Edited version of your private ruling

Authorisation Number: 1012603984209

Ruling

Subject: CGT - subdivision

Question 1

Will the proceeds from the sale of the subdivided land be assessable income under section 6- 5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 2

Will the proceeds from the sale of the subdivided land be accounted for under the capital gains tax (CGT) provisions?

Answer

Yes

Question 3

Will any capital gain that arises from the sale of the block of land that includes the existing dwelling be disregarded under the main residence exemption to the extent that it was not used to produce assessable income?

Answer

Yes

This ruling applies for the following periods:

Year ending 30 June 2014

Year ending 30 June 2015

The scheme commences on:

1 July 2013

Relevant facts and circumstances

You own a property that is less than 2 hectares in size.

There is an existing dwelling on the property and it has been your main residence for your entire period of ownership.

You also operated a business on the property, using an area of the land.

Since your acquisition of the property, the land around your property has been rezoned and redeveloped with smaller residential blocks. Your property and a neighbouring property are some of the only remaining properties in the surrounding area that have not been redeveloped.

You have decided to subdivide and sell the property. The existing dwelling will remain on one of the blocks and will also be sold.

You have not been involved in any land similar developments in the past and you have no plans for any future developments.

You have obtained a loan to finance the subdivision works.

You have engaged professionals to carry out the subdivision works and associated approval process.

You have obtained council approval for the subdivision and expect the works to be completed by 30 June 20XX.

No new buildings will be constructed on the blocks and all of the blocks, with the exception of the block that includes the existing dwelling, will be sold as vacant land.

Some roads and pathways will be constructed and some essential services will be connected to the blocks to comply with the minimum requirements for approval of the subdivision.

The subdivision of your property will occur in conjunction with your neighbour who is also subdividing their property. You have engaged a separate real estate agent to your neighbour, however they work in conjunction with each other and the blocks will be advertised for sale together. You will split the advertising costs and other jointly incurred costs with your neighbour. It is likely that you will create an estate name for the purposes of advertising your and your neighbour's blocks together.

Your neighbour has not been involved in any similar land developments in the past.

You will continue to reside in the existing dwelling on the property until it is sold.

You have no other properties that you treat as your main residence for CGT purposes.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Subdivision 118-110

Income Tax Assessment Act 1997 Section 118-190

Reasons for decision

Under section 6-5 of the ITAA 1997, the assessable income of an Australian resident includes ordinary income derived both in and out of Australia during an income year. Ordinary income is defined as income according to ordinary concepts.

In FC of T v The Myer Emporium (1987) 163 CLR 199; 87 ATC 4363; (1987) 18 ATR 693 (Myer Emporium), the Full High Court expressed the view that profits made by a taxpayer who enters into an isolated transaction with a profit making purpose can be assessable income.

Taxation Ruling TR 92/3 considers the assessability of profits on isolated transactions in light of the principles outlined in Myer Emporium. According to Paragraph 1 of TR 92/3, the term isolated transactions refers to:

• those transactions outside the ordinary course of business of a taxpayer carrying on a business, and

• those transactions entered into by non-business taxpayers.

Paragraph 6 of TR 92/3 provides that a profit from an isolated transaction will generally be income when both the following elements are present:

• your intention or purpose in entering into the transaction was to make a profit or gain, and

• 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.

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.

In your case, you do not carry on a business of buying, selling or developing land. You purchased the initial property primarily for domestic use. Taking your circumstances into account, including the size and scale of the development, we consider that the sale of the subdivided land will be a mere realisation of a capital asset.

Accordingly, the proceeds from the sale of the subdivided blocks will not be included in your ordinary income. Rather, the sale will be considered a capital transaction subject to the CGT provisions in Part 3-1 of the ITAA 1997.

Main residence exemption

Section 118-110 of the ITAA 1997 provides that you can disregard any capital gain or loss realised on the disposal of a dwelling that was your main residence for your entire ownership period.

The dwelling on the property has and will be your main residence for the entire period of ownership. Accordingly, when you sell the block that includes the existing dwelling, any capital gain will be disregarded to the extent that that portion of the property was not used to produce assessable income.