Edited version of your written advice

Authorisation Number: 1012926587086

Date of advice: 21 December 2015

Ruling

Subject: Subdivision

Question 1

Will the proceeds of subdivision amount to more than a mere realisation of the property and hence deem the receipts to be assessable income in accordance with section 6-5 or section 15-15 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

Is the supply of subdivided land a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No.

This ruling applies for the following periods:

Year ending 30 June 2016

Year ending 30 June 2017

The scheme commences on:

1 July 2015

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 and your spouse purchased a property prior to 20 September 1985. At the time of acquisition, you and your spouse intended to build a new dwelling to be used as your main residence. A draft plan was prepared. The property is X acres in size and was vacant land.

You and your spouse did not proceed with the construction of the new dwelling and the land has been left vacant since its acquisition. The property has never been used to produce assessable income. You and your spouse are both in your X0's and you propose to subdivide the property into a number of blocks and sell them to fund your retirement.

You and your spouse obtained subdivision development approval from the local council. You and your spouse intend to subdivide and then sell the blocks. The level of improvement work would be limited to the work necessary to secure council approval. You and your spouse have engaged an engineer to assist with the tender process for the development. You and your spouse will oversee the project but consult with experts including an engineer.

You and your spouse are not jointly registered for GST and have not sold any properties in the past.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5.

Income Tax Assessment Act 1997 Section 15-15.

A New Tax System (Goods and Services Tax) Act 1999 Section 9-5.

Reasons for decision

Summary

In this case, given the scale of the activity, the number of lots and the level of involvement, any proceeds from the sale of the subdivided land will represent a mere realisation of a capital asset.

The supply of the subdivided land is not a taxable supply

Question 1

Under section 6-5 of the ITAA 1997, your assessable income includes the ordinary income you derived directly or indirectly from all sources, during the income year.

Additionally, section 15-15 of the ITAA 1997 includes profit arising from the carrying on or carrying out of a profit-making undertaking or plan. However, this provision does not apply to a profit that is assessable as ordinary income under section 6-5 of the ITAA 1997, or which arises in respect of the sale of property acquired on or after 20 September 1985.

Profits arising from an isolated business or commercial transaction 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 Income Tax Assessment Act 1997 (ITAA 1997) as ordinary income.

If a taxpayer makes a profit from a transaction or operation, that profit is income if the transaction or operation is not in the course of the taxpayers business but:

• the intention or purpose of the taxpayer in entering into the profit-making transaction or operation was to make a profit or gain, and

• the transaction or operation was entered into, and the profit was made, in carrying out a business operation or commercial transaction.

Whether an isolated transaction is business or commercial in character will depend on the circumstances of each case.  Where a taxpayer's activities have become a separate business operation or commercial transaction, the profits on the sale of subdivided land can be assessed as ordinary income within section 6-5 of the ITAA 1997. TR 92/3 lists the following factors to be considered:

a) the nature of the entity undertaking the operation or transaction 

b) the nature and scale of other activities undertaken by the taxpayer

c) the amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained

d) the nature, scale and complexity of the operation or transaction

e) the manner in which the operation or transaction was entered into or carried out

f) the nature of any connection between the relevant taxpayer and any other party to the operation or transaction

g) if the transaction involves the acquisition and disposal of property, the nature of that property, and

h) the timing of the transaction or the various steps in the 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.

Miscellaneous Taxation Ruling MT 2006/1 provides a list of specific factors relevant to isolated transactions and sales of real property. If several of the factors are present, it may be an indication that a business or an adventure or concern in the nature of trade is being carried on. These factors are as follows:

• there is a change of purpose for which the land is held;

• additional land is acquired to be added to the original parcel of land;

• the parcel of land is brought into account as a business asset;

• there is a coherent plan for the subdivision of the land;

• there is a business organisation - for example a manager, office and letterhead;

• borrowed funds financed the acquisition or subdivision;

• interest on money borrowed to defray subdivisional costs was claimed as a business expense;

• there is a level of development of the land beyond that necessary to secure council approval for the subdivision; and

• buildings have been erected on the land.

No single factor is determinative; rather it will be a combination of factors that will lead to a conclusion as to the character of the activities.

Application to your circumstances

In this case, the property was originally acquired prior to 20 September 1985. You and your spouse planned on building a main residence but did not proceed and the property has remained vacant. Approval has been obtained from the local council to subdivide the property into a number of blocks. These will then be sold to fund your retirement. You and your spouse will oversee the project but consult with experts on the subdivision.

Having regards to the circumstances and the factors outlined above, we consider that any proceeds from the sale of the subdivided land will represent a mere realisation of a capital asset which will fall for consideration under the capital gains tax provisions of the ITAA 1997.

Question 2

The supply of the subdivided land is not a taxable supply under section 9-5 of the GST Act. The supply is not made in the course or furtherance of an enterprise carried on either by you and your spouse.