Edited version of private advice

Authorisation Number: 1052013591603

Date of advice: 28 July 2022

Ruling

Subject: CGT - subdivision

Question

Will the proceeds from the sale of the subdivided lots be subject to the capital gains tax (CGT) provisions in Part 3-1 and Part 3-3 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes. Based on the information provided, the proceeds from the sale of the subdivided lots will not be ordinary income and not assessable under section 6-5 of the ITAA 1997 as either:

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

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

Therefore, any proceeds received on the disposal of the subdivided 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:

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You and your ex-spouse purchased a block of land (the Property) some XX years ago. The size of the land is approximately XX,XXX square meters.

In 20XX, your marriage ended, and you paid your ex-spouse an amount in accordance with a court order. As part of the court order, your ex-spouse's interest in the Property was transferred to you. You have rented a property to live in for many years following your divorce. Now that your children are growing up, you are in a position where you would like to build your own home.

The size of the land is too large for your needs and that is why you plan to subdivide and sell the blocks. The land is to be subdivided into several blocks.

The size of the blocks being sold are between XXXX and XXXX square metres each. The estimated market value of each block is between $XXX,XXX and $XXX,XXX.

The total cost of the subdivision is expected to be around $XXX,XXX when all of the work is complete. There is an expectation that roads and guttering will be required before the subdivision is complete.

Early last year, you applied to the council for permission to subdivide the land and sell the resulting subdivided blocks. Approval was received several months later. The blocks are currently with the surveyor for finalisation. Contracts are subject to these approvals being completed. Sale of the first few blocks will determine the timeline for completion of the remaining works and availability for sale of the remaining blocks.

You have received offers for several of the blocks. There are contracts in place for these blocks, but they have not been signed yet.

One of the blocks is being held for sale at a later date to a family friend. One block was advertised, and a real estate agent approached you regarding a third block as they had clients looking to purchase land.

A small portion of the land has a shed on it and your family have lived in the shed for a short period. Otherwise, the land has been sitting dormant since the time of purchase.

You have never previously been involved in subdivision activities or purchasing land for development.

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