business; and

(b) livestock.

TD 92/124 states at paragraph 2 that both the required purpose and the business activity must be present before land is treated as trading stock.

For the Property to be considered trading stock, the land would need to be held for the purpose of sale or exchange in the ordinary course of business. While TR 97/11 is about carrying on a business of primary production, the indicators in that ruling which have been developed by the courts of law are used for all cases about the carrying on of a business. Paragraph 18 of TR 97/11 lists the following indicators:

· a significant commercial activity;

· the taxpayer has more than an intention to engage in business;

· a purpose and intention of profit from the activity;

· repetition and regularity of the activity;

· the activity is carried on in a similar manner to that of the ordinary trade in that line of business;

· the activity is planned, organised and carried on in a business like manner;

· size, and scale of the activity;

· not a hobby, recreation or a sporting activity;

· a business plan exists;

· the taxpayer has knowledge or skill.

From the information provided by the Taxpayer it indicates that:

· the Taxpayer had no intention of subdividing at time of acquisition;

· the Taxpayer has no purpose or intention to engage in business of land subdivision;

· the land release is on a small scale;

· there will be no repetition or regularity of the activity;

· the Taxpayer only has only a purpose of realisation in a manner calculated to maximise their receipts;

· the Taxpayer's activities will not be carried out in the same manner as a normal land subdivision business;

· the Taxpayer's trading activities would not be better described as a hobby, form of recreation or a sporting activity;

· the Taxpayer has not developed a business plan;

· the Taxpayer has no experience in the business of subdividing land and will engage third parties to undertake all the work required for them.

The Taxpayer acquired the land for family use and domestic related purposes. They did not acquire the land for the purpose of making a profit by its sale. Taking the above factors into account, we do not regard the Taxpayer as having ventured into a new business of profit making through subdivision of land. As such it is considered that the Taxpayer is not in the business of subdivision of land and the land is not considered to be trading stock.

Question 5

Will the anticipated gain made from the sale of the Property by the Taxpayer be considered a capital gain event pursuant to Part 3-1 of the ITAA 1997?

Answer

Yes.

Summary

The outcome for Option 3 remains the same as for Option 1 and Option 2 - question 5 and that is when the land is subdivided and a vacant block of land is sold, a CGT event A1 will occur as you are disposing of a CGT asset.

Question 6

Will the anticipated gain made from the sale of the Property by the Taxpayer be disregarded under section 104-10(5) of the ITAA 1997?

Answer

Yes.

Summary

As previously stated under Option 1 and Option 2 - question 6, any capital gain from the sale of the sub-divided land will be disregarded if the land was acquired prior to 20 September 1985. As the Taxpayer acquired the Property in 1982, the result will be any capital gain from the sale of the sub-divided land will be disregarded as the land was acquired prior to CGT.