Edited version of your written advice

Authorisation Number: 1051206439371

Date of advice: 24 March 2017

Ruling

Subject: Business - Property subdivision

Question:

Is any part of the sale proceeds assessable to you as ordinary income under section 6-5 of the Income Tax Assessment Act 1997?

Answer:

No.

This ruling applies for the following periods:

2014-15 income year

2015-16 income year

The scheme commences on:

1 July 2011

Relevant facts and circumstances

The two of you have a partnership that is in business unrelated to this issue.

You have never previously had a block that you have subdivided and have never been in the business of property development.

You bought the entire block a few years ago with the intention of splitting the block between your children. You were to retain a block of land to build your own house to retire to once you sold your business. You intended selling any excess land.

Shortly after the purchase, the position of one of your children changed and they no longer wanted to hold a block. So you decided to retain a smaller portion of land. Your other child still wanted to acquire a block and you would subdivide the remainder.

There are X blocks in total - Y house blocks and one larger block.

You have, over several years, developed the blocks. You have done no work yourselves on the blocks. You have not paid anyone to manage the development of the land. You have organised contractors to conduct the required work, and dealt with Council requirements yourselves. The major costs incurred by you have been:

● Sewerage connection costs

● Power line construction costs

● Earthmoving costs

The original land was purchased from your savings (term deposit). The development costs have then been paid from a mixture of finance and saving as the expenses have occurred over a number of years.

You have now sold one block to your other child. You have also sold another house block and have very recently signed contracts for the sale of another block (the larger block).

You still hold Z house blocks. They had been on the market but there has been no interest in them. You have removed them from the market and they are not currently listed as being for sale.

At the end of the calendar year, you will be stopping your business.

Your first child has again shown interest in building a house here and so you are now holding a Lot for that child.

You have commenced building your next home on another of the Lots.

Relevant legislative provisions

Income Tax Assessment Act 1997 6-5.

Reasons for decision

Summary

No part of the sale proceeds is assessable to you as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997).

Detailed reasoning

Section 6-5 of the ITAA 1997 provides that a taxpayer's assessable income includes income according to ordinary concepts derived by the taxpayer during an income year. Income according to ordinary concepts includes income derived from a business.

Are you carrying on business or a profit making undertaking?

The question of whether you are carrying on a business is a question of fact. Over the years the courts have developed a series of indicators that assist in establishing if a business exists. These indicators are summarised in Taxation Ruling TR 97/11 at paragraph 13.

The relevant indicators of whether you are carrying on a business are:

● whether the activity has a significant commercial purpose or character

● whether the taxpayer has more than just an intention to engage in business

● whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity

● whether there is regularity and repetition of the activity

● whether the activity is of the same kind, and carried on in a similar manner, to that of ordinary trade in that line of business

● whether the activity is planned, organised and carried on in a businesslike manner such that it is described as making a profit

● the size, scale and permanency of the activity, and

● whether the activity is better described as a hobby, a form of recreation or sporting activity.

No one indicator is decisive. The indicators must be considered in combination and as a whole.

Where there is no repetition to the activity but the other indicators are present then it may be concluded that the activity is a profit making undertaking that is being undertaken as an isolated transaction.

Your situation

You were seeking to buy a block of land with the intention of constructing a house on it that you would live in. You were also trying to help your children to buy land on which they could each construct a house to live in.

The parcel of land that you bought was larger than what was needed to fulfil your intention. You subdivided it into suitable allotments that would allow the excess to be sold.

You have undertaken some development works on all of the subdivided blocks and have allocated the costs equally among them.

You have sold one block to one of your children at cost. You have sold another of the residential blocks to a third party at a slightly higher amount. The larger block has also been sold.

Conclusion

We consider that you are not carrying on a business of property development or a profit making undertaking as an isolated transaction. Rather you have merely purchased some land on which to construct your house, helped your family and sold some of the excess.