Edited version of your private ruling

Authorisation Number 1012549116623

Ruling

Subject: subdivision of land

Question 1

Will the proceeds of sale on realisation of the individual lots be assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

Will the proceeds of sale on realisation of the individual lots be assessable under section 15-15 of the ITAA 1997?

Answer

No.

Question 3

Will the proceeds of sale on realisation of the individual lots on the land acquired after 20 September 1985 be assessable under the capital gains tax (CGT) provisions contained in Chapter 3 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

Year ending 30 June 2018

The scheme commences on:

1 July 2013

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,

· the additional information provided with the application for private ruling, and

· the trust deed for the Family Trust (FT).

The FT was established by Deed of Settlement in a financial year prior to 1985.

The trustee for FT is a private company.

The FT acquired its original interest in the property pre capital gains tax (CGT). Since this point in time, the FT has acquired additional interests in the land by way of adverse possession and as a beneficiary of a deceased estate.

These additional interests have been acquired by the FT both before and after 20 September 1985.

The total property comprises approximately X hectares.

The FT was established and acquired its initial interested in the land for the exclusive purpose of assisting the FT in commencing, advancing and carrying on a business on the land.

Apart from necessary infrastructure used in carrying on the business, there are no other buildings contained on the land.

The local council identified the land as a potential development site.

The FT opposed this development.

Steps have been taken to develop the area including the construction of a major road next to the land.

The FT has determined that the land is no longer suitable for their business operations.

The FT will re-locate the business to another parcel of land and then sell the land in a manner that will yield maximum sale proceeds.

The FT does not have any particular professional experience in selling or developing land and therefore does not wish to be actively involved in any development and sale of the land.

The FT will subdivide the land into several individual lots and sell the lots to third party purchasers.

A third party will arrange for and be responsible for the operation and administrative aspects of the development and subdivision of the land.

This includes the engagement of a professional project manager who will undertake the specific actions required to develop and subdivide the land.

The project manager will enter into contracts with third parties as necessary to undertake the development and subdivision of the land.

The FT would not have any direct involvement in undertaking any of the development or subdivision activities.

The land would be developed and subdivided into approximately Y individual lots.

It is anticipated that the development and subdivision of the land would take place in several stages. This will be done to ensure that any external borrowing required to complete the development and subdivision are kept to a minimum.

No interest deductions would be claimed by the FT on any external borrowings it obtains in order to fund the development and subdivision of the land.

The development will do no more than required by council for subdivision approval and would include the construction of roads, drainage, electricity, gas, water and sewerage.

The individual lots will be sold as vacant land. No buildings will be constructed on the lots as part of the development.

At all times, ownership of the land would be retained by the FT.

The FT will be entitled to the balance of any proceeds received from the sale of the individual lots after the deduction of the reimbursement costs.

A real estate agent may be engaged to advertise and sell the lots. At this stage, no site office is to be constructed unless this is recommended and undertaken by the real estate agent appointed as selling agent for the lots.

The FT has never previously undertaken or been involved in any subdivision or land development activities. The FT does not currently have any intention to undertake any such activities in the future.

The FT has no intention to retain any lots for its own use.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 10-5

Income Tax Assessment Act 1997 section 15-15

Income Tax Assessment Act 1997 section 25A

Income Tax Assessment Act 1997 section 102-5

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 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 into 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 Commissioner's 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 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:

- 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.

Application to the current circumstances

Based on the facts provided, the proposed sale of the property would not be considered to be income for the purposes of section 6-5 of the ITAA 1997. The Trustees 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 used commercially by the Trustees for a considerable period of time. The Trustees relied upon expert advice in relation to the proposed sale and it has at no time expressed any desire to become involved in the development process.

The proposed sale of the property 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.

The proposed sale is more akin to the mere realisation of a capital asset in the most advantageous form.  The land will be subdivided and sold and the sale was only instigated by surrounding road works which would have had a detrimental affect on the businesses conducted on the property.

Capital gains or losses realised from the sale of the land acquired prior to 20 September 1985 can be disregarded.