Edited version of your written advice

Authorisation Number: 1051337936794

Date of advice: 5 March 2018

Ruling

Subject: Property development – Income vs Capital

Question

Are the proceeds from the sale of subdivided land assessable income under either under section 6-5 or section 15-15 if the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes. Proceeds are assessable under section 6-5 of ITAA 1997.

This ruling applies for the following periods:

1 July 2017 to 30 June 2018

1 July 2018 to 30 June 2019

1 July 2019 to 30 June 2020

The scheme commences on:

1 July 2017

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.

a. Mr and Mrs are joint owners of Lot 1 and Lot 2. The lots were purchased for the sole purpose of carrying out a nursery business.

b. Lot 1 with land area of approximately 2 hectares, zoned rural, was acquired in the late 1970s and it has been used as a nursery for the whole period and a home was built on the property as residence for the owners.

c. In YYYY the adjoining lot, Lot 2 with land are of approximately 2 hectares was purchased to allow expansion of the business. This lot was also zoned rural and it has been farmed for over 15 years.

d. In the recent past, due to the lobbying of the local council by a large landowner and a property development company, the area has now been rezoned to urban. A requirement imposed by the Council to the property development company for rezoning approval was that they had to produce a subdivision “structure plan” for the entire area. All subdivision within the locality is required to comply with the prepared structure plan and scheme requirements.

The consequences of council rezoning the land to urban have greatly impacted the nursery business. The business operates outside normal hours at times as it is now surrounded by residential development. Complaints have also been made by nearby residents regarding noise, spraying of agricultural chemicals and burning of garden refuse. Methods of operating have now been modified with consequential increases in operating costs.

The owners are now starting to suffer the effects of old age; the Mr and the Mrs both in their mid to late 60s can no longer work as required to operate the nursery. Due to deteriorating health, subdivision is being contemplated in stages over time to reduce debt and to fund retirement.

The owners are forced to fund retirement out of sale of their land as they have insufficient superannuation and the value of their landholding means they are unable to access the age pension.

The owners have debts attributable to the business and a mortgage on both properties which are becoming increasingly difficult to service. As a consequence of their current situation they are looking at subdividing both properties with a view of retiring debt and funding their retirement.

Neither of the properties has been placed on the open market in the entire period since they were acquired by our clients. They noted that at this point in time, there are no developers interested in purchasing the land.

The estimated value of both properties with improvements is $XX million - $XX million and the estimated market value if sold to developers as a development site is $X million to $X million. In addition, the real estate agent has estimated the average price of lots will be in range of $XXX,000 with estimated total sale value to be approximately $XX million.

Taking the above factors into consideration, you determined that the outright sale of both properties on the current market would not result in an outcome that was better than that expected from the sale of the proposed subdivided lots. You had anticipated that taking the path of sale by subdivision rather than selling directly to developers would realise the maximum sale price for both properties.

e. It is envisaged to subdivide both properties over time in stages. The initial stage of subdivision would enable debt to be retired, remove the mortgage and provide some funds for other purposes. Some funds may be required to be borrowed to initiate subdivision and if so, it is intended to pay these and any interest off out of sales receipts of the subdivided lots and will be treated as private expenses.

f. The owners have never been in the business of purchasing and developing land with the intent of selling at a profit. They do not have the required skills to undertake the subdivision and sale of the land.

g. The owners have consulted or engaged the following entities to undertake activities in relation to the subdivision of both properties and will provide services as required:

Company	Activities / Role
Town Planners	The preparation and lodgement of plans and applications for approval of council and other statutory authorities
Engineers/ Managers	Civil Engineers / Project Managers
Real Estate Agent	Sales and marketing of the XX lots
Legal Co.	Legal affairs of the property development
Others	To undertake other activities/ services required as the subdivision progresses

To undertake other activities/ services required as the subdivision progresses

h. Civil contractors will be selected via a tender process which will be overseen by Engineers/ Managers. This will not be completed until detailed engineering designs have been produced. There has been no detailed engineering design available to date.

