Edited version of private advice

Authorisation Number: 1051925790131

Date of advice: 2 December 2021

Ruling

Subject: Sale of land - revenue v capital

Question 1

Will the whole or part of the proceeds or profit from the sale of part of your farming land (the Farmland) be assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 2

Will the whole or part of the proceeds or profit from the sale of the Farmland be assessable income under section 15-15 of the ITAA 1997?

Answer

No

Question 3

Will the whole or part of the proceeds or profit from the sale of the Farmland be assessable income under section 25A of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

No

Question 4

Will the anticipated capital gain on the sale of your interest in the Farmland acquired before 20 September 1985 be included in your assessable income under subsection 102-5(1) of the ITAA 1997?

Answer

No, unless the cost base of the development approvals for the Farmland exceeds 5% of the sale proceeds, in which case the approvals will be considered as a separate CGT asset.

Question 5

Will the first element of the cost base of the interest in the Farmland you acquired as surviving joint tenant, be the market value of that interest, on the date of your sibling's death under subsection 128-50 of the ITAA 1997?

Answer

Yes

Question 6

Will any capital gain on the sale of the interest in the Farmland you acquired as surviving joint tenant be a discount capital gain with a discount amount of 50% under Division 115 of the ITAA 1997?

Answer

Yes

This ruling applies for the following periods:

Financial year ending 30 June 20XX

Financial year ending 30 June 20XX

Financial year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You intend sell a portion of farmland (the Farmland).

The Farmland was acquired in separate parcels prior to 20 September 1985, as joint tenants, with your sibling prior to their recent death, upon which you became the sole owner.

The Farmland has been used for primary production activities (primarily cropping and cattle) since its acquisition until the current time.

You have stated that your siblings passing, and your advancing age are the reasons for the sale.

Your family has a long connection to the Farmland being part of a larger primary production landholding included adjoining land acquired in over a century ago and farmed by your family since this time.

Approximatively XX hectares of the landholding has been acquired under the threat of resumption by the state government road authority and the local council for the purposes of road development.

After the previous attempts to resume your farming land, you (and your sibling) were concerned about future attempts. You received advice recommending you obtain approvals for the future development of the Farmland. It was thought that establishing a masterplan for the Farmland would help defend against these threats.

According to the advice received, approvals would also:

•         provide greater certainty over the developable area of the land

•         outline the required infrastructure requirements

•         determine the various uses to which different parts could be put

•         negate the requirement for future public consultation

•         provide for a shorter and less complicated future land sale.

The Preliminary Approval for Material Change of Use in accordance with the Local Area Development Plan (PA) application was approved with a currency period of 8 years. A request for extension was lodged recently to prevent it lapsing and this is currently being assessed by the Council.

At the time of the application for the PA the Farmland was already classified for residential development under Council's planning scheme. Neither you, nor your sibling have had input to the planning scheme updates that have occurred over the years.

Under the PA, further development permit applications will need to be obtained from Council before any development of the land can commence. However, with the PA, further development applications and permits in accordance with the PA will not require public notification.

The cost of the applications including civil engineering plants was approximately $XXX. Funding for the application from your cash reserves being from the previous sale of land.

A company owned and controlled by you and your sibling prior to their death, obtained the PA.

You have stated that the reason for applying for the PA in the company's name was twofold:

•         You regarded yourself as a farmer and didn't personally want to undertake other activities.

•         To provide some degree of anonymity, reducing the potential for negative publicity, if that eventuated.

The Council has now superseded its planning scheme. Given the age of the PA, your town planning advisors have recommended you apply for a new PA. You have stated that although technically it is a new application, to a large extent it will essentially replicate the existing PA, updating documentation and technical reporting to align with the current regulatory planning instruments.

The extension to the original PA is being held in abeyance, until the new development approval is obtained from Council. The estimated cost of obtaining a new approval is approximately $XXX.

You have provided a copy of the valuation of the Farmland at the date of your sibling's death.

You have no further plans to dispose of your remaining farmland.

You are an Australian resident for tax purposes.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 25A

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 Division 115

Income Tax Assessment Act 1997 section 15-15

Income Tax Assessment Act 1997 subsection 102-5(1)

Income Tax Assessment Act 1997 subsection 104-10(5)

Income Tax Assessment Act 1997 section 108-7

Income Tax Assessment Act 1997 subsection 108-70(2)

Income Tax Assessment Act 1997 section 128-50

Income Tax Assessment Act 1997 Section 115-10

Income Tax Assessment Act 1997 section 115-20

Income Tax Assessment Act 1997 section 115-25

Income Tax Assessment Act 1997 section 115-100

Income Tax Assessment Act 1997 section 995-1

Reasons for decision

Question 1

Will the whole or part of the proceeds or profit from the sale of a portion of your farmland (the Farmland), be assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Summary

Your activities in obtaining preliminary approvals for development, are not regarded as being those of undertaking a business operation or isolated commercial transaction in relation to preparing the land for sale. The sale of the Farmland will be a mere realisation of a capital asset, therefor no part of the sale proceeds or profit on the sale of the Farmland will be assessable under section 6-5 of the ITAA 1997.

