Edited version of private advice

Authorisation Number: 1051997868131

Date of advice: 24 June 2022

Ruling

Subject: Property subdivision - disposal - income versus revenue - superannuation - downsizer contributions

Issue 1

Question 1: Will the proceeds from the sale of the Subdivided Lot be assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997), on revenue account, as a result of carrying on a business of property development?

Answer: No.

Question 2: Will the proceeds from the sale of the Subdivided Lot be assessable under section 6-5 of the ITAA 1997, on revenue account, as a result of entering into a profit-making undertaking or isolated transaction?

Answer: No.

Question 3: Will any capital gain from the sale of the Subdivided lot be assessable as statutory income under the capital gains tax provisions contained in Parts 3-1 and 3-3 of the ITAA 1997?

Answer: No.

Issue 2

Question: Are you eligible to make Self-Managed Superannuation Fund contributions with sale proceeds from sale of the Subdivided Lot in accordance with the Downsizer Superannuation Eligibility provisions?

Answer: No.

This ruling applies for the following periods:

Income year ending 30 June 2022.

Income year ending 30 June 2023.

The scheme commences on:

1 July 2021.

Relevant facts and circumstances

You, being Person A and Person B, jointly purchased the Property prior to 20 September 1985.

The Property had a land area less than two hectares, with a house located on it, being zoned Residential.

The Property became your main residence following its purchase.

Due to your respective ages and health, you found the size of the Property too difficult to maintain so you decided to subdivide the Property and sell a portion of the land adjoining the house, keeping the subdivided lot the house is located, in which you would continue to reside.

You had discussions with the local town planner and local council, and with local land surveyor about the proposed subdivision.

An application was lodged with the council to subdivide the Property into two lots, with one lot of vacant land (the Subdivided Lot), and the other subdivided lot with the house located on it, which was approved.

You engaged the services of several parties to undertake activities in relation to the subdivision.

You used your personal savings to fund the subdivision activities.

The Subdivided Lot was put on the market but failed to sell at an auction held during the ruling period.

Following the failure to sell by auction, the Subdivided Lot has been marketed by a real estate agent for private sale, being described in the marketing campaign as summarised below:

•         Vacant land

•         Approved plans and permits in place for an architecturally designed home.

The Subdivided Lot will be sold during the ruling period.

Neither of you, nor any related entities, have undertaken any similar activities in the past and have no plans to undertake any similar activities in the future.

The Property has been your principal place of residence for more than ten years.

You are not registered for Goods and Services Tax.

Assumption

This ruling decision has been made on the assumption that you have not previously made a downsizer contribution.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 118-120

Income Tax Assessment Act 1997 subsection 118-120(3)

Income Tax Assessment Act 1997 section 118-165

Income Tax Assessment Act 1997 section 292-102

Income Tax Assessment Act 1997 paragraph 292-102(1)(b)

Income Tax Assessment Act 1997 section 995-1

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 Part 3-3

Reasons for decision

Issue 1

Taxation of the proceeds on the sale of subdivided land

There are three ways proceeds from a subdivision can be treated for taxation purposes as outlined below:

•         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; or

•         As ordinary income under section 6-5 of the ITAA 1997, on revenue account, as a result of an isolated commercial transaction entered into by a non-business taxpayer outside the ordinary course of business of a taxpayer carrying on a business, which is the commercial exploitation of an asset acquired by a profit-making purpose; or

•         As statutory income under the capital gains tax provisions contained in Parts 3-1 and 3-3 of the ITAA 1997 on the basis that a mere realisation of a capital asset has occurred.

Whether the proceeds are treated as income or capital depends on the situation and circumstances of each particular case.

Question 1: Will the proceeds from the sale of the Subdivided Lotbe assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997), on revenue account, as a result of carrying on a business of property development?

Carrying on a business of property development

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

The Commissioner's view on whether a taxpayer is carrying on a business is found in 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.

Paragraph 13 of TR 97/11, uses the following indicators to determine whether a taxpayer is carrying on a business:

•         whether the activity has a significant commercial purpose or character

•         whether there is repetition and regularity of the activity

•         whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business

•         whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at 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 a 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 flavor.

