Edited version of private advice

Authorisation Number: 1051531407072

Date of advice: 24 June 2019

Ruling

Subject: Income Tax

Question 1

Will the proceeds from the disposal of the subdivided blocks be assessable income according to ordinary concepts under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

If the answer to question 1 is no, as the Property was initially acquired before 20 September 1985, will any of the proceeds from the disposal of the subdivided blocks be assessable income from the carrying on or carrying out of a profit-making undertaking or plan under section 15-15 of the ITAA 1997?

Answer

No.

Question 3

If the answers to questions 1 and 2 are no, will the proceeds from the sale of the subdivided blocks of land be from carrying on a business and be assessable as ordinary income in accordance with the trading stock provisions under section 70-30 of the ITAA 1997?

Answer

No.

If the answer to questions 1, 2 and 3 are no, then:

Question 4

Will the proceeds received by Taxpayer A from the disposal of the subdivided blocks be disregarded from the operation of the capital gains tax (CGT) provisions in Parts 3-1 and 3-3 of the ITAA 1997 on the basis the 50% interest is pre-CGT land?

Answer

Yes.

Question 5(a)

Will the proceeds received by Taxpayer B from the disposal of the subdivided blocks be subject to the CGT provisions in Parts 3-1 and 3-3 of the ITAA 1997 on the basis the 50% interest was post-CGT land, having been acquired in 19DD?

Answer

Yes.

Question 5(b)

If the answer to question 5(a) is yes, then will the proceeds received by Taxpayer B from the disposal of the subdivided blocks be eligible for the 50% general CGT discount under Division 115 of the ITAA 1997, on the basis the interest in the land has been held for more than 12 months?

Answer

Yes.

This ruling applies for the following period(s)

1 July 20FF to 30 June 20HH

The scheme commences on

1 July 20FF

Relevant facts and circumstances

The Property

In early 19AA, Taxpayer A and their parent, Taxpayer C, acquired the Property together with the intention to establish a farming business:

·        Taxpayer C was unable to raise their proportion of the finance to construct the required improvements on the Property for this purpose, so the Property remained undeveloped (that is, no improvements made to it).

·        During the period the Property was held jointly by Taxpayer A and Taxpayer C, Taxpayer A made all the loan repayments and paid all of the other associated holding costs (i.e. rates, etc.) connected with the Property.

At the time of purchase, the Property consisted of approximately 5 hectares of land on a single title. The land was still vacant and unimproved at the time of purchase.

In 19BB Taxpayer C transferred their 50% of the Property to Taxpayer A:

·        At that time, Taxpayer C had been quite ill for an extended number of years and desired to make certain gifts of their assets prior to death in order to avoid issues involving their estate and potential claims from other family members. Taxpayer C eventually passed away in 19CC.

·        Although the Property was transferred to Taxpayer A at the time, it was Taxpayer C's wish that both Taxpayer A and Taxpayer B (the Landowners) should share the property jointly because the property in question was originally purchased with the intention of using it to run part of the family business.

·        In 19BB Taxpayer B was residing in North Queensland for work purposes, unrelated to the family businessesTaxpayer C transferred the property solely into Taxpayer A's name, given at that point in time Taxpayer B was away, and was not able to execute documents.

·        Taxpayer C had always intended for Taxpayer A to ensure that the property be shared with Taxpayer B. This wish was communicated to both Taxpayer A and Taxpayer B at that time (19BB), and they both understood it to be an expression of gratitude by Taxpayer C as both Taxpayer A and Taxpayer B had been working in and out of the family business for a number of years, for very little reward.

·        The Certificate of Title for the transfer from Taxpayer C to Taxpayer A was registered in 19BB.

·        The transfer by Taxpayer C was in-specie and not as a consequence of their will.

·        Although it was Taxpayer C's express wish (as communicated by Taxpayer C to Taxpayer A and Taxpayer B in 19BB) that the property be owned by Taxpayer A and Taxpayer B equally, there was insufficient information for the legal advisors to establish if a constructive trust for Taxpayer B had in fact been created. Although there was a wish by Taxpayer C, the legal advisors at the time (19BB) did not prepare any documents to evidence that 50% of the property transferred to Taxpayer A was to be held on trust for Taxpayer B.

While it was intended Taxpayer B would also become the owner of the Property in 19BB, Taxpayer B did not become a 50% joint owner with Taxpayer A until 19DD when the Certificate of Title was amended:

·        The amendment in 19DD was done to reflect their parent's wishes, and to ensure that the legal title to the property reflected what had always been understood to be how the property was owned as between Taxpayer A and Taxpayer B since 19BB.

·        Since the 19BB's both siblings had contributed equally to the maintenance and upkeep of the property (i.e. paying rates and clearing land, etc.). However, as the legal title did not reflect this, there eventually became a desire to ensure both siblings' legal entitlements were clearly reflected to avoid any potential estate problems that Taxpayer A's untimely death might create.

