Edited version of your written advice

Authorisation Number: 1051433647767

Date of advice: 26 September 2018

Ruling

Subject: Property subdivision - income versus capital

Question 1

Are the sale of your ownership interests in the subdivided lots considered to be a mere realisation of your capital assets and therefore are dealt with on capital account under the capital gains tax provisions contained in Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

Will any profit you make from the sale of your ownership interests in the subdivided lots be treated as ordinary income under section 6 -5 of the ITAA 1997?

Answer

Yes.

This ruling applies for the following periods

Income year ending 30 June 20xx

Income year ending 30 June 20xx

Income year ending 30 June 20xx

Income year ending 30 June 20xx

The scheme commences on

1 July 20xx.

Relevant facts and circumstances

Background

Prior to 20 September 1985, you and your spouse (Person A) purchased some parcels of land as joint tenants (Parcel A) being vacant parcels of land, which had a land area of more than two hectares.

Prior to 20 September 1985, you and Person A acquired equal ownership interests with Persons Y and Z in some vacant land (Parcel B), which had a land area of more than two hectares.

After 20 September 1985, you and Person A purchased parcels of vacant land as joint tenants (Parcel C), which had a land area of more than one hectare.

A number of years later, you, Person A, and your child (Person B) purchased parcels of land (Parcel D) in which you and Person A each had an ownership interest of XX.X% and Person B had a XX% ownership interest.

A house is located on Parcel D, which was rented out to unrelated parties, with the remaining property being vacant land. The land area of Parcel D is more than one hectare.

Services were connected to the house on Parcel D and also ran to the boundaries of each of the remaining lots. There was no road access to some of the parcels of land in Parcel D.

The parcels of land were originally zoned so that there could be one dwelling on lots of less than one hectare.

A number of years later Person Y passed away and their share in Parcel B was transferred in equal shares to Person B, and another of your children (Person C), resulting in them each having a XX.X% ownership interest in Parcel B.

Person Z passed away and their share in Parcel B was transferred in equal shares to you and Person A, resulting in you each having a XX.X% ownership interest in Parcel B.

A number of years later, the parcels of land were rezoned to R2 low density residential and as a result each lot could be 1,000 m². You did not have an active role in the rezoning of the parcels of land.

After a period of time, you and Person A decided that you wanted to dispose of your ownership interests in the parcels of land to reduce debt and to fund your retirement by increasing your retirement savings (further information regarding the subdivision is detailed below).

You and Person A approached Person X from Company XYZ in relation to overseeing the proposed subdivision of the parcels of land.

Person A passed away a number of years later and their ownership interest in Parcels A, B, C and D passed to you resulting in you having the following ownership interests in the parcels of land:

● Parcel A – XXX%;

● Parcel B – XX%;

● Parcel C – XXX%; and

● Parcel D – XX%.

You are over retirement age and your financial circumstances have not changed since Person A passed away. You still wish to use funds received from the sale of your ownership in the parcels of land to reduce your debt and increase your retirement savings to fund your retirement.

Prior to the commencement of the subdivision activities, the parcels of land had never been placed on the market and no offers for the purchase of any of the parcels of land had been received.

Subdivision of Parcels A, C and D

Prior to Person A passing away, the preparation of the development application in relation to the proposed subdivision of the parcels of land commenced.

The services of Company XYZ were engaged to complete reports and plans in relation to the development application process.

The plan was to:

● subdivide Parcels A, C and D into subdivided lots in a number of stages;

● subdivide Parcel B into subdivided lots in an additional stage; and

● a specified number of the remaining subdivided lots to be used to satisfy the conditions in the development agreement.

A real estate agent (the Real Estate agent) provided estimates of the market value of the parcels of land prior to the subdivision activities commencing with Parcels A, C and D being valued at $X.X million each.

The Real Estate Agent provided Person B with a market appraisal of a number of the proposed subdivided lots which were estimated to be valued at more than $XXX each.

A development application (DA) was lodged with the local council (the Council).

