Edited version of your written advice

Authorisation Number: 1012869518798

Date of advice: 28 August 2015

Ruling

Subject: Subdivision of land

Question 1

Will the proceeds from the partition and subsequent sale of the subdivided land 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 proceeds from the partition and subsequent sale of the subdivided land be a capital gain under section 104-10 of the ITAA 1997 that is subsequently disregarded under subsection 104-10(5)(a) of the ITAA 1997 to the extent it was acquired before 20 September 1985?

Answer

Yes.

Question 3

If improvements are made to the subdivided land will the improvements constitute separate capital gains tax (CGT) assets under section 108-70(2) of the ITAA 1997 and therefore subject to the CGT provisions?

Answer

For capital improvements to be a separate asset the total of their cost base must exceed the improvement threshold for the relevant income year and also exceed more than 5% of the capital proceeds from the event.

This ruling applies for the following period

Year ended 30 June 2014

Year ended 30 June 2015

Year ended 30 June 2016

Year ended 30 June 2017

Year ended 30 June 2018

Year ended 30 June 2019

Year ended 30 June 2020

The scheme commences on:

1 July 2013

Relevant facts and circumstances

The individuals purchased land prior to 1985.

At the time of acquisition, the property was zoned residential development zone.

The property was rezoned a number of time but none of the individuals were involved in any activity relating to the rezoning of the region.

The property was not otherwise used for any commercial activities or purpose.

The individuals decided they wanted to subdivide the property.

The individuals had neither previously undertaken property development activities nor engaged surveyors, town planners, engineers and real estate agents to develop properties.

The proposed steps of the subdivision of the property were as follows:

• the individuals would engage surveyors, town planners, engineers and real estate agents to sell the property

• other than making such decisions as the advisors required the individuals to make, the individuals would not be involved in either the subdivision or the sale of the property

• the individuals would finance the first stage of the proposed development from their own resources and the next two stages would be financed from the sale of the previous stages

• the estimated cost of the development was in the range of $X million to $X million

• the estimated gross sales of the development was $X million

• at the time, the individuals had engaged in preliminary discussions with a surveyor as to the viability of the proposed development and engaged a valuer of the land

A number of lots have been sold.

To enable the individuals to deal with their proportion of the subdivided lots individually, they intend to partition the remaining lots so that each of the owners each holds an equal portion of the remaining lots registered in their own name, rather than holding the land collectively as tenants in common.

No consideration will be paid on the partition of the lots.

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 104-10

Income Tax Assessment Act 1997 paragraph104-10(5)(a)

Income Tax Assessment Act 1997 subsection 108-70(2)

Income Tax Assessment Act 1997 section 120-20

Reasons for decision

Question 1

We need to determine whether the proceeds from the sale of the lots:

• are assessable ordinary income as you were carrying on a business of property development

• are assessable ordinary income under as you conducted an isolated commercial transaction with a view to a profit, or

• are a realisation of a capital asset and assessable under the CGT provisions of the ITAA 1997.

Carrying on a business of property development

Based on the information provided, we do not consider that any proceeds received from the sale of the subdivided land would be derived in the course of carrying on a business.

Profits from an isolated transaction

Profits arising from an isolated business or commercial transactions will be ordinary income if the taxpayer's purpose or intention in entering into the transaction is to make a profit, even though the transaction may not be part of the ordinary activities of the taxpayer's business (FC of T v. Myer Emporium Ltd 1987 163 CLR 199; 87 ATC 4363; 18 ATR 693) (Myer Emporium). 

Taxation Ruling TR 92/3 considers the principles outlined in the Myer Emporium case and provides guidance in determining whether profits from isolated transactions are assessable under section 6-5 of the ITAA 1997 as ordinary income.

Having regards to your circumstances and the factors outlined in TR 92/3, we do not consider that the proceeds from the sale of the land will be assessable under section 6-5 or 15-15 of the ITAA 1997. We consider that the disposal of the property will be a mere realisation of a capital asset.

Question 2

Under section 120-20 of the ITAA 1997, an entity will make a capital gain or a capital loss if a CGT event happens to a CGT asset. A capital gain on the disposal of an asset can be disregarded under paragraph 104-10(5)(a) of the ITAA 1997 if it was acquired prior to 20 September 1985.

If you subdivide a block of land, each block that results is registered with a separate title. For CGT purposes, the original land parcel is divided into two or more separate assets. Subdividing land does not result in a capital gains tax (CGT) event if you retain ownership of the subdivided blocks.

Market value substitution rule

In some cases, if you receive nothing in exchange for a CGT asset you are taken to have received the market value of the asset at the time of the CGT event. This is known as the market value substitution rule for capital proceeds.

In this case, each individual held a X interest in each block of land. The individuals intend to affect a transfer that results in each of the owners holding Y of the total blocks in their own names. As there will be no consideration paid for this transfer, the individuals will be taken to have acquired their additional interest in each block for market value at the time of the event.

As a result of the transfer each individual will hold both pre and post CGT interests in the blocks. Therefore, any capital gain on the disposal of the blocks can only be disregarded to the extent that they were acquired prior to 20 September 1985.

Question 3

Under subsection 108-70(2) of the ITAA 1997, a capital improvement to a CGT asset that you acquired before 20 September 1985 (that is not related to any other capital improvement to the asset) is taken to be a separate CGT asset if its cost base when a CGT event happens in relation to the original asset is more than the improvement threshold for the income year in which the event happened and more than 5% of the capital proceeds from the event.