·        The legal advisors in 19DD prepared the transfer on the basis of a sale from one party to the other, rather than as transfer from Taxpayer A (as trustee) to Taxpayer B (as beneficial owner).

·        It is possible that Taxpayer C intended for a constructive trust to be created for Taxpayer B in 19BB, when they transferred the legal ownership to Taxpayer A. However, the current legal advisors for the Landowners have not as yet been engaged to review and provide an opinion on whether arguments for a constructive trust can be sustained in light of the available information on what has occurred historically.

·        The preparation of the PBR has been prepared on the assumption that Taxpayer B's interest in the property is post-CGT acquired in 19DD, albeit this may be subject to further consideration in the future.

The Landowners did not build any residences or otherwise make improvements to the Property:

·        Due to capital requirements in their business operations the Property remained undeveloped.

·        Since it was acquired in 19AA, the Property has not been used by the Landowners in their business operations. That is, it has not been used for either storing vehicles or animals.

·        The Property has never been leased or rented to anyone since it was acquired in 19AA.

·        The Property has remained in the same state it was in when acquired by Taxpayer A and Taxpayer C in 19AA.

The Property has been zoned as rural/residential since 19AA.

No applications or submissions have ever been made to the Council by the Landowners regarding the zoning of the Property or any other requests for alterations to the Property itself.

Since 19AA the Property has remained in its original state without any improvements and it has never been used for any business purposes.

Previous offers to sell the Property

Over the years, particularly as the surrounding areas were developed, the Landowners have received a myriad of unsolicited letters from numerous sources enquiring on the possible sale of the Property.

These unsolicited letters were predominantly from property developers, expressing an interest to buy. Most of these were received as letters of interest but some verbal offers were made at times directly to the Landowners with some suggested selling prices. No formal negotiations were entered into by the Landowners as they did not regard the offers as genuine and/or were not interested in selling at the time. No actual prices were negotiated, nor were any written contracts exchanged with potential buyers.

In 1996 the Landowners considered selling the Property:

·        At the time they had 'preliminary drawings' prepared by an architect to assist in the sale of the block. Their intention was that if the Property was sold with plans, the Property would get a better sale price.

·        In order to obtain the highest and best price for the Property, the Landowners wanted to show to a potential buyer what could be achieved with the site by providing drawings that included a plan for a potential subdivision scenario. This plan was merely to demonstrate to a buyer an option they might consider taking forward (given that they were never lodged with Council for approval, so were merely conceptional at the time). The Landowners believed that having possible site drawings would aid in the marketing and sale of the property to the widest possible number of likely buyers.

·        The Landowners didn't at the time lodge any applications to either re-zone the Property or obtain a Development Approval (DA).

·        The Property was never listed for sale. The Landowners via their company acquired a new business at around this time, so were focused on the building up and operation of that activity. There was no specific need or reason to sell the property at that particular time, and therefore the Landowners were happy to set aside investigating a property sale until a later time, given their focus on other things. There was no intention / plan at that time for the Landowners to consider when a future sale might take place. They were happy to wait to see how things progressed in the future.

Reasons for sale

The Landowners are now aged and have commenced to downsize their various business interests as well as certain personal assets that are no longer needed.

The Property was identified as an asset which, never having been used for any purpose by the Landowners was one to be disposed of.

At some time, between 20EE to 20FF, as part of this process, the Landowners re-approached the architect engaged in 1996 to update the drawings done 20 years earlier. As the Landowners already had pre-existing drawings for the property in place, it made sense to the Landowner to have these reviewed to determine if the original plans for what could be done on the site were still within Council's existing guidelines. Essentially, the update to the conceptional plan was to check that it could continue to be used to demonstrate to a buyer one potential option for subdividing the land.

Ultimately nothing was done with the new drawings, however, as a consequence of dealing with the architect, through a contact of the architect, the Landowners received an unsolicited offer for approximately $x for the Property.

In late 20FF, the Landowners appointed a real estate agent to market the Property on their behalf. This real estate agent had recently acted for the Landowners to sell one of their business properties.

The real estate agent undertook an 'Expressions of Interest' styled marketing campaign for the possible sale of the Property.

By early 20GG, there had been a number of offers for the Property.

The best offer for the Property was $X by ABC. Neither the Landowners, nor any entities they control or are affiliated with, have any relationship or prior involvement with ABC or with any entities connected with ABC. This offer was significantly less than the Landowners' expectations and accordingly they declined to sell.

Subsequently ABC reapproached the Landowners with a revised proposal to achieve their desired sale price of $x. The Landowners were advised by ABC that an outright sale of the Property to ABC would not meet their desired sale price. However ABC was willing to offer the Landowners a Development Agreement under which ABC could undertake the property subdivision on their behalf to realise this value.