It was anticipated that the following would occur:

● a specified number of the proposed lots, which are located on the original Parcel D, would be transferred to Person B who intends building on them and keeping them as passive investments. It was agreed that Person B would receive these subdivided lots in exchange for any entitlement they may have in the proceeds from the sale of the other lots in each of the stages of subdivision; and

● the remaining subdivided lots will be sold as vacant land, with you keeping the proceeds from the sale of those lots.

The DA was granted in the year after it lodged with the approval being subject to condition.

Following the granting of the DA, the services of Company XYZ were engaged to undertake the engineering design for the stages of the subdivision. They were subsequently engaged to:

● undertake the project management of the subdivision;

● arrange for the completion of electrical design and all civil and utilities work;

● arrange all of the surveying works;

● prepare the subdivision plans and works as executed plans and documentation lodged with council and other authorities for final approvals of each of the stages of subdivision, which is currently with council.

Company XYZ has provided quotes and estimates for approval for each piece of work it undertook on the subdivision and engaged other contractors to provide their services in relation to the subdivision of the parcels of land.

A number of months later an agency agreement was signed between you and the Real Estate agent for them to sell the subdivided lots in all of the subdivision stages. All of the lots were available for pre-sale following their engagement.

The sale lots vary in size, with all of them being less than one hectare. No structures will be constructed on the subdivided lots for sale.

Person B will receive two lots in return for any entitlement they have to the proceeds on their ownership interest in Parcel D.

Work on the first stage of the subdivision commenced a number of months after the DA was approved, with work on the other stages commencing after that date.

The first stage was registered with council a number of months later, being finalised after a period of time when you received the completion certificate and new titles for the subdivided lots in that stage. The sales of the subdivided lots in that stage were settled.

Company XYZ advised you that the final application for subdivision certificate in relation to a number of the subdivision stages was with the council for approval.

Company ABC prepared a valuation report for Parcel B from which outlined that it had been valued at over $XXX per hectare.

The total gross sales proceeds from the sale of the subdivided lots in all of the stages are estimated to be $XXX.

The sale values of the subdivided lots are varied between a number of sale prices.

At this point, contracts of sale have been entered into for a number of the lots, with deposits having been received for all lots with the exception of only a few lots.

The titles for the later stages are expected to issue shortly, with the sale of the subdivided lots in those stages to settle after the titles have been issued.

You will keep the proceeds from the sale of the lots in all stages after the loans have been repaid.

The funding for the subdivision activities were sourced as follows:

● you contributed funds sourced;

● you obtained a bank loan;

● borrowed funds from family members as follows:

● Person C, with a specified rate of interest being charged, with repayments to be made at specified periods, with the loan to be repaid in a specified period (this amount has not been repaid at this point);

● Person D, with a specified rate of interest being charged, with repayments to be made at specified periods, with the loan to be repaid in a specified period (this amount has not been repaid at this point); and

● funds borrowed from a friend on the terms that the principal and interest would be repaid after the settlement of the sale of the subdivided lots in all of the stages.

The estimated total cost of the subdivision activities is $XXX. A list of costs incurred in relation to the subdivision activities as at this point have been provided which total more than $XXX of the subdivision related costs remain unpaid at this point, which will be paid from proceeds from the sale of the subdivided lots.

You have not been involved in any previous subdivision activities and do not have any plans to undertake any subdivision activities in the future.

No related entities have undertaken any subdivision activities in the past.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 995-1

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 Part 3-3

Reasons for decision

Summary

Based on the information provided, it is viewed that any profit from the sale of your ownership interests in the subdivided blocks will still be accounted for on revenue account as an isolated commercial transaction under section 6-5 of the ITAA 1997.

Detailed reasoning

Taxation treatment of property sales

There are three ways profits from property sales can be treated for taxation purposes:

1. As ordinary income under section 6-5 of the ITAA, on revenue account, as a result of carrying on a business of property development, involving the sale of land as trading stock;

2. As ordinary income under section 6-5 of the ITAA, on revenue account, as a result of entering into a profit-making undertaking or scheme (including an isolated transaction); or

3. As statutory income under the capital gains tax legislation.

Carrying on a business of property development

Section 995-1 of the ITAA 1997 states the term ‘business’ includes any profession, trade, employment, vocation or calling, but does not include occupation as an employee.

