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Edited version of private advice
Authorisation Number: 1012631607788
Ruling
Subject: CGT - land subdivision
Questions
1. Will the proceeds received from the sale of the subdivided blocks of land be assessable pursuant to sections 6-5 or 15-15 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Answer:
No.
2. Will the proceeds received from the sale of subdivided blocks of land be treated as a mere realisation of a capital asset and subject to the capital gains tax provisions of the ITAA 1997?
Answer:
Yes.
3. If the subdivision is completed in two stages, will the proceeds received from the sale of the subdivided blocks of land continue to be treated as a mere realisation of a capital asset and subject to the capital gains tax provisions of the ITAA 1997?
Answer:
Yes.
This ruling applies for the following periods:
Year ending 30 June 2014
Year ending 30 June 2015
Year ending 30 June 2016
Year ending 30 June 2017
Year ending 30 June 2018
The scheme commences on:
The scheme has commenced
Relevant facts and circumstances
A, B, C and D, purchased an X hectare block as tenants in common, each with a 25% share, prior to 20 September 1985.
At the date of purchase, the only building on the property was a private residence. This residence was occupied by A and B as their main residence since the date of purchase. The residence continues to be the main residence of A and was the main residence of B until their death.
B's 25% share in the property passed to A under B's will. As a result of this transfer, A now owns 50% of the land with both a pre and post CGT share of the land.
The property has never been used for any business activity.
No improvements have been done to the land since it was purchased.
The parties have never been involved with subdivision or development of land for sale.
Subdivision of the land has been proposed for the following reasons:
• Due to health issues, A intends to discontinue using the property as their main residence and needs to realise the asset to fund the next stage of their life.
• C and D have a need to realise their interest in the asset to fund their retirement.
Due to the size of the property, professional advice has been received that the land would be more easily marketed if it was subdivided into smaller blocks.
The subdivision plans include demolishing the family home and dividing the land into multiple blocks.
The parties have sought the assistance of professionals in every aspect of the development to date and will rely on these professionals to undertake the subdivision.
The parties will not be providing any equipment, labour or materials to the project. They will only be involved so far as to obtain the permit for the development and any necessary documentation.
The parties state that they are not in the business of property development for the following reasons:
• They do not have a business plan, they wish to merely realise the asset to fund their retirement,
• There will be no site office, no secretary, no letterhead and no manager engaged, other than the professionals engaged to undertake the development,
• No entity will be created to undertake the development,
• The subdivision will be basic and sufficient only to comply with council regulations,
• The parties are not disposing of the land for a commercial outcome
• They no longer have a use for the land and will fund their retirement from the proceeds
• The scale of the activity is modest and is a one off activity,
• The development will be undertaken in stages as funding allows.
The parties will be using their existing private bank accounts from which the costs will be paid and into which the proceeds from the development will be deposited.
The parties consider that any profit made from the development will not be assessable as income from an isolated transaction for the following reasons:
• There is no intention or purpose in entering into the transaction to make a profit or gain. The intention is to merely realise the asset as there is no longer a need to retain it and the parties are looking to retire.
• The parties have not had any property development experience. A was a salary and wage earner and B are directors in a business.
• The land will be developed progressively and partly funded by sales of blocks.
There was no intention to dispose of the property upon acquisition.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 6-5,
Income Tax Assessment Act 1997 Subsection 104-10(5),
Income Tax Assessment Act 1997 Subsection 108-70(3),
Income Tax Assessment Act 1997 Section 108-80 and
Income Tax Assessment Act 1997 Subsection 128-50(2).
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, the parties do not carry on a business of buying, selling or developing land. The property was purchased as the main residence for two of the owners. The parties will have minimal involvement in the subdivision of the land and will only change the land to the extent that you are required for council purposes.
Accordingly, any proceeds received from the subdivision will not be ordinary income and not assessable under sections 6-5 or 15-15 of the ITAA 1997. Rather, the proceeds will represent a mere realisation of a capital asset which will fall for consideration under the CGT provisions in Part 3-1 of the ITAA 1997.
This will continue to be the case where the subdivision is conducted over two stages.