Detailed reasoning

Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of an Australian resident includes income according to ordinary concepts (ordinary income) derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Proceeds from the sale of land can give rise to ordinary income under section 6-5 of the ITAA 1997 either:

• where the land is held as trading stock and sold as part of carrying on a business of property development
• where the land in not trading stock and is old as part of an isolated commercial transaction entered into with a profit-making intention.

Alternatively, the sale of the land can be regarded as a mere realisation of a capital asset. In which case gains can be statutory income under the capital gains tax (CGT) provisions contained in Part 3-1 of the ITAA 1997.

Carrying on a business of property development

Section 995-1 of the ITAA 1997 states the term business includes any profession, trade, employment, vocation or calling, but does not include occupation as an employee.

Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? (TR 97/11). Although TR 97/11 deals with the issues of determining whether a taxpayer is carrying on a business of primary production, the same principles can be applied to the question of whether a taxpayer is in the business of property development.

In the Commissioner's view, the factors that are considered important in determining the question of business activity are:

• whether the activity has a significant commercial purpose or character
• whether the taxpayer has more than just an intention to engage in business
• whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity
• whether there is regularity and repetition of the activity
• whether the activity is of the same kind and carried on in a similar manner to that of ordinary trade in that line of business
• whether the activity is planned, organised and carried on in a businesslike manner such that it is described as making a profit
• the size, scale and permanency of the activity, and
• whether the activity is better described as a hobby, a form of recreation or sporting activity.

In determining whether a taxpayer is carrying on a business, no one indicator will be decisive. The indicators must be considered in combination and as a whole. Whether a business is being carried on depends on the large or general impressions gained from looking at all the indicators and whether these indicators provide the operations with a commercial flavour.

Based on the information provided and the above factors, we do not consider that your activities in applying for the preliminary approval amounted to the carrying on of a property development business.

Profits from an isolated transaction

In FC of T v The Myer Emporium (1987) 163 CLR 199; 87 ATC 4363; (1987) 18 ATR 693 (Myer Emporium), the Full High Court expressed the view that profits made by a taxpayer who enters into an isolated transaction with a profit making purpose can be assessable income.

Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income (TR 92/3), considers the assessability of profits on isolated transactions in light of the principles outlined in Myer Emporium. According to Paragraph 1 of TR 92/3, the term isolated transactions refers to:

• those transactions outside the ordinary course of business of a taxpayer carrying on a business, and
• those transactions entered into by non-business taxpayers.

Taxation Ruling TR 92/3 provides guidance in determining whether profits from isolated transactions are income and therefore assessable.

A profit from an isolated transaction will generally be income when:

• 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 or in carrying on a business operation or commercial transaction.

TR 92/3 lists the following factors which are relevant in determining whether an isolated transaction amounts to a business operation or commercial transaction:

• the nature of the entity undertaking the operation or transaction;
• the nature and scale of other activities undertaken by the taxpayer;
• the amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained;
• the nature, scale and complexity of the operation or transaction;
• the manner in which the operation or transaction was entered into or carried out;
• the nature of any connection between the relevant taxpayer and any other party to the operation or transaction;
• if the transaction involves the acquisition and disposal of property, the nature of that property; and
• the timing of the transaction and the various steps in the transaction.

In contrast, paragraph 36 of Taxation Ruling TR 92/3 notes 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 elements set out above it is generally not a mere realisation of an investment.

No single factor will be determinative rather it will be a combination of factors that will lead to a conclusion as to the character of the activities.

Based on the information provided and the above factors, we do not consider that your activities in applying for the preliminary approval amounted to a business operation or commercial transaction. Nor was the intention or purpose of profit from sale present at the time acquisition for the transaction to be considered an isolated transaction.

Mere Realisation

Where the sale is a 'mere realisation' the sale is on capital account to which the CGT rules will generally apply. These proceeds are not ordinary income.

A sale that is more than a 'mere realisation' will be on revenue account and proceeds will generally be assessable as either income from the carrying on of a business or income from a profit-making undertaking or scheme.