The question of whether a business is being carried on is a question of fact and degree. Over the years the courts have developed a series of indicators to determine if a business is being carried on.

Taxation Ruling TR 97/11 provides the Commissioner’s view of the factors used to determine if you are in business for tax purposes. In the Commissioner’s view, the factors that are considered important in determining the question of business activity 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.

In determining whether a taxpayer is carrying on a business, no one indicator will be decisive. The indicators must be considered in combination and as a whole. Whether a business is being carried on depends on the large or general impressions gained from looking at all the indicators and whether these indicators provide the operations with a commercial flavour.

Isolated transactions

Profits arising from an isolated transaction as a result of entering into a profit-making undertaking or scheme will be ordinary income under section 6-5 of the ITAA 1997, on revenue account, (FC of T v. Myer Emporium Ltd 1987 163 CLR 199; 87 ATC 4363; 18 ATR 693 (Myer Emporium)). This is distinguished from a ‘mere realisation’ which is not ordinary income.

Taxation Ruling TR 92/3 (TR 92/3) sets out the ATO view as to the application of the decision in Myer Emporium and provides guidance in determining whether profits from isolated transactions are assessable under section 6-5 of the ITAA 1997 as ordinary income.

Paragraph 16 of TR 92/3 states that if a taxpayer not carrying on a business makes a profit, that profit is income if:

(a) the intention or purpose of the taxpayer in entering into the profit-making transaction or operation was to make a profit or gain; and

(b) the transaction or operation was entered into, and the profit was made, in carrying out a business operation or commercial transaction.

Paragraph 13 of TR 92/3 outlines the following factors which may be relevant when considering whether an isolated transaction amounts to a business operation or commercial transaction:

● the nature of the entity undertaking the operation or transaction;

● the nature and scale of other activities undertaken by the taxpayer;

● the amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained;

● the nature, scale and complexity of the operation or transaction;

● the manner in which the operation or transaction was entered into or carried out;

● the nature of any connection between the relevant taxpayer and any other party to the operation or transaction;

● if the transaction involves the acquisition and disposal of property, the nature of the property, and

● the timing of the transaction or the various steps in the transaction.

TR 92/3 outlines that the relevant intention or purpose of the taxpayer, of making a profit or gain, is not the subjective intention or purpose of the taxpayer. Rather, it is the taxpayer’s intention or purpose discerned from an objective consideration of the facts and circumstances of the case.

Profits on the sale of subdivided land can therefore be income according to ordinary concepts within section 6-5 of the ITAA 1997 if the taxpayer’s subdivisional activities amount to a business operation or commercial transaction.

Paragraph 42 of TR 92/3 provides that if a taxpayer acquires an asset with the intention of using it for personal enjoyment but later decides to venture or commit the asset either:

a) as the capital of a business; or

b) into a profit-making undertaking or scheme with the characteristics of a business operation or commercial transaction,

the activity of the taxpayer constitutes the carrying on of a business or a business operation or commercial transaction carrying out a profit-making scheme, as the case may be. The profit from the activity is income although the taxpayer did not have the purpose of profit-making at the time of acquiring the asset.

In addition to the above factors, for the purposes of determining whether the activities undertaken in relation to real property and development equate to a profit-making undertaking or scheme, Miscellaneous Taxation Ruling MT 2006/1 (MT 2006/1) aligns itself with TR 92/3 and provides a list of factors which, if present may be an indication that a business or profit-making undertaking or scheme is being carried on.

In determining whether activities relating to isolated transactions are a profit making undertaking or are the realisation of a capital asset, it is necessary to examine the facts and circumstances of each particular case. This may require a consideration of the factors outlined above; however there may also be other relevant factors that need to be weighed up as part of the process of reaching an overall conclusion. No single factor will be determinative; rather it will be a combination of factors that will lead to a conclusion as to the character of the activities.

Capital gains tax provisions

The capital gains tax (CGT) provisions are contained in Parts 3-1 and 3-3 of the ITAA 1997. Broadly, the provisions include in your assessable income any assessable gain or loss made when a CGT event happens to a CGT asset that you own.