i. The subdivision provided by the Town Planners shows that the lots will be subdivided into XX Green Title residential lots. Landowner will be responsible for applying for loans to carry out the subdivision and make progress payments as appropriate.

j. On MMM YYYY, a subdivision plan was prepared by Town Planners.

k. The Real Estate Agent has placed value on the lots at approximately $9 million and they were engaged by the owners to undertake the sale of the properties.

l. The following documents were provided as support for the ruling application:

Date	Document	Prepared by
MMM YYYY	Opinion for probable costs for the proposed subdivision and costings for stage 1 of the proposed subdivision	Engineers/ Managers
MMM YYYY	Subdivision lot plan	Town Planners
MMM YYYY	Subdivision approval subject to condition(s)	Council

m. The key conditions of Council’s subdivision approval are as follows:

1. Landowner to contribute towards development infrastructure provisions pursuant to local government scheme;

2. The proposed reserve(s) shown on the approved plan of subdivision to be ceded free of cost and without any payment of compensation by the Crown;

3. Proposed public open space to be developed by landowner to a minimum standard and maintained for two summers. The development is to include full earthworks, basic reticulation, grassing of key areas, bushfire mitigation areas and pathways that form part of the overall pedestrian and cycle network;

4. Construction of approved shared paths;

5. Satisfactory arrangements being made with the local government for the upgrading of Road A to a standard of an Access Street;

6. Provision of an underground electricity supply to the lots;

7. Transfer of land as a Crown reserve free of cost to Power Co. for the provision of electricity supply infrastructure; and

8. The landowner making a pro-rata contribution towards the cost of the acquisition of the primary school site identified in the subdivision locality.

n. Only the minimum amount of work required to comply with council requirements and obtain subdivision approval will be carried out.

o. The subdivided lots will be sold as vacant lots, with the infrastructure work in accordance with the subdivision approval, with no improvements constructed on them.

p. No deductions will be claimed for income tax purposes in relation to any of the costs associated with the subdivision (including interest costs).

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Subsection 995-1(1)

Reasons for decision

Summary

The planed subdivision is on a massive scale, involving laying out and construction of roads, the provision of parklands, services and other improvements that amounts to development and improvement of the land to such a marked degree that is it impossible to say that it is a mere realisation of an asset therefore proceeds are assessable under section 6-5 of the ITAA 1997 as income from carrying on a business of property development.

Detailed reasoning

Taxation treatment of property sales

Section 6-5 of the ITAA 1997 includes in your assessable income, where you are an Australian resident, all ordinary income which you derive during an income year. Ordinary income is defined as income according to ordinary concepts.

Income according to ordinary concepts generally includes income that arises in the ordinary course of a taxpayer’s business. In certain circumstances proceeds not within the ordinary course of the taxpayers business may form part of their ordinary income.

Therefore the following needs to be considered in order to determine whether the proceeds to be received from the sale of the land are:

● assessable ordinary income under section 6-5 of the ITAA 1997 as income from carrying on a business of property development; or

● assessable ordinary income under section 6-5 of the ITAA 1997 as income from a profit-making undertaking or scheme..

In circumstances where it is neither assessable income from carrying on a business of property development nor income from a profit-making undertaking or scheme, then the amount might be assessable as statutory income under the capital gains tax legislation as a result of the sale of a capital asset.

Mere Realisation vs Disposal in the course of business or profit making undertaking

Generally, when you enter into an arrangement to develop and sell your land, the key question to be determined is whether the ultimate sale is a ‘mere realisation’, or whether it is a disposal either in the course of business or as part of a profit-making undertaking or plan.

Where the sale is ‘mere realisation’ the sale is on capital account to which the capital gains tax (CGT) rules will generally apply. These proceeds are not ordinary income.

A sale that is more than a ‘mere realisation’ will be on revenue account and proceeds will generally be assessable as either income from the carrying on of a business or income from a profit making undertaking or scheme.

