Edited version of private advice

Authorisation Number: 1012651130151

Ruling

Subject: CGT - subdivision

Questions

1. Will the proceeds received from the sale of the subdivided blocks 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 be taxed under the capital gains tax provisions of the ITAA 1997?

Answer: Yes.

3. Will any capital gain or capital loss you make on the disposal of each subdivided block be disregarded for CGT purposes?

Answer: Yes.

This ruling applies for the following periods:

Year ending 30 June 2014

Year ending 30 June 2015

The scheme commences on:

1 July 2013

Relevant facts and circumstances

The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:

• your application for private ruling, and

• The documents provided with the private ruling application.

You purchased neighbouring pieces of land prior to the introduction of CGT.

The land has remained in your name since acquisition and has not been sold or transferred in whole or part since acquisition.

The land was purchased to carry on farming activity.

You actively farmed the land from acquisition to 20XX.

From then, the land has been leased to a business that actively conducts a livestock farm. The decision to lease the land was brought about due to your ill health.

You have decided to retire and sell the farm due to your ill health.

Due to the encroaching residential development surrounding the land, subdividing the land was investigated and it was decided that a subdivision would be the best way to dispose of the land and to maximise the return.

You have not been involved with land subdivision in the past and have not been involved in any business connected with development of land.

A developer has tabled a Development Management Agreement, but you have not yet signed the agreement.

The intention of the agreement is to allow the developer to do all things to the land to capitalise on the subdivision approval and for you to deliver the land for sale.

You will not commit any funds to the development of the land. The developer will be responsible for funding the project costs. You have consented to the land being used as security toward the developer's funding obligations.

There is no current intention or plans to continue the development beyond this one block of land. However it would be a logical progression that the remaining blocks of land will be developed at some point in the future.

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) and

Income Tax Assessment Act 1997 Section 108-80.

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 property as farming land. 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.

Capital gains tax

As the land was acquired before 20 September 1985, it is a pre-CGT asset. Disposal of a pre-CGT asset does not give rise to a taxable capital gain in accordance with paragraph 104-10(5)(a) of the ITAA 1997. Furthermore, subdivision of the land does not alter its pre-CGT status. Taxation Determination TD 7 states:

Where pre-CGT land is subdivided after 19 September 1985 the land will maintain its pre-CGT acquisition date because no CGT event has happened. The subdividing of the land is not itself a CGT event: section 112-25 of the ITAA 97.

Therefore, as the land was acquired pre-CGT the capital gain made on the disposal of the subdivided blocks will be disregarded under subsection 104-10(5) of the ITAA 1997, subject to the value of the capital improvements.