CGT event A1 happens if you dispose a CGT asset. A CGT asset is any kind of property, or a legal or equitable right that is not property.

When a CGT asset (the original asset) is split into 2 or more assets (the new assets), such as when land is subdivided, the subdivision of the land into subdivided blocks is not a CGT event. Each of the new subdivided lots will retain the acquisition date of the original asset.

Where the original land was acquired before 20 September 1985, each new lot retains its pre-CGT status and any capital gain or capital loss made on its disposal is disregarded.

Section 118-20 contains anti-overlap provisions which operate to reduce any capital gains by any amounts which are included in your assessable income under a provision of the ITAA outside of Part 3-1 as a result of the sale, for example, as ordinary income under section 6-5 of the ITAA 1997.

Application to your situation

Taking all of the available facts into consideration, and on weighing the various factors contained in TR 97/11, we consider that the proceeds from the sale of the subdivided lots in all of the stages will not be those of a business being carried on as the subdivision activities. The activities do not display the salient indicator of a business, which are transactions entered into on a continuous and repetitive basis, or that this is the commencement of you carrying on a business of property subdivision.

Making an overall assessment on the factors set out in TR 92/3, it is the Commissioner’s view that the sale of the subdivided lots will not be a mere realisation of capital assets, but will be the disposal of the subdivided lots as an isolated transaction. Therefore, any profit made on the subdivided lots will be included in your assessable income under section 6-5 of the ITAA 1997.

In the context of considering the above authorities and factors as provided in TR 92/3 when determining whether your activities would be viewed as a profit making undertaking, we have made the following general observations of your situation:

You acquired your various ownership interests in the parcels of land both prior to and after 20 September 1985. The house located Parcel D has been used to earn rental income. The remaining land has remained vacant until the subdivision activities occurred. There is a complete lack of nexus of the subdivision of the parcels of land to any rental income from renting out the house (or agistment income) which indicates a clear change of intention to cease one activity and commence a new activity. That is, to change the intention from earning rental income to subdividing the parcels of land for the purpose of selling the subdivided lots.

No attempt was been made to sell any of the parcels of land on the open market prior to undertaking the subdivision activities and you have made a considered decision to subdivide the parcels of land and sell the subdivided lots. The simplest way you could have divested yourself of your ownership interests in the parcels of land would have been to dispose of them without seeking any subdivision approvals and without actually undertaking the associated works activities to receive the gain made from the capital growth due to the length of time they have been held. The acts of seeking approvals and undertaking of the subdivision work must in some way contribute towards a finding that the overall activity constitutes something more than a ‘mere realisation’ of a capital asset.

While you have submitted that you have no written business plan or budget, there is an obvious coherent plan for the subdivision of the parcels of land which is more complex than what would have been involved in the disposal of the parcels of land as semi-rural land and a house.

There was no corporate branding, no office, no manager, no secretary and no staff. You engaged the services of other parties to undertake all of the management and co-ordination of the subdivision of the parcels of land and were not physically involved in the subdivision. All marketing and sales of the subdivided lots has been undertaken by a real estate agent.

However, you have approached the transaction in a businesslike way, engaging the services of Company XYZ to either undertake the subdivision activities, or engage others to complete, in relation to lodging the relevant applications, undertake surveys and investigations and prepare reports. The inherent nature of the subdivision of the parcels of land is such that it is quite complex given that many preliminary approvals were sought. The process of physically undertaking the subdivision works involves complexities requiring specialist knowledge, the engagement of specialist contractors and the co-ordination of the said parties.

Additionally, while you engaged the services of Company XYZ to manage the subdivision activities and engage professionals to undertake activities in relation to the subdivision, you were in the position as a decision maker to make the decisions and give authority in respect of the subdivision activities, whether you chose to or not. As owner of the subdivided lots you were able to instruct the Real Estate agent in relation to the marketing of the subdivided lots and the sale price of each lot in which you had an ownership interest in, which you continued to hold until each subdivided lot is/was sold.