The doctrine of ‘mere realisation’ was developed in the Full High Court case of Scottish Australian Mining Co Ltd v Federal Commissioner of Taxation (1950) 81 CLR 188 (Scottish Australian Mining), and has been relied upon by numerous cases post its decision such as in FC of T v NF Williams to hold the sale of land which has been subdivided is necessarily no more than the mere realisation of capital asset, with any improvements in such as subdivision as being merely an enterprising way to realise an asset to its best advantage. For many years it was felt that the doctrine of ‘mere realisation’ was applied so broadly that it was thought that only in exceptional circumstances would an isolated transaction fall within the ordinary concepts of income.

However this all changed in 1982 when the landmark Full High Court case of FC of T v Whitfords Beach Pty Ltd (1982) 150 CLR 355; 82 ATC 4031(Whitfords Beach) was decided. In this respect, the Commissioner would like to refer to the following comments made by Justice Mason in that landmark case

“37. However, apart altogether from this factor, the facts previously mentioned show that there was involved more than mere realization of an asset. Deane J. was right in pointing to the circumstance that the asset was divided and improved in the course of a business of dividing and improving the asset. In this respect I do not agree with the proposition which appears to be founded on remarks in some of the judgments that sale of land which has been subdivided is necessarily no more than the realization of an asset merely because it is an enterprising way of realizing the asset to the best advantage. That may be so in the case where an area of land is merely divided into several allotments. But it is not so in a case such as the present where the planned subdivision takes place on a massive scale, involving the laying out and construction of roads, the provision of parklands, services and other improvements. All this amounts to development and improvement of the land to such a marked degree that it is impossible to say that it is mere realization of an asset. We need to bear in mind that the subdivision of broad acres into marketable residential allotments involves much more in the way of planning, development and improvement than was formerly the case. (at p385)

38. Like Wilson J., I have difficulty with the decision of Williams J. in Scottish Australian Mining Co. Ltd. v. Federal Commissioner of Taxation (1950) 81 CLR 188. The taxpayer there, after giving up its mining business in 1924, devoted itself to the subdivision of its land. This entailed the construction of roads, the building of a railway station, the granting of land to public institutions such as schools and churches and the setting aside of land for parks. I should have been inclined to the view that the taxpayer had ceased to carry out its mining business and that it had commenced to carry on the business of land development. (at p385)

39. This conclusion would have been more consistent with the later decisions of this Court in Fox (1956) 96 CLR 370 and White v. Federal Commissioner of Taxation (1968) 120 CLR 191. In Fox (in which no mention was made of Scottish Australian) the activities were less extensive, though they did involve land subdivision and improvement (reclamation). The only difference between Scottish Australian and Fox seems to lie in the circumstance that there was a new taxpayer in Fox. He was a new taxpayer whose function it was to get in the bankrupt's assets so that a distribution among creditors could take place. (at p385)

40. From what I have said it will be seen that it is my opinion that what the respondent did amounted to more than realization of an asset and constituted the carrying on of the business of land development. Accordingly, the gross income is assessable under s. 25(1). (at p386)

Therefore the decision in Whitfords Beach has severely narrowed the scope of the ‘mere realisation’ doctrine develop by Scottish Australian Mining, which so many of the proceeding cases relied upon. The case highlights that while ‘mere realisation’ may still be possible where blocks are merely subdivided to several blocks with minimal activity, however where the size and scale of the activity reaches such a level (such as constructing roads, the provision of parklands, services and other), this all amounts to a development and improvement of the land to such marked degree that it’s no longer possible to say it’s a mere realisation of an asset. The case of Whitfords Beach also highlights the requirements of modern day residential subdivision that involves much more by way development and improvement of land than was formerly the case, making it far more difficult for modern day residential subdivisions to satisfy the ‘mere realisation’ doctrine.

Carrying on a business of property development

The question of whether a business is being carried on is a question of fact and degree to be determined on a case by case basis. The courts have developed a series of indicators that are applied to determine the matter on the facts.

