Edited version of your written advice

Authorisation Number: 1051422656425

Date of advice: 30 August 2018

Ruling

Subject: Property Subdivision

Question 1

Is the sale of Properties X and Y as vacant undeveloped land liable to be assessed as ordinary income under section 6-5 ITAA 1997 as a result of an ‘isolated transaction’ carried out for profit and commercial in character?

Answer:

No.

Question 2

Is the sale of Properties X and Y as vacant undeveloped land liable to be assessed as the mere realisation of a capital asset pursuant to the capital gains tax (CGT) provisions of Part 3-1 of the Income Tax Assessment Act 1997 (ITAA 1997) rather than ordinary income under section 6-5 of the ITAA 1997?

Answer

Yes.

Question 3

Will the profit from the separate sale of Property Z as a house or land package be assessed as ordinary income under section 6-5 ITAA 1997 as a result of an ‘isolated transaction’ carried out for profit and commercial in character?

Answer:

Yes.

Question 4

Is the separate sale of Property Z as a house and land package liable to be assessed as the mere realisation of a capital asset pursuant to the capital gains tax provisions of part 3-1 of the ITAA 1997 rather than ordinary income under section 6-5 of the ITAA 1997?

Answer:

No

This ruling applies for the following periods

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commenced on

1 July 20XX

Relevant facts and circumstances

Family home at Property W

In 20XX you and your spouse purchased Property W as joint tenants. The lot was essentially vacant but had some old horse stables on it.

You and your spouse purchased the property to build your family home and your intention was to live there with your family for a very long time.

The property was located close to your work place and also the airport which accommodated your frequent business travel.

In 20XX you and your spouse sold your former main residence.

In 20XX you and your spouse built your new home on W Street. You moved in to the new home on completion in 20XX.

During the period 20XX to 20XX you made capital improvements to your home.

The boundary of Property W shares a common southern boundary with a neighbour’s property.

In 20XX your neighbour commenced a violent campaign of harassment and physical harm and intimidation against you and your family, apparently emanating from his mistaken belief that you had entered his property at some time.

Following the assault, harassment and intimidation by your neighbour, you and your family were living in absolute fear for your lives. You took measures to protect your family.

In 20XX you and your spouse put your home up for sale on the open market. You did not receive any offers to purchase, only queries as to whether you would consider splitting your land into smaller lots and selling the individual lots.

In 20XX you and your spouse applied to the council to subdivide your land into four lots with separate individual titles in the belief that this would accelerate the sale of the property and enable you to leave the area.

To pay for the costs of the subdivision you and your spouse utilised funds drawn on a pre-existing line of credit facility.

Your application to subdivide was approved in Winter 20XX.

You and your spouse attempted to sell the property either as a whole or as separate (one or more) lots. The property did not sell.

In Spring 20XX the four titles were created with you and your spouse listed as joint tenants of each lot: Properties X, Y and Z with Property W being your existing family home.

An auction was held in 20XX but was not successful.

Between 20XX and 20XX you and your spouse engaged a number of real estate agents to market and sell properties W, X, Y and Z. Despite extensive marketing campaigns the agents were unable to sell all four lots together, nor could they sell the individual vacant lots.

In 20XX you and your spouse paid for a separate sale listing of Property X being the vacant lot next to your neighbour’s property. No offers to purchase have been received to date.

In Winter 20XX you and your spouse secured a buyer for your main residence at Property W. The sale settled in 20XX and you and your spouse moved out just prior to settlement.

In Winter 20XX you entered into a contract for the sale of Property X and Y as vacant land. Settlement date is 120 days from the contract date.

Recently you and your spouse have been advised by various real estate agents that in order to have the best chance of selling the remaining lot in the current market you should build a house on it and sell it as house and land package.

You are contemplating constructing a residential dwelling on the remaining lot (Property Z) to retain as an investment for the purposes of generating rental income. Alternatively, you may sell the developed lot as a house and land package.

Reasons for decision

Under section 6-5 of the ITAA 1997, the assessable income of an Australian resident includes ordinary income derived both in and out of Australia during an income year. Ordinary income is defined as income according to ordinary concepts.

In FC of T v The Myer Emporium (1987) 163 CLR 199; 87 ATC 4363; (1987) 18 ATR 693 (Myer Emporium), the Full High Court expressed the view that profits made by a taxpayer who enters into an isolated transaction with a profit making purpose can be assessable income.

Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income considers the assessability of profits on isolated transactions in light of the principles outlined in Myer Emporium. According to Paragraph 1 of TR 92/3, the term isolated transactions refers to:

● those transactions outside the ordinary course of business of a taxpayer carrying on a business, and

● those transactions entered into by non-business taxpayers.

Paragraph 6 of TR 92/3 provides that a profit from an isolated transaction will generally be income when both the following elements are present:

● your intention or purpose in entering into the transaction was to make a profit or gain, and

● the transaction was entered into, and the profit was made, in the course of carrying on a business or in carrying out a business operation or commercial 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. A mere realisation of an asset will generally be considered under the capital gains tax provisions contained within Part 3-1 of the ITAA 1997. However, if a transaction satisfies the elements set out above it is generally not a mere realisation of an investment.

Application to your circumstances

You purchased the property and built your home with the intention of staying ‘for a very long time’. You built an in-ground pool and landscaped the gardens, including adding a vegetable patch at substantial cost. After associations with a neighbour deteriorated to the point of criminal charges being made and you being afraid for the lives of yourself and your family, you decided you would have to sell your home and move away.

You put your home on the market however the only enquiries you received asked if you were interested in selling smaller parcels of land or your home subdivided on a smaller block.

You applied for and received approval from the Council to proceed with the subdivision and four new titles issued. You attempted to sell the vacant lots and after having no success you sort professional advice. You were advised to build dwellings on each lot and sell them as house and land packages as there was an ‘oversupply of vacant land’ in the area.

You were eventually able to sell Property X and Y as vacant undeveloped land. However you were not able to sell Property Z as vacant land. You have been informed that the best way to sell this land is to sell it as a house and land package. You intend to go forward with this suggestion.

Sale of Properties X and Y as vacant undeveloped land

Due to the extenuating circumstances surrounding the reasons for selling your property, the subdivision and sale of Properties X and Y as a vacant undeveloped land will be assessed as the mere realisation of a capital asset pursuant to the capital gains tax provisions of Part 3-1 of the Income Tax Assessment Act 1997 (ITAA 1997) rather than ordinary income under section 6-5 of the ITAA 1997.

You did not intend to subdivide the property when you first bought the property. However due to the circumstances with your neighbour, you subdivided the property as you assumed this would make the properties more sellable. This would enable you to leave quicker. You did not intend to build anything on those lands and they were sold as vacant undeveloped land. The actions undertaken to subdivide the land and sell it as vacant land represent you trying to realise your asset fully. It does not constitute a commercial transaction which would mean the profit would be assessable income.

Sale of Property Z as a house and land package

The sale of Property Z cannot be considered the mere realisation of your investment. While we consider that when you originally purchased the asset you did not have the requisite profit-making intention, this changed when you decided to construct the house on the subdivided lot.

This construction of a house goes beyond what is required by council to sell the land. You sought information in regards to the best way to realise a profit from the sale of the lot. You will enter into building contracts in order to build the dwelling on the land. These actions show an intention to derive profit and are actions that go beyond a mere realisation of your asset.

Accordingly the proceeds from the sale of this dwelling with be assessable under section 6-5 of the ITAA 1997 as ordinary income from an isolated profit making transaction.