Your choice to subdivide the parcels of land, engage Company XYZ to undertake the subdivision, and engage their services to sell the subdivided blocks demonstrates that there is an intention to profit from the subdivision of the parcels of land and that it has been undertaken in a commercial manner with a level of repetition occurring.

To fund the subdivision activities you provided some of your own funds in addition to borrowing funds from a bank, your family members and a friend. The bank loan needs to be repaid and the funds borrowed from family members and the friend will be repaid from the proceeds from the sale of the subdivided lots. It is viewed that you have assumed and will bear the financial risk in relation your ownership interests in the parcels of land as a result of the subdivision activities and will personally reap the rewards of its success. While you stand to profit from the subdivision activities, you were subject to any losses or resulting liabilities. The assumption of the risks and the receipt of the subsequent rewards (or losses) is a strong indicator of profitmaking activity.

You have a purpose of profit as well as a prospect of profit from undertaking the subdivision activities. Based on the estimated amounts provided, you will make a net profit of $X.X million (being total proceeds less cost of development), which is considerably more what you would receive if you sold the land un-subdivided. The decision to pursue the subdivision shows your choice to engage in exposure to risks involved with the subdivision, including the profits, losses and its general success for the purpose of maximising the potential profit made on the sale of the subdivided lots.

There will be some level of repetition, throughout the subdivision as you intend to sell off the subdivided lots in which you have an ownership interest. On balance, it would seem that the parcels of land being subdivided have been ventured into a profit making venture which is on a sufficient scale to characterise it as a commercial or profitmaking undertaking.

There has been a change in the nature of the parcels of land with the subdivision transforming them from semi-rural to small residential lots for the purpose of increasing the return from the sale of the subdivided lots.

There has been a significant amount of earthworks undertaken in relation to the subdivision activities. Additionally, there are significant other infrastructure improvements such as utilities.

Neither you nor any related entities have been involved in similar activities in the past and you have no intention to undertake any similar activities in the future.

Based on the information provided, and on a balance view of the above observations with no one feature being determinative in isolation, reasonably leads to the conclusion the intention for holding your ownership interests in the parcels of land had changed upon the commencement of the subdivision activities to one of a profit-making intention. Therefore, it is viewed that the subdivision activities have the characteristics of a commercial transaction and that your activities were the carrying out of a profit making undertaking. Therefore, any profit made on the sale of the subdivided lots will be assessable as ordinary income under section 6-5 of the ITAA 1997.

Note: CGT event A1 will occur on the disposal of each subdivided lot. The capital gain for the event is worked out by comparing the cost base of the asset with the capital proceeds for its disposal. If the conditions under Division 115 of the ITAA 1997 are met, the capital gain can be reduced by 50% by applying the CGT discount.

Any capital gain made on the sale of the subdivided lots that were originally part of your ownership interests in the parcels of land that you acquired prior to 20 September 1985 will be disregarded.

Any capital gain made on the disposal of the subdivided lots will be reduced to the extent that the profit from the sale of the subdivided lots is included in your assessable income under section 6-5 of the ITAA 1997.

Addressing the specific points you have made in your ruling request:

● You state that the parcels of land were not acquired by you with a significant profit-making purpose. No steps were taken to try to develop the land and sell it for a profit with the land never being built on with an intention to sell the developed lots.

We accept that the parcels of land were not developed, nor any structures constructed on them, prior to the subdivision activities being undertaken. Nor will any construction on the subdivided lots occur as part of the subdivision. However, you have had a change of intention in relation to the purpose of the parcels of land by deciding to subdivide them with the intention to sell the resulting subdivided lots. You have changed the nature of the parcels of land and have increased their value by undertaking the subdivision activities from an estimated $XXX to $XXX.

● You claim that the sale of the subdivided lots will not be part of a profit making undertaking as there will be no change in purpose for which the land was being held. The parcels of land were acquired for the purpose of funding you and your husband’s retirement and increasing your retirement savings. Your interests are now being sold to fulfil this purpose.

In accordance with the above statement, the parcels of land had been purchased with the intention that they be ultimately be sold to fund your retirement in the future. You have made the choice to undertake the subdivision activities and sell the subdivided lots. However, you had a viable alternative to the subdivision, being to sell the parcels of land without doing anything to them to realise the capital growth on them, which would have been a mere realisation.