Subsection 995-1(1) of the ITAA 1997 defines 'business' to include 'any profession, trade, employment, vocation or calling, but does not include occupation as an employee'. This definition simply states what activities may be included in a business; it does not provide any guidance for determining whether the nature, extent, and manner of undertaking those activities amount to the carrying on of a business.

Profits made on the sale of land can be considered ordinary income under section 6-5 of the ITAA of 1997 if the activities become a separate business operation.TR 92/3: Income Tax: Whether profits on isolated transactions are income (TR 92/3), paragraph 11 states:

“The transaction may take place in the course of carrying on a business even if the transaction is outside the ordinary course of the taxpayer’s business.”

Paragraph 13 of TR 97/11: Income Tax: Am I carrying on a business of primary production (TR 97/11) states that the courts have held that the following indicators are relevant to whether or not a person is carrying on a business (although TR 97/11 specifically deals with carrying on a primary production business, the principles discussed in that Ruling can apply to any business):

● 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. Whether a 'business' is carried on depends on the large or general impression.

Application to your circumstances

The following considers the above indicators for your circumstances:

a. Significant commercial purpose or character.

The 'significant commercial purpose or character' indicator is closely linked to the other indicators and is a generalisation drawn from the interaction of the other indicators. It is particularly linked to the size and scale of activity, the repetition and regularity of activity and the profit indicators.

Paragraph 29 of TR 97/11 provides that a way of establishing that there is a significant commercial purpose or character is to compare the activities with those of a taxpayer who is carrying on a similar activity that is a business.

Any knowledge, previous experience or skill of the taxpayer in the activity, and any advice taken by the taxpayer in the conduct of the business should also be considered but are not necessarily determinative.

The owners have engaged a number of professionals to progress subdivision of both properties. It has engage Town Planners to draw up the subdivision plan and applied for subdivision approval from Council. Engineers/ Managers have also been engaged to provide the opinion of probable construction cost for stage 1. Real estate Agent has been engaged for the sales and marketing of the lots.

The Commissioner considers the owners activities to have a significant commercial purpose and character.

b. Intention to engage in business

In Inglis v FC of T (1979) 80 ATC 4001; 10 ATR 493, Brennan J stated:

“The carrying on of a business is not a matter merely of intention. It is a matter of activity.... At the end of the day, the extent of activity determines whether the business is being carried on. That is a question of fact and degree.”

You have stated the subdivision of both properties and the sale of the subdivided land is to realise a capital asset given your ages and health, and your reduced ability to continue working in the nursery business.

The Commissioner’s position at paragraph 42 of TR 92/3 indicates a taxpayer’s intention may change to profit-making after the time of acquisition. This is supported by the decision of the Federal Court in Stevenson v Commissioner of Taxation (1991) FCR 282 (Stevenson) where doubt was raised in relation to the position that a landowner may only form a profit-making intention in respect of any asset at the time of acquisition. Although the landowner in Stevenson did not acquire land with an intention to resell it many years later, the landowner subdivided his land into 180 lots and the scale of the borrowings used to finance the subdivision and sale of the land resulted in the commitment of the use of the land to a profit-making undertaking scheme or business activity.

The Commissioner considers that you committed both properties to subdivision from the moment of lodging the development approval with Council in August 2017.

At this point your intention changed to holding both properties as trading stock for the purposes of a land development business.

The Commissioner considers this to be a positive indicator of carrying on a business of land development.

c. Is there an intention to make a profit or a genuine belief that a profit will be made?

Stronger evidence of an intention to make a profit occurs when you have conducted research into your proposed activity, consulted experts or received advice on the running of the activity and the profitability of it before setting up the business.

You have stated that the market value if sold to developers as a development site is $8 - $9 million as opposed to the estimated sale value of $19 million in selling the lots after subdivision, therefore you have decided to do the subdivision to maximise profits. You have also acknowledged during our discussion that you can merely realise the land but chose to go down the path of subdivision to maximise profit and that you did not attempt to sell because you were not satisfied with the sale value you will be getting from outright sale versus from that of subdivision.

