Edited version of private advice

Authorisation Number: 1051657529600

Date of advice: 16 April 2020

Ruling

Subject: Assessable income - sale of property - revenue versus capital

Question

Will any profits from the sale of the developed lots be assessable, on revenue account, as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You own a property that was a family property that you have used as your main residence.

You have never carried on a business on the land.

You entered into an aged care facility and decided to subdivide the land to get the maximum value for your property in order to fund the care.

A development manager was never engaged. All the development work is organised by you and a relative who is acting as Power of Attorney.

There were no planning documents, business plan or budget prepared when the decision to subdivide was made.

You have spent approximately XX hours per week on the development.

No borrowings were made to fund the development so far

No attempt was made to sell the land before subdivision and no potential buyer has made an offer for the land.

The land has never been rezoned and there is no requirement for rezoning in order for the subdivision to occur.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Reasons for decision

Broadly, there are three main ways profits from a land development, subdivision and sale 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 an isolated business transaction entered into by a non-business taxpayer, or outside the ordinary course of business of a taxpayer carrying on a business, which is the commercial exploitation of an asset acquired for a profit making purpose;
3. As statutory income under the capital gains tax legislation.

Change of intention

While holding an asset for a considerable period of time may seem to indicate that it is a long term capital asset, the intention of the taxpayer at the time of acquisition and throughout the ownership period is a crucial aspect.

Federal Commissioner of Taxation v. Myer Emporium Ltd (1987) 163 CLR 199; 87 ATC 4363; (1987) 18 ATR 693) (Myer Emporium) is one of the leading cases which shows that the intention at the time of purchasing the asset is an important consideration in determining whether the proceeds received on disposal are on a capital or revenue account. According to the Myer Emporium case, the relevant intention or purpose of the taxpayer is not a subjective test. Rather, it is the intention or purpose as discerned from an objective consideration of the facts and circumstances of the case. Also, if the taxpayer is a company or trust, the courts determine its purposes by looking at the people who control the entity.

Further, the decisions in Casimaty v. Federal Commissioner of Taxation (1997) 97 ATC 5135, 37 ATR 358 (Casimaty) and McCorkell v. Federal Commissioner of Taxation 98 ATC 2199; (1998) 39 ATR 1112 demonstrate that if a taxpayer does not intend to make a profit when he or she acquires farming land then the likelihood that any profit made on the eventual sale of land is ordinary income is greatly diminished.

Numerous cases have concerned the assessability of profits or proceeds from the sale of land. The two leading Australian cases dealing with the change of intention and the disposal of capital assets on revenue account are Scottish Australian Mining Co Ltd v Federal Commissioner of Taxation (1950)81 CLR 188 (Scottish Mining case) and Whitfords Beach Pty Ltd v Federal Commissioner of Taxation (1983) 14 ATR 247 (Whitfords Beach).

It follows from the decisions in Scottish Mining and Whitford's Beach cases that a taxpayer, who had originally acquired property for farming operations purposes, could subsequently embark on a profit making scheme. This means that a taxpayer could embark on a profit making scheme after property was acquired for a different purpose.

Carrying on a business

Taxation Ruling TR 97/11 outlines some factors that indicate whether or not a business is being carried on.

Based on the information provided, we do not consider that any profit made from the sale of the property would be derived in the course of carrying on a business.

Isolated transactions

Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income discusses profits on isolated transactions and the application of the principles outlined in the decision of the Full High Court of Australia in FCT v. Myer Emporium Ltd (1987) 163 CLR 199; 87 ATC 4363; (1987) 18 ATR 693. This ruling states that profits on isolated transactions may be income.

Profit from an isolated transaction will be ordinary income where:

·         the intention or purpose of a taxpayer in entering into the transaction was to make a profit or gain and

·         the transaction was entered into, and the profit was made, in the course of carrying on a business operation or commercial transaction.

Taxation Ruling 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 have become a separate business operation or commercial transaction, or an isolated profit making venture.

At paragraphs 56 and 57, Taxation Ruling TR 92/3 explains that a profit is income where it is made in any of the following situations:

·         a taxpayer acquires property with a purpose of making a profit by whichever means prove most suitable and a profit is later obtained by any means which implements the initial profit-making purpose; or

·         a taxpayer acquires property contemplating a number of different methods of making a profit and uses one of those methods in making a profit; or

·         a taxpayer enters into a transaction or operation with a purpose of making a profit by one particular means but actually obtains the profit by a different means.

In very general terms, a transaction or operation has the character of a business operation or commercial transaction if the transaction or operation would constitute the carrying on of a business except that it does not occur as part of repetitious or recurring transactions or operations.

Application to your circumstances

In your case, the sale of your subdivided land will be an isolated commercial transaction assessable on revenue account.

Although the property is a family property and you have used it for your main residence, this intention is not definitive alone. There has been a change in purpose for which the land is held, as it is now held primarily for the purpose of resale in the form of subdivided blocks. There is a coherent plan for the subdivision of the land. Based on the facts, it can be concluded that the development and subsequent sale of the subdivided lots, occurs with the intention of profit as a commercial transaction.

Therefore, proceeds from the sale of the subdivided blocks will constitute a profit from an isolated transaction and should be included as ordinary income under section 6-5 of the ITAA 1997.