Development Arrangement

In 20GG, the Landowners had an initial meeting with ABC and the real estate agent to discuss a possible development arrangement with ABC whereby the Landowners may be able to achieve their asking price.

In this initial meeting, ABC indicated there were two possible ways ABC could assist the Landowners, being:

·        First option - ABC provide their development services to the Landowners for the Property on the basis that ABC would be contracted to provide all the required works, with the Landowners providing funding for all the costs (i.e. essentially a standard contract).

·        Second option - ABC provide all the above services, as well as funding the required development costs, with an agreement to be paid based on a proportion of the sale proceeds of the Property.

Under both options, the Landowners would have no personal involvement in arranging, providing or managing any of the required works.

In 20GG, the Landowners appointed Solicitors to assist them with their ongoing discussions with ABC for the sale of the Property.

Between mid to late 20GG, the Landowners entered into negotiations with ABC relating to their preferred option, being the 2^nd Option:

·        While the Landowners had the capacity to finance the arrangement under the first option, having recently sold some of their business interests, it was not their preferred choice, even though their ultimate return would have been higher based on forecasts.

·        The Landowners preference for the second option was primarily driven by the return meeting their expectation. It also required them to have less involvement (i.e. no financing) and incentivised ABC to complete the subdivision as quickly and efficiently as possible.

·        Under the second option, ABC was to be paid a proportion of the sale proceeds from the Property. This proportion was determined by using forecasts of (i) estimated costs and (ii) projected proceeds from the subdivision, to arrive at the expected return each party would receive as a consequence. By incentivising ABC to minimise costs and maximise returns, the Landowners believed they would get the return they expected (with potential for more) with the least amount of involvement.

In late 20GG, ABC provided the Landowners with an initial Heads of Agreement document to formalise their proposed arrangement. The Heads of Agreement was entered into in late 20GG.

The Heads of Agreement provided the Proposal to enter into a Development Agreement and associated documentation between Taxpayers A and B and the Developer to deliver the Project (i.e. subdivision and sale of land) on the Property. The Heads of Agreement included the principal commercial terms to inform the preparation of the Development Agreement and associated documentation if the parties decided to execute a formal agreement.

In late 20GG, ABC provided the Landowners with a Development Agreement pursuant to the Heads of Agreement.

The Development Agreement is yet to be executed.

ABC's obligations as developer are specified in the Development Agreement and require ABC to:

(a)   undertake or procure others to undertake all Development Services in accordance with all Laws and Requirements;

(b)   enter into and perform, or procure the entry into and performance of, all Project Documents;

(c)   make, or join in as a party to, all applications for, or procure, all Project Approvals;

(d)   execute, or procure the execution of, all documents required by any relevant Authority to complete the Project;

(e)   enter into, or procure the entry into, all relevant Project Documents with suitably qualified Consultants to enable it to carry out all Development Services in a workmanlike and professional manner;

(f)     provide the Developer Funding;

(g)   pay or procure the payment of all Project Costs;

(h)   identify and procure Project Buyers;

(i)     procure the execution of contracts for the Disposal of Subdivided Lots for amounts determined in accordance with the provisions of this Agreement;

(j)     authorise the collection and distribution of the proceeds of any Disposal of Project Assets in the manner set out in this Agreement;

(k)   deal with the Project Assets in the manner set out in this Agreement;

(l)     maintain proper books of account in accordance with Accounting principles to ensure that the financial affairs and performance of the Project and all payments due to the Landowner and the Developer under this Agreement can be properly assessed, calculated and, if required, verified;

(m) do anything else which is reasonably required to complete the Project substantially in accordance with the Project Plan; and

The Landowners' obligations under the Development Agreement are to:

(a)   execute or authorise the execution of any Project Document to which the Landowner is required to be a party;

(b)   do all things within its power which are reasonably required to ensure that the Developer is able to perform its Obligations under this Agreement;

(c)   make the Land available for the purposes of the Project by permitting the Land to be developed in accordance with this Agreement and the Project Program; and

(d)   ensure that all Receipts can be applied in accordance with this Agreement.

Effectively, from the time ABC is engaged, the only thing the Landowners will have to do is sign the sale contracts for each of the lots as presented to them.

The Development Agreement also includes the following terms:

·        The parties are not involved as a partnership or joint venture arrangement.

·        The Landowners will retain title of the Property throughout the project and will be the vendor listed on any sale contracts.

·        ABC as the developer is to obtain all of the relevant development approvals that it believes are relevant and at its cost.

·        The Landowners are to ensure that they assist where necessary to provide relevant consents as requested by ABC or the relevant authorities, including: allow the register of mortgages over the title for both the equity and bank funding incurred by ABC for the development costs.

·        The Project will be funded by a mix of Developer Funding and the Senior Debt Facility. ABC will therefore contribute equity of its own and will obtain bank finance to fund all of the development costs required for the project.