The Commissioner regards that you have intentions to make profit from the property development on top of the land’s true value. You have conducted research into your proposed activity, consulted experts or received advice on the running of the activity and the profitability of it before starting the business. These are all positive indicators of carrying on a business of land development.

d. Is there repetition and regularity in the activity?

There will be repetition and regularity of the activities given that there will be the marketing and sale of 57 lots in various stages, while the subdivision is a “one-off” venture.

e. Is the activity of the same kind and carried on in a similar way to that of the ordinary trade?

An activity is more likely to be a business when it is carried on in a manner similar to that in which other participants in the same industry carry on their activities.

You estimate to incur an average cost of $XX,XXX per block to comply with Council restrictions and an estimated total projected cost of $X.X million to subdivide both properties which is nearly 50% of the land value without considering finance costs. The Commissioner refers you to the comments of Justice Mason in FC of T v Whitfords beach Pty Ltd (1982) 150 CLR 355; 82 ATC 4031 (Whitfords Beach)

“We need to bear in mind that the subdivision of broad acres into marketable residential allotments involves much more in the way of planning, development and improvement than was formerly the case. (at p385)

As inferred by Justice Mason in Whitfords Beach the very fact Council may have imposed these requirements in modern high density residential subdivision, does not alter the fact the land has been developed to such a marked, that it is no longer possible to say it is the mere realisation of an asset.

You stated that you have to borrow funds for the proposed subdivision and will be assuming the financial risk of the development.

You stated you will not be undertaking an active role in the subdivision. Rather, you are engaging external professional to assist with every aspect of the subdivision including planning, surveying, engineering, dealing with council, engaging / managing contractors and marketing / selling.

The Commissioner contends that the development is to be carried on in a manner similar to other land developers.

The Commissioner considers that these are positive indicators of carrying on a business of land development.

f. Is the activity organised in a businesslike manner?

A business is characteristically carried on in a systematic and organised manner rather than on an ad hoc basis. An activity should generally conform with ordinary commercial principles to amount to the carrying on of a business.

You stated you have engaged third parties to undertake the planning approval stage (submissions to Council, etc), an agent to market and sell the lots and will engage civil engineers/ project managers to manage and undertake the subdivision activities.

You stated that you have a minimal involvement in the subdivision. As you are the owners of both properties and it is you undertaking the subdivision, you will be signing documentation as required; however this would be on advice provided by your advisers. However Commissioner notes that you engaged or will engage the services of professionals for planning the subdivision, carrying out civil works and marketing of allotments for sale. Secondly, even if instead the Developer (civil contractor) engaged these experts on your behalf, in respect of this claim the Commissioner would like to refer you to case of Abeles and Anor v. Federal Commissioner of Taxation (1991) 91 ATC 4756 (Abeles) and the following statement from Justice O’Loughlin:

“In the application of these principles to the facts of this case, I have concluded that the taxpayers exceeded the bounds of the mere realisation of their land in an enterprising way. No doubt they were aided by Mr. Markham in making their decisions; perhaps, arguably, he induced them, first to agree to subdivide and then to participate in the larger plan that involved the six blocks and the four groups of owners. But, in these particular circumstances, they cannot hide behind Mr. Markham. He was their agent and his conduct was their conduct. Through Mr. Markham, the brothers went beyond a mere simple subdivision and sale of their 10 acres; they entered into an arrangement that was in the nature of a joint venture, sharing costs and expenses rateably; they even participated in variations to the boundaries of their land in order to present, and participate in, the best plan of subdivision. Their financing commitment was heavy; their established line of credit was $90,000 more than they paid for the land five years earlier; they allowed for the subdivision being a lengthy project and arranged with the finance company to accrue interest on the borrowed moneys. Although the size of a project is not a conclusive factor, it is one of numerous matters that are to be weighed in the balance. In this case, the readiness of the brothers to involve themselves with the other owners was more consistent with a business enterprise than a private realisation. The taxpayers, through their agent, Mr. Markham, chose to embark upon a business-like and efficient program of subdivision.”

