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Edited version of private advice
Authorisation Number: 1012648270673
Ruling
Subject: CGT - Land Subdivision
Questions
1. Will the proceeds received from the sale of the subdivided blocks of land be assessable pursuant to section 6-5 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 taxed under 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
The scheme commences on:
1 July 2013
Relevant facts and circumstances
This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.
You purchased a property, post CGT.
You later built your main residence on the property. This has been your main residence since construction.
The property is also used as a hobby farm, maintaining a small herd of livestock.
The property is not used in your occupations.
Neighbouring land has recently been subdivided, or approved for subdivision. Given this activity, you have decided to subdivide a section of your property.
Your subdivision proposal will include:
• X blocks of approximately 1 hectare each
• One block of the remaining land which you will retain.
You will continue to live on your retained block after the completed subdivision.
In the future you may consider subdividing your remaining block, for a further X blocks. This will be subject to future development approval however.
You have engaged a town planner to assist in managing the subdivision including the approval process and ensuring the development will comply with the approval.
You intend to only do the minimum amount of work as required by council under the development approval.
Your involvement in the subdivision will be limited to:
• Arranging contractors to carry out earth works and to widen the existing road the property
• Superficial work in improving the presentation of the blocks
• Engage a real estate agent to sell the subdivided blocks
You estimate that the subdivision will cost approximately $X.
The subdivided blocks are expected to be ready for sale shortly.
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. A mere realisation of an asset will generally be considered under the capital gains tax provisions contained within Part 3-1 of the ITAA 1997. 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 property as a hobby farm and built your main residence on it. You 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, the proceeds from the sale of the subdivided blocks will not be included in your ordinary income. Rather, the subdivision is considered to be a mere realisation of a capital asset and the proceeds will be subject to the capital gains tax provisions in Part 3-1 of the ITAA 1997.