Edited version of your private ruling

Authorisation Number: 1012535913723

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 periods

Year ended 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

The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:

· the application for private ruling, and

· the documents provided with the application for private ruling.

The farmland was purchased after 20 September 1985.

The land was purchased as joint tenants by you and your spouse and was used to operate a hobby farm.

You and your spouse's principle place of residence is located on the property.

You and your spouse had been approached to sell the land previously, but the sale fell through.

The property has received council approval to be subdivided into less than 20 lots.

The development is to be conducted over less than 5 stages due to finances.

The reason for undertaking the development and sale of land is due to early retirement and the realisation that the land is too large to maintain.

You and your spouse wish to remain living in the home on one of the lots.

The services of a local real estate agent were utilised for the marketing and sale of the land for each stage.

No site office or any other buildings were erected on the land during the development.

In order to undertake the work to subdivide the initial lots, a payment was required to an electricity company to the put the required electricity infrastructure in place. This payment was required up front.

To fund this payment, a small short term loan for this amount was taken out secured over Lot 1, which was repaid as soon as Lot 1 was sold.

All other costs of the initial approvals and of work done have been met out of the personal funds of the taxpayers. No further borrowings will be required as work will only progress as funds are available.

Financial accounts are kept by your spouse in relation to income and expenditure incurred regarding development purely to assist with the preparation of income tax.

The extent of work completed as part of the development was kept to the minimum standards required by the local council.

The following development works will be carried out as part of the subdivision: environmental inspections to remove land from contamination register, surveying, roads, fire trails, electricity infrastructure and pit and pipe infrastructure.

You and your spouse had been approached to sell their land previously, but the sale fell through.

The land was not acquired with the intention of subdividing or developing.

To date, 3 lots in stage X have been sold.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 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 this case, the property was originally purchased by you and your spouse after 20 September 1985. You and your spouse live on the property and operate a small hobby farm. You and your spouse had been approached previously to sell the property. However, this sale fell through. You and your spouse 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.

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.