·        The Senior Debt Facility will be procured by the Developer and will be secured by a mortgage against the Land to be consented to by the Landowner.

·        The Landowner must execute and deliver to the Developer a power of attorney for the purposes of the Project.

·        The Landowner must grant a Developer Mortgage to the Developer to secure the Developer's entitlement to the Development Fee and to secure the Landowner's performance of its obligations.

·        ABC will effectively engage all the contractors and incur all the costs to undertake the development of the Property into the subdivided lots. The Landowners have no say in what costs are incurred, how the work is to be performed, or who is to do the work.

·        ABC will arrange for the marketing and sales of the lots to the eventual purchasers. ABC will engage real estate agents and solicitors to draft up the contracts for the sales.

·        The Development Fee to be paid to ABC by the Landowners will be based on an agreed formula which is yet to be finalised. The formula will be based on a percentage of the net receipts from the sale of individual lots.

·        An option exists whereby the Project Financier may be repaid in priority to payment to the Landowner and Developer.

Under the Project the following will occur:

·        The Property is already zoned as residential. No rezoning is required.

·        The Property will be subdivided into X lots in total.

·        To date there have been no formal applications lodged with Council by either the Landowners or the Developer for the subdivision of the Property.

·        No other applications or approvals have yet been made in respect of the subdivision.

·        In accordance with the Development Agreement the application will be prepared by the Developers (or third parties engaged by it). The only involvement the Landowners will have in the application to Council will be to sign the form as the owners of the property.

·        The only work undertaken to date is related to due diligence activity by each party into the other and the various discussions leading to the drafting of the Development Agreement, and feasibility studies by the Developer to assess the viability of a project. In this respect, technical and engineering consultants have been engaged by the Developer for their due diligence to assess the costs of required works.

·        A Project Financier has not been engaged to date.

·        Under the Development Agreement, the Developer is allowed to obtain a maximum Senior Debt Facility of up to $x.

·        Under the Development Agreement, the Developer is contributing Developer Funding of approximately $x towards the project.

·        The Landowners will not incur any project costs, all project costs are the responsibility of the Developer.

·        Works will be undertaken in one stage, and is expected to take approximately 6-9 months in total, with commencement within a few months of signing the Development Agreement.

·        Expected costs of the works are $x (including GST).

·        Expected selling price of the works are $x (average of $x per lot).

·        The Landowners expect to receive at least $x in total (i.e. $x each).

·        It is expected that the sales are to be completed within 18 months of commencing works (i.e. the lots are expected to be fully sold 9 months after the project works are completed).

·        The works undertaken by ABC on the Landowners behalf will be the bare minimum necessary to obtain subdivision approval from the Council.

·        The Developer is not intending to incur additional costs to improve the land in excess of what would be required by the Council. No additional land improvements will be undertaken (including constructing fencing or the levelling of the lots, etc.) beyond what is required by the Council itself. For example, the Developer is not intending to undertake cosmetic landscaping or installing fencing on the subdivided lots which would not otherwise be a condition of Council.

·        It is anticipated that the Council will require the various sub-division works expected in any broad acre land subdivision. This would include the installation of paved roads, kerbing, and connections for storm water, sewerage, power and lighting, as well as installation of footpaths and planting of trees in common areas (i.e. parks and footpaths). It is not expected that there will be any substantial earthworks (i.e. construction of retaining walls) or major drainage works required given the nature of the land.

·        Undeveloped lots will be sold. Buildings will not be constructed on the lots.

·        The Developer has prepared a draft project program. It is only a draft at this stage, as no applications have been made to Council yet. The final program will be dependent on the date of formal applications and/or approvals.

Landowners' details

Neither the Landowners nor their associated Company have ever been involved in property development or property subdivisions in the past.

The Landowners have held their real property for long term assets whether used in part of their business or for personal use.

The Landowners have never operated businesses in their personal names, either individually or as partners. The businesses were all operated by the Company.

Relevant legislative provisions

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 15-15

Income Tax Assessment Act 1997 subsection 15-15(1)

Income Tax Assessment Act 1997 subsection 15-15(2)

Income Tax Assessment Act 1997 Division 70

Income Tax Assessment Act 1997 section 70-10

Income Tax Assessment Act 1997 section 70-30

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 subsection 104-10(5)

Income Tax Assessment Act 1997 section 112-25

Income Tax Assessment Act 1997 subsection 112-25(1)

Income Tax Assessment Act 1997 subsection 112-25(2)

Income Tax Assessment Act 1997 Division 115

Income Tax Assessment Act 1997 section 115-5

Income Tax Assessment Act 1997 section 115-10

Income Tax Assessment Act 1997 section 115-15

Income Tax Assessment Act 1997 section 115-20

Income Tax Assessment Act 1997 section 115-25

Income Tax Assessment Act 1997 section 115-40

Income Tax Assessment Act 1997 section 115-45

Income Tax Assessment Act 1997 section 115-100

Income Tax Assessment Act 1997 section 775-70

Reasons for decision

Question 1

Summary

The proceeds from the disposal of the subdivided blocks are not assessable income under section 6-5 of ITAA 1997.