Therefore you can’t merely hide behind the Developer (civil contractor) to claim you are not in the business of subdivision and sale of the property. The Developer is your agent, so ultimately the conduct of the Developer is your conduct, and you have through the Developer chosen to embark upon a business-like efficient program of subdivision.

The Commissioner also notes you will also be assuming the financial risk of the development. All these activities conform to ordinary commercial principles of a land development.

The Commissioner considers that this is a positive indicator of carrying on a business of land development.

g. What is the size and scale of the activity?

The size or scale of the activity is not a determinative test, and a person may carry on a business in a small way. However, if the scale of the activities result in more than is required for your own domestic needs combined with an intention to profit from the activities and a reasonable expectation of doing so, a business may be carried on despite the scale.

Mason J in Whitfords Beach made the following comments at paragraph 37:

I do not agree with the proposition which appears to be founded on remarks in some of the judgments that sale of land which has been subdivided is necessarily no more than the realization of an asset merely because it is an enterprising way of realizing the asset to the best advantage. That may be so in the case where an area of land is merely divided into several allotments. But it is not so in a case such as the present where the planned subdivision takes place on a massive scale, involving the laying out and construction of roads, the provision of parklands, services and other improvements. All this amounts to development and improvement of the land to such a marked degree that it is impossible to say that it is mere realization of an asset. We need to bear in mind that the subdivision of broad acres into marketable residential allotments involves much more in the way of planning, development and improvement than was formerly the case.

You stated that you have decided to subdivide both properties as you believe it is the most advantageous way to realise the land.

On MMM YYYY, you lodged a development application with the Council which was conditionally approved on MMM YYYY. As such, you confirmed that you will subdivide the both properties into XX blocks with lots averaging approximately 500 m² each.

According to you, it is projected the development will be completed in various stages. Each stage of the subdivision will commence once funding for that stage is available, either from borrowed funds initially or from sales later on.

You further stated the total cost of subdivision will be approximately $X.X million and the gross sales of approximately $XX million.

The Commissioner contends that the scale of the activities and the improvements to both properties goes beyond merely realising the asset in the most enterprising way. Therefore the Commissioner contends there was a change of purpose in relation to the use of both properties and this is a positive indicator of carrying on a business of land development.

h. Is the activity better described as a hobby, a form of recreation or a sporting activity?

You have not provided any argument to support that the activity is better described as a hobby, a form of recreation or a sporting activity.

The Commissioner considers that your activities are not a hobby or a form of recreation and this indicator is not relevant.

Quoted cases in the ruling application

Casimaty Case

You have noted the Full Federal Court case Casimaty v FC of T (1997) 97 ATC 5135; 37 ATR 358 (Casimaty) where the Court ruled that sales from subdivision occurred as part of the mere realisation of a capital asset.

In Casimaty, the owner subdivided the land into 8 separate subdivisions over a period of 18 years (1975 to 1993) and the lots were sold as low density farming rural lots as opposed to your development plan for 3 years (2017 to 2020) and subdivision into high density residential lots. It is also to note that in Casimaty, the taxpayer’s developmental activities never extended to the proposal or creation of public facilities nor did the taxpayer undertook any works on, or development of, the land beyond what was necessary to secure the approval by the municipal authorities of the successive plans of subdivision and enhance the presentation of individual allotments for sale as vacant blocks.

Ryan J considered the following factors in reaching to this conclusion:

a. The indisputable fact that the taxpayer acquired and continued to hold the property for use as a residence and the conduct of a business of primary production, there is nothing to suggest a change in the purpose or object with which the property was held (distinguishing Whitfords Beach);

b. The taxpayer did not acquire other land to be added to the original land;

c. The taxpayer had previously carried on farming and fencing business in partnership with his wife and son respectively but did not attempt to bring the property to account as a partnership asset and did not seek to claim as business expense the interest on moneys borrowed for the subdivision;

d. The subdivision was undertaken piecemeal in response to the exigencies of increasing debt and deteriorating health, as well as no coherent plan was conceived at the outset for the development, even in stages, to maximise the return from the aggregate of each lots;

e. The taxpayer did not undertake any development or works beyond that necessary to secure the council approval for the subdivisions and enhance the presentation of the various lots and his developmental activities never extended to the proposal or creation of public facilities;

f. The taxpayer did not set up his own sales organisation or advertised or conducted sales himself.