Alternatively, it was stated in the ruling that reason for the parcels of land being purchased was to earn rental income in relation to the house located on Parcel D, and the potential of using some of the other land for agistment purposes. The question before us is whether your intention changed when you committed the parcels of land to being subdivide for the purpose of selling the resulting lots. Based on the information provided, it is viewed that your intention in relation to the parcels of land changed when you committed to undertaking the subdivision activities, with the resulting lots being sold.

● You claim that no level of development of the subdivided lots will go beyond what was necessary to meet council approval.

In Casimaty v FC of T 97 ATC 5135 it was accepted that the Mr Casimaty had not at any time done more in preparing the allotments for sale than was required by the Council apart from slashing and clearing scrub, filling in some creeks and waterholes and pushing up level banks on creek lines to improve the presentation of certain allotments. His development activities never extended to the proposal or creation of public facilities.

Judge Mason J at ATC 4057 made the following statement in Whitfords Beach Pty Ltd v Federal Commissioner of Taxation (1983) 14 ATR 247:

In the present case, a great deal had to be done in order that the land could be sold in residential subdivision. Its character had to undergo significant change. That which at 20 December 1967 was no more than a distant potentiality had to be brought within the range of practical achievement. I am inclined to question whether some of the earlier cases have not assumed too readily that the conversion of broadacres into residential allotments with all the services and facilities that are requisite to an urban environment is no more than the realisation of a capital asset in an enterprising way.

He also made the following statement:

… 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.

In subdividing the parcels of land there was a coherent plan of subdivision, significant costs, and the requirement to outsource work to specialised contractors. While you are only doing what is required in order to meet the DA approved by Council, the subdivision involves the laying out and construction of roads and footpaths and the provision of a drainage reserve and public reserve.

The activities being undertaken to subdivide the parcels of land are substantially more than the activities that were undertaken by Mr Casimaty and in complying with the approved DA you have significantly improved the parcels of land from what they had been prior to the commencement of the subdivision activities.

● You claim that you did not have the requisite intention to profit from the sale of the subdivided lots.

While you held your ownership interests in the parcels of land for significant periods, your intention in relation to the parcels of land has changed and you are now seeking to make a profit from the sale of the subdivided lots.

As discussed above, the parcels of land were purchased to fund your retirement, therefore their sale was always in contention.

It is viewed that you had a purpose of making a profit as well as a prospect of making a profit from the subdivision activities and based on the information provided you will make a net profit of $XXX on the sale of the subdivided lots (being estimated proceeds from the sale of the subdivide lots less the estimated costs).

● You assert that the scale of this subdivision is not on the scale of the developments in the Whitfords Beach Pty Ltd v Federal Commissioner of Taxation (1983) 14 ATR 247 or Stevenson v FC of T (1991) 22 ATR 56.

In the Whitford’s Beach case a large parcel of land was acquired for long-term investment, but later a change of intention in relation to the land occurred. While the subdivision in this case was on a massive scale, it had a change of intention to commit the asset from private to business.

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.

The subdivision involves applying for the relevant approvals from council, obtaining the relevant surveys, and completing the conditions as outlined in the council’s development approval such as construction of roads, pathways, and connection of utilities, etc. The activities being undertaken in this case will be significantly more complex than what would have been involved if the parcels of land were disposed of as a whole.

While subdivision will be smaller in scale when compared to other developments, size is not the determinative factor, and all of the factors need to be taken into consideration when determining the nature of the subdivision. It is viewed that the subdivision activities in relation to the parcels of land are being undertaken in a commercial manner with a level of repetition occurring.

● You state that the subdivision and disposal of the subdivided lots between XX and XX years after the various parcels of land were acquired supports that the subdivision activities are not a business operation or commercial transaction.

While the holding of land may indicate that it is a capital asset which was not originally acquired to conduct a development business or profitability resell, the actions of the landowner are taken into consideration to determine if they have ventured into a business or profit making undertaking at a later point.