The proceeds from the disposal of the subdivided blocks represent a mere realisation of a capital asset and will be assessable under Parts 3-1 and 3-3 of the ITAA 1997.

Detailed reasoning

The proceeds from the sale of land can be treated as:

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

·        assessable ordinary income under section 6-5 of the ITAA 1997 as income from an isolated commercial transaction with a view to a profit; or

·        a realisation of a capital asset and assessable as a capital gain under Parts 3-1 and 3-3 of the ITAA 1997.

The mere realisation of capital assets, such as land, does not give rise to income according to ordinary concepts if the realisation is merely carried out in the most advantageous manner (Californian Copper Syndicate v Harris (1904) 5 TC 159). The Commissioner accepts that where the activities are no more than the mere realisation of a capital asset, any realised gain on the transaction will be a capital gain under the CGT provisions in the ITAA 1997.

The expression 'mere realisation' is used to distinguish a mere realisation from an isolated commercial transaction with a view to a profit and the carrying on of a business. Profits made on the realisation of capital assets can still be ordinary income if the activities go beyond a mere realisation and instead become a separate business operation or commercial transaction even though the Landowner did not have a purpose of profit-making at the time of acquiring the asset.

Taxation Ruling TR 97/11 Income Tax: am I carrying on a business of primary production? provides guidance on the relevant factors to consider to determine whether a business exists including; whether the activity is carried on in a similar manner to that of the ordinary trade, size and scale of the activity, and whether the activity is organised and carried on in a business-like manner.

Even where the sale of subdivided land is not regarded as part of carrying on a business, an isolated business or commercial transaction for the purpose of profit making by sale may have occurred. In Federal Commissioner of Taxation v Myer Emporium Ltd (1987) 163 CLR 199 (Myer Emporium) the High Court stated at 211:

...a receipt may constitute income, if it arises from an isolated operation or commercial transaction entered into otherwise than in the ordinary course of the carrying on of the Landowner's business, so long as the Landowner entered into the transaction with the intention or purpose of making a relevant profit or gain from the transaction.

Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income (TR 92/3) discusses the application of the principles outlined in the Myer Emporium case and provides guidance in determining whether profits from isolated transactions are ordinary income, and therefore assessable under section 6-5 of the ITAA 1997. Paragraph 16 of TR 92/3 provides:

16. 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.

Further, in relation to the intention of profit or gain, paragraph 38 of TR 92/3 states that the intention or purpose of the Landowner is not the subjective intention or purpose of the Landowner but is their purpose or intention discerned from an objective consideration of the facts and circumstances. It is also not necessary that the intention or purpose of profit-making be the sole or dominant intention or purpose for entering into the transaction. It is sufficient if profit-making is a significant purpose.

The basic distinction between a sale of property as part of a business, or alternatively, as an isolated 'profit making' undertaking or scheme is that the latter will generally be a one-off event and not carried out in an overly organised or systematic manner.

Whilst a one off event will generally be an isolated profit making undertaking or scheme, repetitive buying and selling of property is not necessary to establish that a business is being carried on. It does not have to be shown that the Landowner carried on a business of trading in land in the sense of buying and selling land with some regularity (R & D Holdings Pty Ltd v DFC of T 2006 ATC 4472 (R & D Holdings)). A single acquisition for that purpose is sufficient (Taxation Determination 92/124: Income tax: property development: in what circumstances is land treated as 'trading stock'? (TD 92/124)).

The following factors have been considered by the courts to decide whether proceeds from the sale of subdivided land was income from either carrying on a business or carrying out an isolated commercial transaction:

·        whether the landowner held the land for a considerable period of time prior to any subdivision and sale;

·        whether the landowner conducted farming or other non-developmental activities prior to beginning the process of developing and selling the land;

·        whether the landowner originally acquired the land as a private residence or for recreational purposes;

·        whether the landowner originally acquired the property as an investment, such as long term capital appreciation or to derive income;

·        whether the land was originally acquired near the urban fringe of a major city or town;

·        if the property has been recently rezoned, whether the landowners actively sought that rezoning;

·        whether a potential buyer made any offers to the landowners before they commenced discussion to enter into a proposed or final development agreement;

·        whether the landowners had tried to sell the land without subdivision;

·        whether the landowner had any history of buying and profitably selling developed land or land for development;

·        whether the operations will be planned, organised and carried on in a business-like manner;

·        whether the landowners have changed their business activity relating to the land from one business to another (for example, from farming to property development);

·        the scope, scale, duration and degree of complexity of the proposed development;

·        who initiated the proposal to develop the land for resale;

·        whether the development and pre-sale arrangement is sophisticated;

·        whether the landowners will be actively involved in any development or sale activities;

·        the level of legal and financial control maintained by the landowners in the proposed or final development agreement; and

·        the level of financial risk borne by the landowner in acquiring, holding and/or developing the land.

