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Edited version of your written advice
Authorisation Number: 1012991321341
Date of advice: 5 May 2016
Ruling
Subject: Capital Gains Tax
Question 1
Will the proceeds from the 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 sale of the subdivided land be a capital gain under section 104-10 of the ITAA 1997 that is subsequently disregarded under paragraph 104-10(5)(a) of the ITAA 1997 to the extent it was acquired before 20 September 1985?
Answer
Yes.
This ruling applies for the following period
Year ended 30 June 2016
The scheme commences on
1 July 2015
Relevant facts and circumstances
The Trust acquired the property which was approximately X acres before 20 September 1985.
The Trust operates a primary production business on the property.
The Trust has sold sections of the property over the years.
The Trust still holds approximately X acres of land including a primary residence.
The Trust is considering subdividing the remaining land into less than 20 residential lots and selling them for approximately $X each.
The Trust will enter into an arrangement with a subdivision contractor.
The cost is expected to be approximately X% of the sale or $X per block.
The Trust will have minimal involvement in the subdivision of the property.
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 considered 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.
In this case, CGT event A1 will occur when the parcels of land are sold. However, the capital gain on each disposal will be disregarded under paragraph 104-10(5)(a) of the ITAA 1997 as the land was acquired prior to 20 September 1985.