Application to your situation

Based on the information provided it is not viewed that your subdivision activities are the carrying on of a business in accordance with the factors listed in Taxation Ruling 97/11, and neither you nor any related entities have undertaken any similar activities in the past.

Nor are your activities viewed as the commencing of the carrying on of a business given that neither you nor any related entities have any intention to undertake any future subdivision activities.

Therefore, the proceeds from the sale of the Subdivided Lot will not be assessable under section 6-5 of the ITAA 1997 as a result of a carrying on of a business.

Question 2: Will the proceeds from the sale of the Subdivided Lot be assessable under section 6-5 of the ITAA 1997, on revenue account, as a result of entering into a profit-making undertaking or isolated transaction?

Isolated business transactions

Profits arising from an isolated transaction as a result of entering into a profit-making undertaking or scheme will be ordinary income under section 6-5 of the ITAA 1997, on revenue account, (FC of T v. Myer Emporium Ltd 1987 163 CLR 199; 87 ATC 4363; 18 ATR 693 (Myer Emporium)). This is distinguished from a 'mere realisation' which is not ordinary income.

Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income (TR 92/3) sets out the Commissioner's view on the application of the decision in Myer Emporium and provides guidance in determining whether profits from isolated transactions are assessable under section 6-5 of the ITAA 1997 as ordinary income.

Paragraph 1 of TR 92/3 provides that the term isolated transactions refers to:

(a)  those transactions outside the ordinary course of the business or a taxpayer carrying on a business; and

(b)  thosetransactions entered into by non-business taxpayers.

Paragraph 6 of TR 92/3 provides that a profit from an isolated transaction is generally income when both of the following elements are present:

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

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

In general, whether a profit from an isolated transaction is income according to ordinary concepts depends very much on the individual circumstances of the case.

Paragraph 13 of TR 92/3 lists the following factors which are relevant in considering whether an isolated transaction amounts to a business operation or a 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 or the various steps in the transaction.

In addition to the above factors, for the purposes of determining whether the activities undertaken in relation to real property and development equate to a profit-making undertaking or scheme, Miscellaneous Taxation Ruling MT 2006/1 (MT 2006/1) aligns itself with TR 92/3 and provides a list of factors which, if present may be an indication that a business or profit-making undertaking or scheme is being carried on.

In determining whether activities relating to isolated transactions are a profit-making undertaking or are the realisation of a capital asset, it is necessary to examine the facts and circumstances of each particular case. This may require a consideration of the factors outlined above; however, there may also be other relevant factors that need to be weighed up as part of the process of reaching an overall conclusion. 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.

Application to your situation

Based on the information provided it is not viewed that your subdivision activities are either a commercial transaction or profit-making undertaking in accordance with the principles contained in TR 92/3.

Therefore, the proceeds from the sale of the Subdivided Lot will not be assessable under section 6-5 of the ITAA 1997 as either a commercial transaction or profit-making undertaking

Question 3: Will the proceeds from the sale of the Subdivided lot be assessable as statutory income under the capital gains tax provisions contained in Parts 3-1 and 3-3 of the ITAA 1997?

Capital gains tax

The capital gains tax (CGT) provisions are contained in Parts 3-1 and 3-3 of the ITAA 1997. Broadly, the provisions include in your assessable income any assessable gain or loss made when a CGT event happens to a CGT asset that you own.

CGT event A1 happens if you dispose a CGT asset. A CGT asset is any kind of property or a legal or equitable right that is not property.

When a CGT asset (the original asset) is split into two or more assets (the new assets), such as when land is subdivided, the subdivision of the land into subdivided blocks is not a CGT event, according to subsection 112-25(2) of the ITAA 1997.

Where the original land was acquired before 20 September 1985, each new subdivided block will be viewed as having been acquired on the same date the original land was acquired and will retain its pre-CGT status, with any capital gain being made on its disposal being disregarded.

Application to your situation

As outlined above the proceeds from the sale of the Subdivided Lot will not be assessable under section 6-5 of the ITAA 1997 as a result of either a carrying on of a business or a profit-making undertaking.

Therefore, the sale of the Subdivided Lot will be subject to the CGT provisions.

Note: The Subdivided Lot will be viewed for CGT purposes as having been acquired on xx/xx/197x when the Property was originally purchased and will retain its pre-CGT status.

