Edited version of private advice

Authorisation Number: 1012622443289

Ruling

Subject: Capital gains tax

Questions and answers

1. Does the profit on the sale of the subdivided lots constitute assessable income under section 6-5 or section 15-5 of the Income Tax Assessment Act 1997?

No.

2. Is the sale of the subdivided blocks of land subject to the capital gains tax (CGT) provisions of the Income Tax Assessment Act 1997?

Yes.

This ruling applies for the following periods:

Year ended 30 June 2013

Year ending 30 June 2014

The scheme commences on:

1 July 2012

Relevant facts and circumstances

You and your spouse purchased a vacant block of land with the intention of subdividing the block for later sales.

You and your spouse separated and you paid out your spouse in order to take over full ownership of the land.

You incurred expenses over several years in subdividing the block into four new blocks.

The first block was sold over ten years from the time the land was originally purchased and the other three blocks were sold in the next financial year.

Prior to subdividing the blocks, you had no experience in the building or subdivision industry.

The subdivision was a one-off project.

You continued your existing employment throughout the project.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 15-15

Income Tax Assessment Act 1997 section 104-10

Reasons for decision

Income tax provisions 

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year.

Additionally, section 15-15 of the ITAA 1997 specifies that your assessable income includes profit arising from the carrying on or carrying out of a profit-making undertaking or plan. However, this provision does not apply to a profit that is assessable as ordinary income under section 6-5 of the ITAA 1997 or which arises in respect of the sale of property acquired on or after 20 September 1985.

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 Income tax: whether profits on isolated transactions are income (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.

Paragraph 49 of TR 92/3 states that the following factors may be relevant in determining whether an isolated transaction amounts to a business operation or commercial transaction: 

a) the nature of the entity undertaking the operation or transaction (for example, the existence of a corporate entity may indicate that the transaction is of a commercial nature);

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 (for example, the use of professional agents or advisers may indicate that the transaction was more commercial in nature);

f) the nature of any connection between the relevant taxpayer and any other party to the operation or transaction (for example, the involvement of another family member may indicate a family dealing);

g) if the transaction involves the acquisition and disposal of property, the nature of that property (for example, did the property have a commercial use or nature); and

h) the timing of the transaction or the various steps in the transaction (for example, in regard to the acquisition and disposal of property, the holding of the property for many years may indicate that the transaction was not of a commercial nature).

In your case, you purchased a vacant block of land with the intention of subdividing the block for later sales.

Although your intention or purpose on purchasing the land was to make a profit or gain, it is not considered that the subsequent subdivision and sale of the blocks constituted the carrying out of a business operation or commercial transaction because of the following:

• you purchased the land with your then spouse;

• prior to subdividing the blocks, you had no experience in the building or subdivision industry;

• you continued your existing employment throughout the project;

• the subdivision was not a large project in comparison to a typical residential subdivision; and

• a lengthy period of time elapsed between the land being purchased and the eventual subdivision and sale of the blocks.

Therefore, the proceeds you received from the subdivision of the land are not ordinary income and not assessable under sections 6-5 or 15-15 of the ITAA 1997.

CGT provisions 

In your case, you purchased a block of land after 20 September 1985 which was subsequently subdivided into blocks for sale.

Therefore, under section 104-10 of the ITAA 1997, CGT event A1 happened when you disposed of each subdivided block.