Does the proposed subdivision and sale of the Property amount to carrying on a business or carrying out an isolated commercial transaction?

To determine whether the proposed subdivision and sale of the Landowners' Property will amount to carrying on a business or carrying out an isolated commercial transaction it is relevant to consider the facts of the proposed subdivision and sale in light of the factors considered by the courts.

Relevantly in this matter:

·        The Property has been jointly owned by the Landowners since 19DD however their individual interests in the Property arose at different times. Taxpayer A acquired the Property jointly with their parent in 19AA. In 19DD, the Certificate of Title for the Property was amended to reflect Taxpayer B's interest as joint owner of the Property with Taxpayer A. Whilst the Certificate of Title was not amended until 19DD, it had been their paents wish and their understanding since 19BB, that the Property was jointly owned by Taxpayer A and Taxpayer B. The Landowners have held the Property for a considerable time prior to the subdivision and sale being contemplated.

·        The Property has never used for farming or other non-development activities. The Property has never been leased or rented.

·        The Property was originally acquired for use as a capital asset. When the Property was originally acquired by Taxpayer A jointly with their parent in 19AA it was acquired with the intention that it be used to establish and conduct a farming business. Whilst this was their intention the Property was never used for this purpose. In 19DD, Taxpayer A's interest in the Property, as joint owner with Taxpayer B, was reflected on the Certificate of Title for the Property. Since 19BB Taxpayer A has been maintaining the Property with Taxpayer B.

·        The Property remains in, and has been maintained by the Landowners in, the same state as when it was originally acquired in 19AA. It is vacant and has no improvements.

·        The Property has never been rezoned and application has never been made to rezone the Property. Rezoning is not required for the proposed development. The Property has been zoned as rural/residential since 19AA.

·        The reason for subdividing and selling the Property is because the Landowners have commenced downsizing their various business interests and personal assets that are no longer needed.

·        Over the years, particularly as the surrounding areas became developed, unsolicited letters were received expressing an interest to buy the Property. In 1996 sale of the Property was contemplated. Drawings were obtained from an architect to show potential buyers the potential for subdivision and to obtain the best sale price however the Property was not subsequently listed for sale because the Landowners acquired a new family business which required their focus and there was no specific need or reason to sell the Property.

·        In 20FF the Landowners appointed a real estate agent to market the Property for sale. By 20GG there had been a number of offers made to buy the Property outright. The best offer for $x was rejected by the Landowners because it was less than the $x desired sale price. That potential buyer then reapproached the Landowners with the proposed development arrangement to allow the Landowners to achieve their desired sale price.

·        The Landowners will not actively be involved in the development and sale of the subdivided lots and will have no say in what costs are incurred, how the work is to be performed or who is to perform the work. The Landowners will grant Power of Attorney for the purposes of the development.

·        The Developer will be engaged to attend to all matters necessary to effect the land development, subdivision and sale. This will include the Developer securing all planning permits, obtaining approvals, undertaking all works required by the planning permit/approvals, subdividing and attending to registration of any plan of subdivision of the land for the purposes of sale and selling the lots under the plan of subdivision. The Developer will also make all decisions in relation to marketing and sale of the lots and will engage the real estate agents and solicitors to effect the sales.

·        The Landowners will retain legal ownership of the Property throughout the development until such time as the subdivided lots are sold.

·        The Property is 5 hectares. The Development arrangement proposes subdivision into X lots, with completion in one stage which will take approximately 6-9 months. It is expected that the sale of the lots will be finalised within 18 months of the works commencing and that the sale price of a lot will be approximately $x.

·        Dwellings will not be erected on the subdivided lots. The works to be undertaken by the Developer will be the bare minimum necessary to obtain Council approval for the subdivision.

·        The Landowners do not bear the costs of the proposed development. The cost of the development will be funded in part by the Developer and by finance which the Developer will obtain from a third party.

·        The expected cost of the development is $x (including GST). The Developer will contribute approximately $x towards costs. The maximum third party finance the Developer can obtain is $x.

·        The Landowners will allow the Developer to use the Property as security for the finance they obtain from the third party. The Property will not be used as security for the Developer's costs.

·        The Development Fee to be paid by the Landowners, and the sale proceeds to be received by the Landowners, are based on a formula which is a percentage of the net receipts from the sale of individual lots.

·        The Landowners, nor their associated Company, have ever been involved in property development or subdivision of land in the past.

