Edited version of your private ruling

Authorisation Number: 1012618275468

Ruling

Subject: Property subdivision

Question 1

Are the property transactions capital in nature and subject to Part 3-1 of the Income Tax Assessment Act 1997?

Answer

Yes.

Question 2

Are the property transactions a profit making activity and assessable as ordinary income?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2013

The scheme commenced on

1 July 2012

Relevant facts and circumstances

You bought a property located on two lots after 20 September 1985.

A home was placed on one of the lots.

You moved into the home promptly after it was delivered.

Over twelve months later you decided to subdivide the land into three equal blocks.

The house that you were living in was located on one of the lots.

On another of the lots was an old unliveable structure that was also knocked down as part of the subdivision process.

You decided that your current house was not suitable and sought to arrange for another home delivered on to another of the lots.

You then moved into this new home after you had sold your original home.

Recently you decided that you are still not happy with your current home and you have placed it on the market for sale.

You are planning to purchase and arrange for another home to be delivered to the remaining lot.

You are planning that you will get it right this time and live there into the foreseeable future.

Your initial intention was to live in the original lot and then hold on to the rest of the property long term and possibly sell when you were ready to retire.

You physically changed your address etc. to the new property when you moved.

You have never carried out similar property transactions prior to this and you do not intend to do any further similar activities in the future.

You put forward the following contentions:

The transactions are of a capital nature.

According to paragraph 6 of Taxation Ruling 92/3 Income tax: whether profits on isolated transactions are income the following two items need to be present for the income to be treated as ordinary income:

(a) the intention or purpose of the 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 or in carrying out a business operation or commercial transaction.

You believe that the fact that your initial intention was to hold the assets long term and it was only due to you not being happy with the actual houses that you were forced into selling them to upgrade them to nicer transportable homes indicates that the transactions were not entered into with a profit making intention.

You believe that this can be seen with the lengths of time that you lived in each house.

You believe this shows that the properties were not of a profit making intention as they were not just developed and sold as soon as possible.

You also contend that the lack of any business structure also aids your case to say that the profit is not income according to ordinary concepts.

You argue that due to the above reasons that neither of the two conditions in TR 92/3 are met.

You would also like to provide the following information per TR 92/3, paragraph 13:

a) You undertook the operation in your own name and did not set up any business structure.

b) You have a permanent job.

c) The amounts involved have all been identified in the facts of the case.

d) The transactions were all of a reasonably simple nature without any complexity and on a pretty low scale.

e) Refer to the above facts.

f) All parties involved with all of the transactions were not related and all transactions were carried out on an arms' length basis.

g) The nature of the property in question is all residential.

h) As mentioned above the transactions took place over period of time and each property was lived in for approximately two years before being sold.

As such you believe that the transactions in question are capital in nature and should be assessed under Division 104 of the Income Tax Assessment Act 1997.

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 102-5

Income Tax Assessment Act 1997 Division 104

Reasons for decision

Taxation treatment of property sales

There are three ways a profit or loss from property sales can be treated for taxation purposes:

(1) As ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997), on revenue account, as a result of carrying on a business of property development. Here, the property is trading stock.

(2) As ordinary income under section 6-5 of the ITAA 1997, on revenue account, as a result of an isolated commercial transaction. Here, the property sold is not trading stock.

(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.

Profits from isolated transactions will be assessable under section 6-5 of the ITAA 1997 as ordinary income where the intention or purpose of 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 out a business operation or commercial transaction (Federal Commissioner of Taxation v. Myer Emporium Ltd (1987) 163 CLR 199; 87 ATC 4363; (1987)18 ATR 693 (the Myer case)).

Taxation Ruling (TR) 92/3 Income tax: whether profits on isolated transactions are income discusses profits from isolated transactions and the application 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 states that a profit from an isolated transaction will generally be ordinary 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 the Myer case the High Court stated that, because a business is carried on with a view to profit, such profits or gains are invested with a profit making purpose and are thereby stamped with the character of income.

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.

This is the first time that you have subdivided a property and you have not carried on a business in this area in the past.

You are not carrying on a business of property development because your activity does not display the main indicators of a business, which are transactions entered into on a continuous and repetitive basis. Due to its size and scale, your activity is not carried on in a similar manner to that of other businesses in the same industry. Although your development has a reasonable size and scale as an individual development, its nature does not give the impression of a business.

This determination is further supported by the manner in which your property development came to fruition. Originally, you acquired the land with the intention of making it your home and as a long term investment for your retirement. Because you were not happy with the transportable home you had purchased, you decided to subdivide and acquire a new transportable home.

You lived in each of these homes for over twelve months and have now established that the second home is still not suitable and you intend to buy a new transportable home to locate on the third lot. You intend to stay in this third home and you will not be doing anything of a similar nature in the foreseeable future.

Accordingly, the proceeds from the property transactions will not be included in your assessable income as ordinary income. Rather, they are considered capital and subject to the capital gains tax provisions in Part 3-1 of the ITAA 1997.