The Commissioner considers there are major differences between your case and the case of Casimaty that do not allow you to rely on it to support the conclusion that the sale of the subdivided lots is a mere realisation of a capital asset. Casimaty can be distinguished from your situation for the following reasons:

● The development is carried on in a businesslike manner. You have a plan of subdivision for the entire land at the outset of the development.

● In Casimaty there were 8 entirely separate subdivisions (each with a separate planning process) done in a piecemeal manner. No coherent plan for subdivision existed. While you might construct your project in different stages, there is a coherent plan of subdivision for the entire development.

● In Casimaty a total of 81 large lots (sizes range up to 5 hectares) were sold over the 8 stages. While your development only encompasses 57 lots, these 57 lots (of approximately 500m2 each) all within a total development area of 4 hectares, which is smaller than the largest subdivided lot of 5 hectares developed and sold off in the case of Casimaty. Therefore significantly more activities were conducted to improve 4 hectares of land in your case, as opposed to the level of activity conducted in subdividing off 5 hectares of land in Casimaty

● In Casimaty only minimal works were conducted, such as providing fencing, minimal road works and mains water, which one would associate with large rural/farmland style lots. This contrasts to your case, which in addition includes works such as underground power, footpaths, bicycle tracks, parkland (and two years maintenance), sewerage and extensive stormwater works that you’d associate with high density residential subdivision Whitfords Beach. The scale of activity in Casimaty was nowhere near the scale of activity in while your case is.

● In Casimaty, the taxpayer continued their farming operations on the underdeveloped portions of the land, while you propose to close your nursery business to allow the development to take place.

Due to the reasons highlighted above, we believe that Casimaty is distinct from your case.

Statham Case

The second case you have noted was the Full Federal Court case Statham & Anor v. FC of T (1988) 16 ALD 723; 20 ATR 228; 89 ATC 4070 (Statham) where the Court ruled that the mere realisation of an asset at a profit did not necessarily render the profit taxable.

The deceased had acquired the subject land from his father in 1970. The land was acquired by the deceased so that he might raise his family in a rural environment and conduct some farming activity. In 1976 he sold off a 36 hectare portion of the property and some urban blocks. Also he sold a further half share of 30 hectares being most of the balance of the farming property to his sister’s company. Part of the property was retained by the deceased so that he might subdivide and sell it. In 1976 the deceased and his sister’s company entered into a partnership to raise beef cattle on the property. However, this was not achieved for a variety of reasons including that the deceased’s health deteriorated. A decision was made during 1979 to subdivide and sell the whole or part of the land. There were four stages of subdivision involving in total 105 lots that were sold. The subdivision involved a relatively simple approval process. After the approval was obtained the local council undertook all necessary work including road, earthworks, sewerage and electrical work. The lots were sold through listing it with local agents. The Full Federal Court noted that the mere magnitude of the realisation does not convert the activity into a business undertaking or scheme, although it is a relevant matter to take into account. The Court considered that the proceeds of sale were not income according to ordinary concepts nor did a profit arise from the carrying on or carrying out of a profit making undertaking or scheme. The Court determined that what occurred was (at page 4077):

“the mere realisation, by the most advantageous means, of the asset which the owners had on their hands when they abandoned the intention of farming the subject property.”

