Edited version of private advice

Authorisation Number: 1012622011532

Ruling

Subject: 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) if you sell your existing residence and build a new residence on one of the new blocks?

Answer

No

Question 2

Will the proceeds from the sale of the subdivided land be assessable income under section 6- 5 of the ITAA 1997 if you sell all of the blocks including your existing residence and purchase or build a new residence in another area?

Answer

No

Question 3

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

Answer

Yes

This ruling applies for the following periods:

Year ending 30 June 2014

Year ending 30 June 2015

The scheme commenced on:

1 July 2013

Relevant facts and circumstances

You are undertaking a subdivision of a property that you acquired prior to 20 September 1985. The property includes your current main residence.

You had intended to retain your existing residence. However, due to health conditions, it has become difficult for you to enter your existing residence, and your existing residence would require refurbishment to enable access.

The civil works for the subdivision are nearing completion. You are now considering selling your existing home as a part of the development and either:

• Building a new home with suitable access on one of the subdivided blocks for you to reside and selling the remaining blocks including the current residence; or

• Selling all of the subdivided blocks including the current residence and purchasing or building a new residence with suitable access in an area closer to town and medical facilities.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Paragraph 104-10(5)(a)

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 and have held the property for that use for an extended period of time. Due to your health, it has become difficult for you to manage such a large property. You have engaged professionals to carry out the council application process and construction works.

Accordingly, the proceeds from the sale of the subdivided blocks, including the block that contains your current residence will not be included in your ordinary income. Rather, the sale will be considered a capital transaction subject to the capital gains tax provisions in Part 3-1 of the ITAA 1997. As you purchased the property prior to 20 September 1985, any capital gain made on the sale of the blocks will be disregarded.