Therefore, any capital gain made on the sale of the Subdivided Lot can be disregarded under the CGT provisions contained in Parts 3-1 and 3-3 of the ITAA 1997.

Issue 2

Question: Are you eligible to make Self-Managed Superannuation Fund contributions with sale proceeds from sale of the Subdivided Lot in accordance with the Downsizer Superannuation Eligibility provisions?

Superannuation downsizer contributions

You have advised that you have subdivided your interest in the Property into two parts, being the dwelling and vacant land adjoining the dwelling.

The Commissioner of Taxation has published Law Companion Ruling 2018/9 - Housing affordability measures: contributing the proceeds of downsizing to superannuation (LCR 2018/9) which describes how the Commissioner will apply the downsizer requirements in section 292-102 of the Income Tax Assessment Act 1997 (ITAA 1997).

Paragraph 32 of the LCR 2018/9 states that an individual must have owned an interest in the land for at least 10 years prior to the disposal of the dwelling interest. All other requirements, including that the disposal must relate to a dwelling and that the main residence requirement is satisfied, continue to apply.

Paragraph 33 of the LCR 2018/9 states where the land on which the dwelling is situated has been subdivided within the last 10 years, the 10-year ownership test may also still be satisfied.

Paragraph 35 of the LCR 2018/9 States that subdividing land does not necessarily give rise to a CGT event, it merely splits the interest into separate assets in their own right. An ownership interest in the land on which the dwelling is situated is treated as being held from the time that the ownership interest in the original parcel was first held.

Paragraph 36 of the LCR 2018/9 states where a subdivision has occurred, it is important to note that the ownership interest in a dwelling requirement and the main residence exemption requirement must be satisfied for the contribution to be eligible to be treated as a downsizer contribution. These requirements will not be satisfied where you dispose a subdivided interest in land on which the dwelling is not situated unless:

•         the interest is adjacent land for the purposes of section 118-120 of the ITAA 1997, and

•         you dispose of the interest to the same person and at the same time as you dispose of the interest on which the dwelling is situated

Subsection 118-120(3) of the ITAA 1997 states:

The maximum area of adjacent land covered by the exemption for the CGT event (the current event) is 2 hectares, less the area of the land immediately under the dwelling.

Section 118-165 of the ITAA 1997 states:

The exemption does not apply to a CGT event that happens in relation to land, or a garage, storeroom or other structure, to which the exemption can extend under section 118-120 (about adjacent land) if that event does not also happen in relation to the dwelling or your ownership interest in it.

The Commissioner of Taxation has published Taxation Determination 1999/68 - Income tax: capital gains: is 'adjacent' land in terms of section 118-120 of the Income Tax Assessment Act 1997 limited to land contiguous to a dwelling? (TD 1999/68) which discusses land being adjacent to a dwelling in respect to section 118-20 of the ITAA 1997.

Paragraph 5 of the TD 1999/68 states the adjacent land must be used primarily for private or domestic purposes in association with your dwelling and the total area of land (including the land on which your dwelling is situated) must not exceed two hectares.

Paragraph 7 of the TD 1999/68 states the main residence exemption does not apply to a CGT event that happens in relation to adjacent land if the event does not happen in relation to the dwelling or your ownership interest in it: see section 118-165 of the ITAA 1997. If you dispose of adjacent land to the same person and at the same time as you dispose of your main residence, the exemption extends to the adjacent land. It does not extend to adjacent land, however, if you dispose of the land separately from the main residence, e.g., you dispose of the adjacent land to the same purchaser but at a different time from when you dispose of the main residence or you dispose of the adjacent land and the main residence to different purchasers even if the disposals happen at the same time.

It is determined that vacant land adjoining a dwelling will be considered as part of the dwelling for the purposes of downsizer requirements where both the dwelling and vacant land are disposed of.

Application to your situation

You have advised that you intend to continue to reside in the dwelling and will not dispose of the dwelling as part of the sale of subdivided vacant land adjoining the dwelling.

You have not met the prescribed eligibility criteria under paragraph 292-102(1)(b) of the ITAA 1997.

Based on this information you are not eligible to make a downsizer contribution using the proceeds of the sale of vacant land as the sale does not include disposal of your residence at the same time.