In this case you have held ownership interests in different parcels of land for varying period of time from prior to 20 September 1985 and after that date. However, you have undertaken activities, such as engaging the services of Company XYZ to manage the subdivision activities, to subdivide the parcels of land and sell the subdivided lots rather than selling your ownership interests in the parcels of land in their original state.

You have changed your purpose in holding your ownership interests in the parcels of land by deciding to subdivide them and sell the resulting subdivided lots, and have ventured into a profit-making undertaking.

● You assert that you maintained a passive role as owner of the parcels of land and had not been involved in any of the work involved with the subdivision activities.

You, or someone acting on your behalf, have engaged the services of a project manager who contracted with sub-contractors to carry out the works in relation to the subdivision. You, or someone acting on your behalf, had also engaged the services of a real estate agent to sell the subdivided lots. While you have not personally undertaken the work involved in the subdivision of the parcels of land, you engaged the services of Person X from Company XYZ to manage the subdivision activities. The engagement of professionals is a normal part of the planning and approval process of a development which involves the acquiring of reports and/or assessments such as engineering, risk assessments and bushfire assessments. The engagement of professionals may indicate that the landowner’s role in the development is no longer limited or passive as it is the landowner who makes the decisions and gives authority for the activities.

In this case, Company XYZ requested approval to undertake works in relation to the subdivision activities, providing quotes or an estimate for each piece of work that they undertook. This indicates that it was you, or someone acting on your behalf, who was making the decisions and giving authority for the activities to be undertaken, or if you had not undertaken them that you had the power to undertake them.

Additionally, you engaged the services of the Real Estate agent to sell the subdivided lots. It is viewed that it would have been you who gave the approval for the sale prices of the lots and the authority to sell them even if you had not excised that authority.

● You state that the nature of the funding used to fund the subdivision activities lacks the commercial nature typically associated with a profit making undertaking. This method of financing is not indicative of the subdivision and sale of your land being a business operation or commercial transaction.

In this case you provided some of the funds and borrowed funds from a bank, family members and a friend to pay for the subdivision activities. While the financing of the subdivision activities may not be of a type normally used in relation to subdivision activities, similar to other subdivision activities, you as the owner of interests in the parcels of land had assumed the financial risk in relation to the subdivision activities, bearing all of the risks involved, being exposed to any potential losses or gains made in relation to the sale of the subdivided lots. You will receive the proceeds remaining from the sale of the subdivided lots after the loans have been repaid.

The funds borrowed from family members could be viewed as a family arrangement. However, similar to other methods of financing subdivision activities, it is stated that those funds will be repaid from the proceeds from the sale of the subdivided lots. The funds borrowed from your friend will also be repaid from the proceeds received on the sale of the subdivided lots. The bank loan, similar to any bank loan, would be repaid in accordance with the loan agreement.

There are numerous cases that consider the issue where the potential outcome is between ‘carrying on a business’, ‘profit making undertaking’ or ‘realisation of an asset’ and that a taxpayer can embark on a profit-making scheme or the carrying on of a business after the property was acquired for a different purpose.

You have cited the following cases in your ruling application to support your contention that the profits from the sale of the proposed subdivided blocks will be on capital account. Those cases are discussed below:

Statham & Anor v FC of T 89 ATC 4070 (Statham)

This case can be distinguished from your situation as the taxpayer in Statham attempted to sell their property as a whole without any success, while you had not attempted to sell any of your ownership interests in the parcels of land as a whole prior to undertaking the subdivision activities.

Additionally, in that case:

● only limited clearing and earthworks were involved. An amount of more than $X.X million was spent on earthworks conducted by one company, as provided in the list of costs incurred as at this point;

● no funds were borrowed to fund the subdivision activities which unlike in your situation where you borrowed some of the funds to finance the subdivision activities;

● the owners relied upon the local council to undertake the roadworks, kerbing, electricity and sewerage works as required to be done; and

● the owners did not advertise the land for sale, while in this case the proposed subdivided lots were actively marketed from the time the services of the Real Estate agent were engaged.

