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Edited version of private advice
Authorisation Number: 1051614405256
Date of advice: 27 November 2019
Ruling
Subject: Subdivision of land being a mere realisation of a capital asset.
Question
Will the proceeds from the sale of the blocks be subject to the capital gains tax (CGT) provisions under Part 3-1 of Income Tax Assessment Act 1997 (ITAA 1997)?
Answer
Yes.
On balance, the sale of the subdivided lots is considered to be a mere realisation of a capital asset. Profits from the sale of the subdivided lots will not be assessable as ordinary income under section 6-5 of the ITAA 1997. The proceeds represent a mere realisation of a capital asset which will fall for consideration under the CGT provisions in Part 3-1 of the ITAA 1997.
However, as the land was acquired in 1979, any capital gain will be disregarded.
This ruling applies for the following periods:
1 July 2014 to 30 June 2015
1 July 2015 to 30 June 2016
1 July 2016 to 30 June 2017
1 July 2017 to 30 June 2018
The scheme commences on:
1 July 2014
Relevant facts and circumstances
Along with your spouse you purchased Lot 1 as your primary place of residence and adjacent property (previously Lot 2 prior to subdivision) and now Lot 3 prior to 20 September 1985. You both continually farmed on Lot 3, apart from a residential house, which is situated on the property that is rented out.
You have provided details of Lot 3.
Your primary residence on Lot 1 has the house and Lot 3 had a big block of land, which had been subdivided.
The land has been owned for many years and has been farmed on for the whole period of ownership.
The farming business was originally a partnership between you and your spouse until their passing, at which point the partnership ceased.
Moving forward you have run your farming business as a sole trader and registered the farming business for Goods & Services Tax.
Recently due to old age, health and the death of your spouse, you decided that the scale of your farming activities on Lot 3 was too large to maintain alone and decided to sell off or subdivide a portion of the land to reduce its size.
You wanted your family to live close to you so you decided to subdivide part of Lot 3 and gift a block of land to each of your children. You wanted the children to be able to build and construct their homes on the subdivided lots. As your home was two storeys and you were the only person living there, you wanted to downsize and decided to also acquire one of the blocks to build a new smaller home for yourself.
To be able to fund the project, you took out a loan from the bank. You sought to subdivide an area enough to be able to self-fund the project and also provide enough to be able to construct your new dwelling.
After a feasibility study being carried out and seeking the services of consultants to advise on the total cost of the project it resulted in an area of the property to accommodate for multiple blocks of land, a defined number for the children and to be sold and one to build for your family home. The total land area of the subdivision was provided as a percentage of Lot 3.
No additional land was acquired.
The total cost of the project was provided.
You had no involvement in the subdivision process. External contractors carried out the works in accordance with the plans approved by the statutory departments.
You have provided details of the contractors you engaged to complete the works.
After the subdivision was completed, you sought to sell the specified blocks. The remainder of Lot 3 is still farmed on today, just on a smaller scale than before.
You retained Lot 4 to construct a private dwelling on for yourself.
Neither you nor any related entities have been involved in any property development or subdivision activities.
Neither you nor any related entities plan to be involved in any property development or subdivision activities in the future.
There was no business plan.
The works only involved what was necessary to secure the approval.
No site office or sales office was erected on the land.
No GST credits were claimed and no deductions for the project.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 6-5
Income Tax Assessment Act 1997 section 104-10
Income Tax Assessment Act 1997 subsection 104-10(5)