The expression 'mere realisation' is used to distinguish a mere realisation from a business operation or a commercial transaction carrying out a profit-making scheme. Lord Justice Clark, in distinguishing between proceeds that is mere realisation of capital and ordinary income, stated in California Copper Syndicate v Harris (1904) 5 TC 159 at pp 165-166 that:

...What is the line which separates the two classes of cases may be difficult to define, and each case must be considered according to its facts; the question to be determined being - is the sum of the gain that has been made a mere enhancement of values by realising a security, or is it a gain made in an operation of business in carrying out a scheme of profit-making?

The Full High Court case of Scottish Australian Mining Co Ltd v. Federal Commissioner of Taxation (1950) 81 CLR 188 (Scottish Australian Mining), found that based on the facts of that case, the subdivision of the land was considered no more than a mere realisation of a capital asset, and its subdivision was merely an enterprising way to realise an asset to its best advantage.

For many years it was felt that the doctrine of 'mere realisation' was applied so broadly that it was thought that only in exceptional circumstances would an isolated transaction fall within the ordinary concepts of income. However, the Full High Court case of FC of T v. Whitfords Beach Pty Ltd (1982) 150 CLR 355; 82 ATC 4031 (Whitfords Beach) has narrowed the scope of mere realisation. In this case, Justice Mason at page 385 stated that:

However, apart altogether from this factor, the facts previously mentioned show that there was involved more than mere realization of an asset. Deane J. was right in pointing to the circumstance that the asset was divided and improved in the course of a business of dividing and improving the asset. In this respect I do not agree with the proposition which appears to be founded on remarks in some of the judgments that sale of land which has been subdivided is necessarily no more than the realization of an asset merely because it is an enterprising way of realizing the asset to the best advantage. That may be so in the case where an area of land is merely divided into several allotments. But it is not so in a case such as the present where the planned subdivision takes place on a massive scale, involving the laying out and construction of roads, the provision of parklands, services and other improvements. All this amounts to development and improvement of the land to such a marked degree that it is impossible to say that it is mere realization of an asset. We need to bear in mind that the subdivision of broad acres into marketable residential allotments involves much more in the way of planning, development and improvement than was formerly the case

Application to your circumstances

It is accepted that your intention for acquiring the Farmland several decades ago, was solely for the use in your primary production business. This is supported by the long period of ownership and the continuous and ongoing use for farming purposes.

In this instance, you have not embarked on further activities beyond the preliminary approval stage. In fact, the preliminary approvals obtained do not actually allow for development to commence without further approvals.

You have decided to sell the Farmland in the process of winding back your primary production activities, prompted by the recent passing of your sibling and your advancing age. The Commissioner accepts the preliminary approvals for development of the Farmland will serve to simplify and expediate the approval process for potential purchasers expected to be property developers. This will improve your prospects for the sale.

Having regard to these factors, the Commissioner considers that, on balance, you have not engaged in the business of property development or undertaken business operations or commercial transactions in obtaining the preliminary approvals.

In preparing the Farmland for the proposed sale, your activities do not go beyond those of a mere realisation of a capital asset. Therefore, no part of the profit or proceeds from the sale will be assessable under section 6-5 of the ITAA 1997.

Question 2

Will the whole or part of the proceeds or profit from the sale of the Farmland be assessable income under section 15-15 of the ITAA 1997?

Summary

Section 15-15 of the ITAA 1997 cannot apply to the sale of the Farmland, regardless of whether gains are considered to be a profit-making undertaking or plan. Profit-making from the sale of property acquired on or after 20 September 1985 being specifically excluded. Profit-making from property acquired before 20 September 1985 falls under the previous provision being section 25A of the ITAA 1936.

Detailed reasoning

Section 15-15 of the ITAA 1997 includes in assessable income, profits arising from the carrying on or carrying out of a profit-making undertaking or plan.

However, profit from the sale of property acquired on or after 20 September 1985 is specifically excluded (paragraph 15-15(2)(b) of the ITAA 1997). Profit making from property acquired before 20 September 1985 falls under the previous provision being section 25A of the ITAA 1936.

On this basis, it can be concluded that section 15-15 of the ITAA 1997 cannot apply to profits from the sale of the Farmland regardless of whether the sale of the Farmland resulted in a profit that arose from the carrying on or carrying out of a profit-making undertaking or plan.

Question 3

Will the whole or part of the proceeds or profit from the sale of the Farmland be assessable income under section 25A of the ITAA 1936?

Summary

Section 25A of the ITAA 1936 cannot apply to the whole or parts of the proceeds from the sale of the Farmland, as the section cannot apply to profits arising in the 1997-98 or later income years.