Based on the facts of the proposed arrangement to subdivide and sell the Property, as outlined above, and in light of the relevant indicia considered by the courts in relation to this matter, it is not considered that the Landowners have ventured into a business of property development, subdivision and sale of land for profit. Therefore, the proceeds from the disposal of the subdivided blocks will not be assessable ordinary income under section 6-5 of the ITAA 1997 as income from carrying on a business of property development.

Further, a balanced view of the characteristics of the Property and of the proposed arrangement, with no one factor determinative in isolation, leads to a conclusion that the proposed subdivision will not amount to engaging in an isolated business or commercial transaction undertaken for the purpose of profit. The proposed arrangement has some characteristics indicative of an isolated business or commercial transaction. For example, the Landowners are assuming risk by sharing in the sale proceeds/profits with the Developer rather than being guaranteed a specific price for their Property, and by providing their Property as security for the external finance. The Landowners also chose not to sell their Property outright but instead to pursue the development as a means of obtaining a greater sale price. It is however considered that these factors are outweighed by the other indicia that indicate that the Landowners are instead entering the development arrangement to dispose of a capital asset and that they are merely realising their Property in the most enterprising manner. This is indicated by factors which include the reason for acquiring the Property, the length of time the Property has been held, the unimproved nature and the use of the property since it was acquired, the passive nature of the Landowners' involvement in the proposed development, that the Landowners will not bear any costs of the development and the limited scope and size and duration of the development. As such, the proceeds the Landowners receive from the sale of the subdivided blocks will not be assessable ordinary income under section 6-5 of the ITAA 1997 as income from an isolated commercial transaction with a view to a profit.

It is considered that the proceeds from the disposal of the subdivided blocks will represent a mere realisation of a capital asset in the most enterprising way available so as to maximise the proceeds of sale. The proceeds from the disposal of the subdivided blocks will be assessable under Parts 3-1 and 3-3 of the ITAA 1997.

Question 2

Summary

The proceeds from the disposal of the Properties are not assessable income pursuant to section 15-15 of the ITAA 1997, being income arising from the carrying on or carrying out of a profit-making undertaking or plan.

Detailed reasoning

Subsection 15-15(1) of the ITAA 1997 includes in assessable income profit arising from the carrying on or carrying out of a profit-making undertaking or plan. However, subsection 15-15(2) of the ITAA 1997 provides that such a profit will not be assessable under section 15-15 if it:

(a) is assessable as ordinary income under section 6-5; or

(b) arises in respect of the sale of property acquired on or after 20 September 1985.

Subsection 15-15(1) of the ITAA 1997 requires that the profit to be included in assessable income arises from the carrying on or carrying out of a profit-making undertaking or plan.

Whether the proceeds to be received by the Landowners from the disposal of the subdivided blocks are 'from the carrying on or carrying out of a profit-making undertaking or plan' has been considered in Question 1. The same facts and indicia considered in Question 1 apply here also. The Land was originally acquired for the purpose of carrying on a farming business and when this did not occur it continued to be held as a capital asset. It has been held for a substantial period of time, during which it has never been used. The proposed development and sale of the Property will be the mere realisation, by the most advantageous means, of the asset, and not the carrying on or carrying out of a profit-making undertaking or plan.

Accordingly, the proceeds will not be assessable income under section 15-15 of the ITAA 1997, and it is not necessary to consider the exclusions in subsection 15-15(2) of the ITAA 1997.

Question 3

Summary

The proceeds from the sale of the subdivided blocks will not be from carrying on a business because the Landowners have not ventured into a business of property development, subdivision and sale of land. Section 70-30 of the ITAA 1997 does not apply to make the Property be held as trading stock, and therefore, the proceeds from the sale of the subdivided blocks will not be assessable as ordinary income.

Detailed reasoning

Division 70 of the ITAA 1997 deals with the tax treatment of trading stock. The term 'trading stock' is defined very widely to include anything produced, manufactured or acquired, that is held for manufacture, sale or exchange in the ordinary course of business (section 70-10 of the ITAA 1997). This definition includes land.

TD 92/124provides that land is treated as trading stock for income tax purposes if it is held for the purpose of resale and the Landowner embarks on a definite and continuous cycle of operations designed to lead to the sale of the land. It is not necessary that the acquisition of land be repetitive; a single acquisition of land for the purpose of development, subdivision and sale by a business commenced for that purpose would lead to the land being treated as trading stock.

The purpose of landholding can alter. Where land was originally acquired as a capital asset but is later ventured into a property development business it will become trading stock of the taxpayer. Section 70-30 of the ITAA 1997 applies where an item which is already owned by the taxpayer (but is not held as trading stock) starts being held as trading stock.

As discussed in Question 1, the Landowners have not ventured into a business of property development, subdivision and sale of land. Rather, the Landowners will merely realise their capital asset in the most advantageous way. The Property will not change from being held as a capital asset.

Accordingly, section 70-30 of the ITAA 1997 does not apply to make the Property trading stock.

