Edited version of private advice

Authorisation Number: 1051774723159

Date of advice: 09 November 2020

Ruling

Subject: Disposal of subdivided land

Question 1

Are the proceeds of sale on realisation of the subdivided residential lots comprising the remaining land assessable to the applicants under either section 6-5 or section 15-15 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 2

If the answer to Question 1 is no, are the proceeds of sale assessable to the applicants under the capital gains tax provisions in Chapter 3 the ITAA 1997?

Answer

Yes

This ruling applies for the following periods:

Income year ended 30 June 2022

Income year ended 30 June 2023

Income year ended 30 June 2024

Income year ended 30 June 2025

Income year ended 30 June 2026

The scheme commences on:

1 July 2021

Relevant facts and circumstances

This ruling relates to the same scheme as ruled upon in 2012 under authorisation numbers 1012150514962, 1012150546013, 1012150554184 and in 2017 under authorisation number 1051182892809.

• The Applicants' land has been used for business purposes over a number of years.
• The business has been relocated and the land has been subdivided into residential blocks.
• The land that is yet to be sold as set out below will be referred to as 'the Remaining Land' for this ruling.

In addition to the facts of the scheme as issued to the applicants in 2012 and 2017, the following has since occurred and forms part of the facts.

In order to undertake the development of the Remaining Land, the Applicants have entered into project management agreements with a third party for the balance of the Remaining Land. The Project Manager will liaise with and manage independent contractors, including civil contractors, an engineer, surveyor, town planner, settlement agent, and lawyer on behalf of the Applicants. The Project Manager is also the Selling Agent.

The Project Manager will charge a fee to the Applicants inclusive of the Project Management fee and selling fee.

Pursuant to the existing agreement with each Landowner, the Co-ordinator has and will continue to incur various costs in the first instance and then pass them on to the Applicants. The Co-ordinator has been passing on such costs to the relevant Landowner every three months and intends to continue this practice in respect of future lot sales.

The Co-ordinator has also been charging a service fee to the relevant Landowners on the settlement of the residential lots and intends to continue this practice in respect of future lot sales. The Co-ordinator's fee is calculated at a flat rate per lot sold to reflect its administration function.

The Project Manager is progressing all planning and subdivision approvals with the expectation that civil works for the first stage of subdivision can commence.

The Remaining Land has been and will continue to be developed broadly in accordance with the following:

(a) The development has done and will continue to do no more than required for subdivision approval and has included and will continue to include the construction of roads and drainage, electricity, gas and water and sewerage. The Remaining Land will continue to be (as the Land other than the Remaining Land has been) subdivided into residential housing lots and sold as vacant land. No buildings have been or will be constructed on those lots as part of the development.

(b) By undertaking the subdivision in stages, external borrowing for the development has been and will continue to be kept to a minimum. The timing of release of each stage has depended and will continue to depend on the prevailing market conditions at the time, as dictated by the purchasers' ability to obtain finance, funding availability and environmental requirements.

(c) All funds required for development so far have been borrowed or used from profits generated on the prior stage, but only to the extent of the same owner.

(d) No interest deductions have been claimed by the Landowners throughout the development of the Land. No interest deductions will be claimed by the Applicants on any external borrowings they obtain to make payments or loan funds to the Co-ordinator to meet the costs of the development of the Remaining Land. All costs have been capitalised to the project.

(e) Ownership of the Remaining Land (legal and beneficial) has been and will continue be retained by the Applicants until the subdivided lots carved from their respective parcels or interests in the Remaining Land are sold. Title in the Remaining Land will not be transferred to the Co-ordinator or to any other person until sold to third party purchasers as subdivided lots.

(f) All proceeds received from the sale of subdivided lots have been distributed to each relevant Landowner, after the deduction of development costs and fees charged by the Co-ordinator. The Co-ordinator has passed on and continues to pass on costs to the relevant Landowner every three months. The Co-ordinator has charged and continues to charge a service fee to the relevant Landowner on the settlement of each subdivided lot, which is calculated at a flat rate per lot sold.

(g) All the financial books and accounts are and have been handled by the Co-ordinator.

(h) The Project Manager has been engaged to oversee and control all activities associated with development of the Remaining Land.

(i) There is no sales office located on the Remaining Land as it was determined by the selling agent to be of no use.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 15-15

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 112-25

Reasons for decision

The proceeds from realising an asset may fall into one of the following situations:

•   it gives rise to income according to ordinary concepts under section 6-5 of the ITAA 1997;

•   it gives rise to profit from the carrying on or carrying out of a profit-making undertaking or plan under section 15-15 of the ITAA 1997 if the asset was acquired before 20 September 1985; or

•   it gives rise to a gain under capital gains tax (CGT) provisions in Chapter 3 of the ITAA 1997.

The proceeds of the sale of the Remaining Land to which this ruling applies would not be assessable income under either section 6-5 or section 15-15, and would be subject to the CGT provisions in Chapter 3 of the ITAA 1997.