Edited version of private advice

Authorisation Number: 1051782676147

Date of advice: 27 November 2020

Ruling

Subject: Treatment of proceeds from disposal of property

Question

Will the proceeds from the sale of the subdivided lots be treated as statutory income under the capital gains tax provisions in Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

This ruling applies for the following periods:

Year ending 30 June 20XX to year ending 30 June 20YY

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Taxpayer purchased their first property and received applicable first homeowner exemptions.

They resided in the house from settlement and continue to reside in the house.

The Property is close to family and transport for commute to work.

Subdivision of the property was not considered as a reason for purchase and no work had previously been done to ascertain the viability of a subdivision.

After speaking to a local real estate agent a year after settlement about the possibility of subdividing, the taxpayer was made aware that the property may be suitable for subdivision.

An initial application for subdivision was submitted a month later. The submission was to divide the existing lot into two separate lots.

After subdivision, the intention was for the "Front lot" which had the existing house located within its boundaries, to be retained by the taxpayer.

After subdivision, the intention was for the "Rear Lot" to be sold.

Subdivision approval was granted, with works completed over several months.

Due to nature of the Taxpayer's employment, they found themselves with extended periods of time in which to perform the works.

The taxpayer engaged a surveyor, coordinated trades and installed fencing, together with the completion of the plumbing works required (sewer and water installation to rear lot). All other works were completed by third parties.

The Rear Lot was sold for a gain.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 Part 3-3

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 1997, 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 1997, 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.

Carrying on a business

Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? 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.

Your activities do not have the repetition, size, nature or scale similar to a business of residential land subdivision.

Isolated transactions

Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income (TR 92/3) 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 advises that 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.

Paragraph 9 of TR 92/3 states that where a transaction or operation involves the sale of property the taxpayer must usually, but not always, have the intention of making a profit when acquiring the property.

Paragraph 36 of TR 92/3 advises that the courts have often said that a profit on the mere realisation of an investment is not income even if the taxpayer goes about the realisation in an enterprising way. However, if a transaction satisfies the points above, it is generally not a mere realisation of an investment.

Matters that may be relevant in considering whether an isolated transaction amounts to a business operation or commercial transactions are listed at paragraph 13 of TR 92/3:

a)    the nature of the entity undertaking the operation or transaction;

b)    the nature and scale of other activities undertaken by the taxpayer;

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

d)    the nature, scale and complexity of the operation or transaction;

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

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

g)    if the transaction involves the acquisition and disposal of property, the nature of that property; and

h)    the timing of the transaction or the various steps in the transaction.

You stated you purchased the property with the intention of it being your main residence. At a later date you were made aware of the potential to subdivide and realise a portion of your property. It was a comparatively simple subdivision involving a 1 into 2 split with a small gain realised on the sale of the newly created lot. While you did conduct many of the works yourself, factoring this into the comparatively simple subdivision supports the view of realising your investment in an enterprising way rather than as a commercial undertaking. The remaining lot continues to be your main residence. The nature, scale and complexity of the undertaking does not support the view that your activities are more than merely realising your investment.

Conclusion

Based on the facts provided the gain on sale of the subdivided lot would be recognised as statutory income under the capital gains tax provisions.