Edited version of your written advice

Authorisation Number: 1012929774174

Date of advice: 17 December 2015

Ruling

Subject: Land subdivision

Question 1

Are you carrying on a business of property development?

Answer

No.

Question 2

Will any future proceeds from the sale of the subdivided lots be assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) as an isolated commercial transaction with a view to a profit?

Answer

No.

Question 3

Will any future proceeds from the sale of the subdivided lots be considered a mere realisation of a capital asset and assessable under the capital gains tax provisions in Parts 3-1 and 3-3 of the ITAA 1997?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 2016

Year ended 30 June 2017

Year ended 30 June 2018

Year ended 30 June 2019

The scheme commences on:

1 July 19XX.

Relevant facts and circumstances

You (spouses) are married and acquired a property more than twenty years ago to be your family home.

You lived at the property from the time you bought it for about eight years when due to a growing family you purchased and moved into a new property.

You rented out the property to tenants for a number of years.

Later your aging parents and another relative became the tenants of the property. This meant that your parents and the other relative (the tenants) could sell their home and provide some cash reserves to support their retired financial requirements.

It was agreed between you and the tenants and approved by local council to construct a granny flat (Dependent Person's Unit) on the rear of the land at the property at the tenant's expense for the other relative to live in while your parents would live in the main house.

In recent years one of your parents passed away and recently, your other relative's health deteriorated to the point that they were unable to live unassisted and had to move out of the Dependent Person's Unit into an assisted care environment. Your other parent still lives as a tenant in the main house.

The local council's legislation for the Dependent Person's Unit is that it can only be used by a person dependent on the person or person's living in the main house.

This has meant in the current circumstances you are unable to rent the Dependent Person's Unit to anybody because your other relative has vacated and is no longer able to live independently in the Dependent Person's Unit.

You are exploring options to realise capital from the Dependent Person's Unit for the benefit of your parent that still resides in the main house and other relative and enable the Dependent Person's Unit to be rented to a tenant that is not a dependent of the person residing in the main house.

The option to realise capital in the above paragraph means the repayment of the money provided by your parents and other relative for the original purchase and construction of the Dependent Person's Unit (because they had provided the initial funds for its purchase and location on the rear of the block at the property).

You have sought advice from a planning consultant on the possibilities of subdividing the land into two parcels with the original house to remain on one parcel and the Dependent Person's Unit to be bought by you from your parent and other relative and be positioned on the subdivided lot at the rear of the property.

The Dependent Person's Unit can be moved but there is a cost involved and in the current situation there is no value in it staying there. Your parent and other relative may not be able to sell the Dependent Person's Unit to a buyer.

If the subdivision proceeds you intend to continue to rent the main house to your parent and rent the property with the Dependent Person's Unit to another tenant. This would provide rental income to you and as stated previously would result in the return of the capital amount invested by your parent and other relative for the purchase of the Dependent Person's Unit.

You are not property developers and have not undertaken property development activities in the past, nor do you plan to do so in the future.

Your employment and areas of expertise are not related to the building or property development fields.

You do not intend to profit or gain from the subdivision, but rather wish to realise some capital from the Dependent Person's Unit for the benefit of your parent and other relative.

You do not plan to sell the subdivided lot that the Dependent Person's Unit is situated on in the short to medium term or the lot with the main house.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 112-25

Reasons for decision

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

• are assessable ordinary income under section 6-5 of the ITAA 1997 as you were carrying on a business of property development

• are assessable ordinary income under section 6-5 of the ITAA 1997 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 lots 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 regard to your circumstances and the factors outlined in TR 92/3, we do not consider that the proceeds from any future sale of the subdivided lots will be assessable under section 6-5 of the ITAA 1997. We consider that the disposal of the property/properties would be a mere realisation of a capital asset.

Capital Gains Tax (CGT)

Subdividing land does not result in a CGT event if you retain ownership of the subdivided lots. You therefore do not make a capital gain or capital loss at the time of the subdivision.

The sale of the subdivided lots would be subject to the CGT provisions in Parts 3-1 and 3-3 of the ITAA 1997. CGT event A1 under section 104-10 of the ITAA 1997 will happen when you dispose of the subdivided lots.