Edited version of private advice

Authorisation Number: 1012680962483

Ruling

Subject: CGT - land subdivision

Question 1

Will the proceeds from the sale of the Developed Lots be assessable income under section 6-5 or section 15-15 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 2

Will the disposal of the Developed Lots constitute a mere realisation of a capital asset and accordingly, any gains from the disposal will only be included in assessable income if so included by section 102-5 of the ITAA 1997?

Answer

Yes

Question 3

As the Developed Lots were originally acquired prior to 20 September 1985, will any capital gain that arises from the disposal of the Developed Lots be disregarded under section 104-10(5)(a) of the ITAA 1997?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June 2014

Year ending 30 June 2015

Year ending 30 June 2016

Year ending 30 June 2017

Year ending 30 June 2018

Year ending 30 June 2019

The scheme commenced on:

1 July 2013

Relevant facts and circumstances

The Trust acquired the Property prior to 20 September 1985

Prior to 20 September 1985, a residential dwelling (the Dwelling) was constructed on the Property.

The Dwelling was occupied by a beneficiary of the Trust for the majority of the time. It has also been used to produce rental income for a period of time.

The Trust's only activities have been to hold the Property; it does not carry on any business activities.

The Property will be subdivided into a number of lots (the Developed Lots).

All of the Developed Lots will be sold as vacant land, with the exception of the lot containing the existing residence which will be sold as a house and land package.

A related entity carried out and financed the development works. The related entity engaged contractors to carry out the development works and market and sell the Developed Lots.

The only development works carried out were those required by the development approval.

The Trust, nor any entity associated with the Trust, has never previously subdivided and sold vacant residential land.

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 102-5

Income Tax Assessment Act 1997 Subsection 104-10(5)

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.

Section 15-15 of the ITAA 1997 provides that your assessable income also includes profit arising from the carrying on, or carrying out, of a profit-making undertaking or plan. 

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 this case, the Trust does not carry on a business of buying, selling or developing land. The Trust purchased the Property initially for domestic use by its beneficiaries and has held the property primarily for that use for an extended period of time. The extent of the development works undertaken was limited to that required by the development approval.

Accordingly, the proceeds from the sale of the Developed Lots will not be ordinary income. Rather, the sales will be considered capital transactions subject to the capital gains tax provisions in Part 3-1 of the ITAA 1997.

Section 102-5 of the ITAA 1997 provides that your assessable income includes your net capital gain for the year. Assets acquired before 20 September 1985, are pre-CGT assets. 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.

In this case, the Property was acquired prior to 20 September 1985. The subdivision of the land into the Developed Lots will not affect the acquisition date. Accordingly, any capital gain that arises from the disposal of the Developed Lots will be disregarded in accordance with paragraph 104-10(5)(a) of the ITAA 1997.