Casimaty v FC of T 97 ATC 5135 (Casimaty)

In Casimaty the taxpayer did as little as possible to ensure the sale of the subdivided blocks and portions of the broad acre farm were subdivided into semi-rural blocks with only basic fencing around the borders of the blocks.

In your case the activities involved with the subdivision will substantially increase the parcel of land’s value, will be more involved, and will include things such as constructing road/s, gutters, footpaths, etc.; and

There was no coherent plan conceived for the subdivision of the whole property in Casimaty even though he had subdivided a portion of his property on a number of occasions. Mr Casimaty acquired and had continued to hold and use the residence and conduct the business of a primary producer on the property prior and after the subdivision activities. Therefore, there was no change of purpose of object for which the property had been held.

In your case there was a change in purpose in relation to the parcels of land were held, being for the purpose of subdividing them to make a profit on the sale of the subdivided blocks rather than being used for earning rental income. There is a coherent plan to subdivide all of Parcels A, C and D with the approved DA including the subdivision of Parcel B.

Whitfords Beach Pty Ltd v Federal Commissioner of Taxation (1983) 14 ATR 247 (Whitfords)

While the subdivision activities will be smaller in size than in Whitfords, it will be of a sufficient scale to be characterised as a commercial or profit-making undertaking.

The High Court held in Whitfords that the adoption of the new set of articles resulted in a change in the intended usage of the land. Similarly, your usage of the parcels of land had changed and it was no longer used as a rental property and vacant land, but was subdivided for the purpose of selling the majority of the subdivided blocks to maximise the profit on the sale of the parcels of land.

Stevenson v FC of T (1991) 22 ATR 56 (Stevenson)

The sale of farm land in Stevenson was held to be on revenue account because the taxpayer planned and managed all of the subdivision activities. He had engaged the services of a real estate agent and had also been directly involved with the sale of the subdivided blocks.

Although you personally are not undertaking the activities of sub-division, you or someone on your behalf had engaged the services of other parties to carry out the necessary activities to subdivide and sell the proposed subdivided blocks for the purpose of making a profit. You continued to retain the ownership interests in the subdivided lots until they were sold and had the authority to control how the subdivision activities and the sale of the subdivided lots were undertaken, even if you had not used that authority. This demonstrates you have entered into a profit making undertaking when you commenced the subdivision activities.

Greig v Commissioner of Taxation [2018] FCA 1084 (Greig)

This case, the Greig case, dealt with the acquisition and sale of one million Nexus shares by Mr Greig and whether the shares had been purchased as part of a profit-making undertaking in a business operation or commercial transaction.

In his findings, Judge Thawley J discussed the importance of the intention at the time that the asset was acquired and included the following in his statement at paragraph 137:

….Purchasers of listed shares often make the decision to acquire shares with a view to profiting from dividends or increase an in the share price or both. That hope or expectation does not necessarily make the purchase of the shares a “business operation or commercial transaction”. The purchase in such circumstances is an example of any ordinary investment engaged by innumerable private investors each date and, without more, does not lend itself easily to the description of a “business operation or commercial transaction” (Myer) or a “commercial dealing” (McCurry).

It is stated the you had not purchased the parcels of land as part of a ‘business operation or commercial transaction’, that you had purchased them as an investment in the ‘hope or expectation’ that the value of the land would increase. According to the Federal Court in the Greig case this does not make the purchase ‘a business operation or commercial transaction. Nothing in your situation can rationally lead to the conclusion that you are undertaking a ‘business operation or commercial transaction’.

Similar to Mr Greig, you purchased assets in the hope of making a profit. However, you have not merely bought and sold the assets, being your ownership interests in the parcels of land, but have undertaken activities to change the nature of the parcels of land from semi-rural to residential lots of less than XXm² for the purpose of selling them. The subdivision activities that you have undertaken in relation to your ownership interests in the parcels of land, and how you have undertaken them, needs to be reviewed to determine your intention in relation to your ownership interests in the parcels of land. While you may not have acquired your ownership interests in the parcels of land while carrying on a business operation or commercial transaction, when applying TR 92/3 to your situation it is viewed that your intention in relation to your ownership interests in the parcels of land changed and your subdivision activities are of a commercial nature and are an isolated transaction.