Detailed reasoning

Section 25A of the ITAA 1936 can bring into assessable income the profit arising from the sale of property acquired for the purpose of profit-making by sale or from the carrying on or carrying out of a profit-making undertaking or scheme.

However, this section does not apply to a profit arising in the 1997-98 year of income or a later year of income, even if the undertaking or scheme was entered into, or began to be carried on or carried out, before the 1997-98 year of income (subsection 25A(1B) of the ITAA 1997).

As the sale of the Farmland will occur after the 1997-98 income year, the section cannot apply. It is therefore not necessary to consider whether the profit that arose from the carrying on or carrying out of a profit-making undertaking or plan.

Question 4

Will the anticipated capital gain on the sale of your interest in the Farmland acquired before 20 September 1985 be included in your assessable income under subsection 102-5(1) of the ITAA 1997?

Summary

Any capital gain from the sale of your interest in the Farmland acquired prior to 20 September 1985 will be disregarded under section 104-10(5) of the ITAA 1997. The approvals for the land development will not be regarded as a separate asset to the pre-CGT land if the approvals expenditure is less than 5% of the sale proceeds.

Detailed reasoning

Section 104-10(5) of the ITAA 1997 provides that a capital gain or loss you make is disregarded if you acquired the asset before 20 September 1985.

You acquired your original interest in the Farmland prior to 20 September 1985, therefore, any capital gain arising from the sale of this interest will be disregarded.

Unrelated improvement to pre-CGT land can be taken as separate CGT assets if its cost base when the CGT event occurs is more than the improvement threshold ($156,784 in the 2021-22 financial year), and more than 5% of the capital proceeds from the event (subsection 108-70(2) of the ITAA 1997).

You have incurred expenditure for the development approvals of $XXX and are expected to spend another $XXX on the updated approval. This combined amount being greater than the improvement threshold. However, the approvals will not be considered improvements to pre-CGT land unless expenditure to obtain exceeds 5% of the sale proceeds. Considering the recent valuation of the Farmland, it is unlikely the total costs on approvals will exceed 5% of the sale proceeds.

Question 5

Will the first element of the cost base of the interest in the Farmland you acquired as surviving joint tenant, be the market value of that interest, on the date of your sibling's death under subsection 128-50 of the ITAA 1997?

Summary

The first element of the cost base of the interest in the Farmland that you acquired as surviving joint tenant is the market value of this interest at the date of your sibling's death.

Detailed reasoning

Individuals who own a CGT asset as joint tenants are treated as if they each owned a separate CGT asset constituted by an equal interest in the asset, and as if each of them held that interest as a tenant in common (section 108-7 of the ITAA 1997).

If one of the joint tenants dies, the survivor is taken to have acquired the individual's interest in the asset on the day the individual died (subsection 128-50(2) of the ITAA 1997). If the individual who died acquired his interest in the asset before 20 September 1985, the first element of the cost base of the interest the survivor is taken to have acquired, is the market value of the deceased interest at date of death (subsection 128-50(4) of the ITAA 1997).

In this case, your sibling's interest in the Farmland was acquired before 20 September 1985. You are taken to have acquired this interest on the date of their death. The first element of the cost base of this interest, being the market value on this date.

Question 6

Will any capital gain on the sale of the interest in the Farmland you acquired as surviving joint be a discount capital gain with a discount amount of 50% under Division 115 of the ITAA 1997?

Summary

As the interest you acquired as surviving joint has been held for more than 12 months and indexation does not apply, if the CGT event results in a capital gain, you are entitled to apply the 50% general discount to the capital gain.

Detailed reasoning

Under section 115-10 of the ITAA 1997, to qualify for a discount capital gain the capital gain must be made by an individual, a complying superannuation entity, a trust or a life insurance company. The capital gain must result from a CGT event happening after 11:45am on 21 September 1999 (section 115-15 of the ITAA 1997) and must not have an indexed cost base (section 115-20 of the ITAA 1997). Also, the gain must result from a CGT event happening to an asset that was acquired at least 12 months before the CGT event (115-25 of the ITAA 1997).

The discount percentage for individuals who are not foreign or temporary residents is 50% (section 115-100 of the ITAA 1997).

In your case, the acquisition date for the purposes of calculating CGT on the sale of the interest you inherited is the date of your sibling's death being more than 12 months before the planned sale. The proposed sale will happen after 21 September 1999 and the interest will not have an indexed cost base. Accordingly, if the CGT event results in a capital gain, as an Australian resident individual, you are entitled to apply the 50% general discount to the capital gain.