Question 4

Summary

Any capital gain or capital loss made by Taxpayer A from the disposal of their interest in the subdivided blocks will be disregarded from the operation of the CGT provisions in Parts 3-1 and 3-3 of the ITAA 1997.

Detailed reasoning

As stated in Question 1, it is considered that the proceeds from the disposal of the subdivided blocks will represent a mere realisation of a capital asset.

Taxpayer A acquired their original 50% interest in the Property in 19AA. In 19BB, Taxpayer A acquired a further 50% interest so that they had 100% interest in the Property. In 19DD Taxpayer A transferred 50% of their interest to their sibling Taxpayer B. Taxpayer A therefore retains a 50% interest in the Property which was acquired prior to 20 September 1985.

Section 104-10 of the ITAA 1997 provides for the disposal of a CGT asset (CGT event A1) and states the circumstances under which you make a capital gain or capital loss. However subsection 104-10(5) of the ITAA 1997 provides exceptions, and states (in part), any capital gain or capital loss you make is disregarded if you acquired the CGT asset prior to 20 September 1985.

Whilst Taxpayer A acquired their interest in the Property prior to 20 September 1985 it is relevant to consider whether the proposed subdivision of the Property causes a CGT event to occur, so that the acquisition date of Taxpayer A's interest in the asset changes.

Section 112-25 of theITAA 1997 sets out what happens if a CGT asset is split into 2 or more assets or changes to an asset of a different nature. Subsection 112-25(1) of the ITAA 1997 provides the example, 'You subdivide a block of land into 3 separate blocks. Each of those blocks is a new asset.' Subsection 112-25(2) of the ITAA 1997 states that the split or change is not a CGT event. CGT Determination Number 7 TD 7 Capital Gains: What are the CGT consequences of sub-dividing pre-CGT land? confirms that the subdivision of land is not a CGT event and pre-CGT land maintains it pre-CGT status.

Therefore, when the Property is subdivided, the subdivision does not constitute a CGT event and Taxpayer A's interest in the subdivided land will retain its pre-CGT status.

CGT event A1 will occur when subdivided blocks are disposed of however any capital gain or capital loss made by Taxpayer A on the disposal of the subdivided blocks is disregarded from the operation of the CGT provisions in Parts 3-1 and 3-3 of the ITAA 1997 pursuant to subsection 104-10(5) of the ITAA 1997.

Question 5(a)

Summary

Any capital gain or capital loss made by Taxpayer B from the disposal of their interest in the subdivided blocks will be subject to the CGT provisions in Parts 3-1 and 3-3 of the ITAA 1997.

Detailed reasoning

As stated in Question 1, the proceeds from the disposal of the subdivided blocks will represent a mere realisation of a capital asset and will therefore be assessable under the CGT provisions in Parts 3-1 and 3-3 of the ITAA 1997.

As discussed in Question 4, the proposed subdivision of the Property does not cause a CGT event to occur, therefore the acquisition date of Taxpayer B's interest in the asset will not change due to the subdivision.

CGT event A1 will occur when subdivided blocks are disposed of. As provided for in section 104-10 of the ITAA 1997 a capital gain or capital loss will be made on the disposal.

The exception provided in subsection 104-10(5) of the ITAA 1997, that any capital gain or capital loss is disregarded if you acquired the CGT asset prior to 20 September 1985, will not apply to Taxpayer B because Taxpayer B acquired the 50% interest in the Property in 19DD.

Question 5(b)

Summary

If Taxpayer B chooses not to index the cost base of the Property, the proceeds from the disposal of their interest in the subdivided blocks will be eligible for the 50% general CGT discount under Division 115 of the ITAA 1997.

Detailed reasoning

Section 115-5 of the ITAA 1997 states you make a discount capital gain if the requirements in sections 115-10, 115-15, 115-20 and 115-25 of the ITAA 1997 are satisfied.

Therefore to be eligible for the CGT discount, the capital gain must:

·        be made by an individual, a trust or a complying superannuation entity (section 115-10)

·        result from a CGT event happening to an asset you acquired at least 12 months before the CGT event (section 115-25)

·        result from a CGT event happening after 11.45am (by legal time in the ACT) on 21 September 1999 (section 115-15), and

·        have been worked out without indexing the elements of the cost base (section 115-20).

Section 115-5 of the ITAA 1997 also states that sections 115-40, 115-45 and 775-70 of the ITAA 1997 identify capital gains that are not discount capital gains. None of these sections apply in this case.

Under the discount method you reduce your capital gain by the discount percentage. The discount percentage is specified in section 115-100 of the ITAA 1997. For individuals, the discount percentage is 50%. However, you can reduce the capital gain only after you have applied all the capital losses for the year and any unapplied net capital losses from earlier years.

Taxpayer B has held their interest in the Property for longer than 12 months therefore, if they choose not to index the cost base, they will be eligible for the 50% CGT discount.