Edited version of private advice

Authorisation Number: 1051897714816

Date of advice: 15 September 2021

Ruling

Subject: Subdivision - sale subdivided lots - capital versus income

Question

Will any of the proceeds from the sale of the subdivided vacant lots of land (the Sale Lots) be treated as ordinary income under section 6 -5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No. Based on the information provided, the proceeds from the sale of the Sale Lots will not be ordinary income and not assessable under section 6-5 of the ITAA 1997as either:

•         the carrying on of a business in accordance with the factors listed in Taxation Ruling 97/11; or

•         a profit-making or commercial transaction in accordance with the principles contained in Taxation Ruling TR 92/3.

Therefore, any proceeds received on the disposal of the Sale Lots will represent a mere realisation of capital assets which will be assessed under the capital gains tax provisions contained in Parts 3-1 and 3-3 of the ITAA 1997.

This ruling applies for the following periods

Income year ending 30 June 20XX

Income year ending 30 June 20XX

The scheme commences on

1 July 20XX

Relevant facts and circumstances

You purchased the Property after 20 September 1985 which had a land area of several acres and had a house located on it, where you have resided since settlement on the purchase of the Property occurred.

The Property was zoned rural residential when it was purchased, which has not changed.

You are considering your retirement and have made the decision to subdivide the Property and sell off the excess portion of the Property. You are hoping to pay off the existing home loan, set you up for retirement, and provide some potential support for your children. You will keep the subdivided lot on which the house is located, in which you will continue to reside as you have family in the area and enjoy the region and will sell the other subdivided lots (the Sale Lots).

You have not put the Property on the market as a whole.

It is estimated that the total costs in relation to subdivision activities will be significantly less than the market value of the Property prior to the subdivision activities commencing.

You anticipate that you will receive total sale proceeds from the sale of the Sale Lots greater than the market value of the Property prior to the subdivision activities commencing.

You will obtain a loan, with some of the borrowed funds to be used to fund the subdivision activities and the remaining being used for other purposes.

You are not undertaking any subdivision activities in connection with any other property owners, such as adjacent property owner/s.

You will not, and have not, acquired any additional land to add to the Property in relation to the subdivision activities.

You have engaged the services of professionals in relation to obtaining the approval from the Council to subdivide the Property into several lots.

The services of others are being engaged to undertake the subdivision activities which commenced, and are expected to be completed, during the ruling period.

Neither you, nor any related entities/parties, have undertaken any subdivision activities or land development in the past, and do not have any intentions to undertake any similar activities in the future.

You will use the services of a real estate agent to sell the Sale Lots, which will be sold during the period covered by this ruling.

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