The Court considered the following factors were significant (page 4076):

(a) the owners were at first content to sell the land as one parcel, but were unable to do so;

(b) no moneys were borrowed by them, although a guarantee was provided to Kingaroy Shire Council by way of bank guarantee;

(c) only very limited clearing and earthworks were involved;

(d) the owners relied upon the Kingaroy Shire Council itself to carry out road works, kerbing, electricity and sewerage works which were required to be done;

(e) the owners did not erect buildings on the land; not even, for example, a site office;

(f) they had no business organisation, no manager, no office, no secretary, and no letterhead;

(g) Dr Bickerton maintained his medical practice;

(h) the owners did not advertise the land for sale;

(i) apart from the Kingaroy Shire Council's activities, the owners did not engage any contractors, although they did obtain some professional advice;

(j) the books kept in relation to the sales of land were kept by Mrs Bickerton; and

(k) the land was sold simply by listing it with the local real estate agents.

The Commissioner contrast this to your case

● You are not content with merely selling the land as one parcel;

● Statham was a low density rural/residential type living lots (average size above 2000 m2) as opposed to your proposed high density development (average size approximately 500m2).

● Statham had limited clearing and earthworks that you’d associate with such low density allotments. In contrast, your development will require extensive earthworks, to develop the sewerage, stormwater, underground power, telephone services, road networks, footpaths, bicycle track and parkland that you’d associate with high density developments.

● In Statham’s case the taxpayer left the development work to the Council to undertake, while you have engaged professionals to draft the subdivision plan that includes provision for public open space, to prepare report on opinion of probable cost, for the submission of development plan to Council and for the sale and marketing of the lots. You also noted in the ruling that civil contractors will be engaged upon finalisation of detailed engineering designs to undertake the development. Notably leaving the construction activity to the council is vastly differently to hiring the services of Developer (civil contractors) to do everything for you, as one could not say the Council is conducting that activity as an agent of the landholder. The Council will continue to operate in the interest of its constituents and is not bound by a Property Development Agreement to act as agent of the landholder, as is the case where a landowner hires the services of a Developer (civil contractors), to undertake the development on their behalf. (refer (Abeles))

N.F. Williams

The third case you have noted was the High Court case N.F. Williams v. FC of T (1972) 72 ATC 4069 (N.F. Williams) where the Court ruled that the sale of subdivided land is a mere realisation of an asset.

In this case, the husband purchased the land and later on transferred his interest in the land to his wife by way of gift. For a number of years the wife took little interest in the land and the proportion of rates payable by her was paid by her husband. After several years, the wife agreed to sell the land upon the husband’s suggestion. The wife left all the arrangements and negotiations relating to the sale to her husband and the land was subdivided into 35 lots. The reason why the Court ruled on mere realisation is because there was no acquisition by the wife which could be said to be an acquisition for the purpose of profit-making by sale. The Commissioner believes that your circumstances are distinguishable from the case N.F. Williams.

However the Commissioner notes that in N.F. Williams, Judge Stephen J highlighted a few cases as basis of his decision with the main case being F.C. of T. v. McClelland (1967) 69 ATC 4001 at p. 4002; 118 C.L.R. 353 (McClelland) noted in his conclusion.

It is to note that those cases noted by Judge Stephen J including F.C. of T. v. McClelland (1967) 69 ATC 4001 at p. 4002; 118 C.L.R. 353 were pre Whitfords Beach case and Justice Mason J in Whitfords Beach stated that:

“20. Not all that was said in McClelland can now be accepted. The majority judgment fails to differentiate between the United Kingdom and the Australian systems of arriving at taxable incomes and employs expressions derived from the United Kingdom Income Tax legislation which have no place in our legislation.”

Given the criticism the McClelland judgement received in Whitfords Beach about the incorrect application of Australian Taxation legislation, the Commissioner questions why the taxpayer is seeking to rely on a case such as N.F. Williams which relied on the McClelland judgement. The fact remains Whitfords Beach was a Full High Court decided after N.F. Williams, where the Honours suggested many of the preceding judgements may have been wrongly decided. From Whitfords Beach the ‘mere realisation’ doctrine as applied in Scottish Australian Mining and N.F. Williams was significantly narrowed and therefore these cases should not be used as authority in current tax matters.