Edited version of private advice

Authorisation Number: 1012622720149

Ruling

Subject: Assessable Income

Question 1

Will any gain made on the sale of the subdivided property be assessable as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

This ruling applies for the following period(s)

Income year ended 30 June 2015

Income year ended 30 June 2016

The scheme commences on

The scheme has commenced.

Relevant facts and circumstances

You are the owner of a property on which you carried on a business.

The property was originally xx acres. You subdivided x acres in 19xx and sold this parcel of land to an independent third party to fund building a new main residence on the other end of the property. You subdivided a further xx acre parcel in 19xx and sold this parcel to a family member.

The remainder of xx acres continues to be used for the business by a related trust. You own an additional parcel of land on which you carried on a similar business since 19xx.

You made a decision to downsize the business and sell the balance of the land in 20xx. After no offers were received for a straightforward sale of land, you decided to obtain development approval to enhance the value of the land. You subsequently applied and received approval for x lots and a balance lot in 20xx.

The land was then listed for sale through various local real estate agents. You have been unable to obtain a buyer for the land. The development approval was extended in 20xx and then again in 20xx. The current development approval runs until 20xx. The total cost to date to obtain the approvals has been approximately $x which has been funded through bank finance.

It was never your original intention to personally develop the property. The property, incorporating the development approval, has always been listed for sale through local real estate agents and is still listed for sale today.

Due to the fact that there has been minimal interest in the land as a development site, and you are at retirement age with no superannuation, you have decided to develop the land yourself.

The anticipated cost of subdivision is between $x and $x per lot. The costs are high due to a council requirement to put in a road. The subdivision cost will be funded through pre-sales and bank finance. You have already spoken to a project builder who has committed to acquiring x lots.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Reasons for decision

Summary

No part of the proceeds of the sale of lots will be assessable as you are not in the business of being a property developer. Nor would any such proceeds amount to an isolated commercial transaction assessable under section 6-5 of the ITAA 1997 as there is not an intention to make a profit merely to realise capital assets.

Detailed reasoning

Taxation Ruling 97/11 provides the commissioner's view as to whether an activity will amount to the carrying on of a business. The ruling summarises the following indicators courts have used to determine whether an activity conducts a business:

• is there a significant commercial purpose or character

• is there more than just an intention to engage in business

• whether the taxpayer has a purpose of profit as well as prospect of profit from the activity

• whether there is a repetition or regularity

• whether the activity is planned, organised and carried out in a business-like manner

• size, scale and permanency of the activity

• whether the activity is better describe as a hobby, a form of recreation or a sporting activity.

Applying the above indicators to your circumstances and the proposed development, it is clear that you are not in the business of developing property. Consequently the proceeds will not be assessable as business income under section 6-5 of the ITAA 1997.

However the proceeds of any sale of subdivided lots may still be assessable as ordinary income from an isolated commercial transaction. The commissioner's view on whether profits on isolated transactions are assessable income under ordinary concepts is contained in Taxation Ruling TR 92/3. Profit from an isolated transaction is ordinary income where both:

• the intention and purpose for the taxpayer in entering into the transaction was to make a profit or gain and the transaction was entered into

• the profit was made in the course of carrying on a business or in carrying out a business operation or commercial transaction.

As was held in FC of T v The Myer Emporium Ltd (1987) 163 CLR 1999 the relevant intention is your intention taking into account objective consideration of all the fact and circumstances of the case.

You have provided that you first attempted to sell the property in 20xx, after x years of being unable to sell the property you applied for development approval to increase the value of the property. The property was listed for sale in 20xx with development approval and continues to remain for sale to the present day. You have also provided that you have reached retirement age with no superannuation.

In light of the above factual circumstance it is considered that your objective intention is not to develop and subdivide the property to make a profit but merely do all that is necessary to effectively sell the property and fund your retirement. Consequently the subdivision and sale of land will be a mere realisation of business assets and not assessable income under section 6-5 of the ITAA 1997.