Edited version of private advice

Authorisation Number: 1052228979371

Date of advice: 13 March 2024

Ruling

Subject: CGT - property subdivision

Question

Will any of the proceeds from the sale of the subdivided Lots of land 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 subdivided 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 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 20YY

Year ending 30 June 20YY

The scheme commenced on:

1 July 20YY

Relevant facts and circumstances

In 19XXPerson A and Person B (You)purchased a property (the Property), which included a house and land of 1.13 hectares.

It was zoned rural residential and has been rezoned to General Residential Zone 1.

You purchased the Property so that You could live there as your main residence and raise your family. You have grown vegetables, fruit trees and it has occasionally been used as a horse paddock.

As at MM 20XX the market value of the house and land unsubdivided was between $X! - $X!.

After a series of major health issues, You decided that as you got older and dealt with potential a decline in mobility, You were concerned that You would not be able to look after and manage the land as would be required.

You made contact with local Council as to current zoning and requirements should you decide to undertake a subdivision and obtained a preliminary survey and advice from a surveyor about the suitability of your land for development.

In the middle of 20XX, the formal planning application was submitted to the local Council.

In MM 20XX the Council passed the application with some amendments.

You adjusted the development plan in accordance with Council's requirements.

In MM 20XX Development Plan approval was received from the local Council. The relevant water authority required additional planning and survey information. Some preliminary works were undertaken in MM 20XX.

In MM 20XX major civil works commenced and are currently underway. The land will be subdivided to meet the criteria of a Pilot Project. You are participating as a possible test case for sustainable subdivision within the local area. It requires certain criteria to be met to ensure and promote environmentally sustainable development.

There is no financial reward or compensation for participating in the project.

In order to meet the requirements of the project, you were only subdividing the land into X Lots (including the existing house Lot) instead of the maximum 12+ lots that would be allowed under the current local government planning scheme. The larger blocks allow for greater capacity to meet the sustainable requirements and to maintain current rural amenity.

As a result of local Council requests, you have reduced the number of Lots to X (including the existing house block). You will still retain one of the Lots for the construction of a new house.

The subdivision will require development of common roads and the provision of power, water and sewerage connection to each of the blocks.

You have engaged the services of the following entities:

•         Business A - Survey and Mapping - Initial Survey

•         Business B - Landscape and Urban Design - Project Management

•         Business C - Consulting - Civil Construction

•         Accounting & Financial Services - Financial Services

•         Solicitors - Legal Services

•         Business D - Tree health survey and management plan including removal.

•         Local real Estate

The total estimated costs to complete the subdivision is expected to be between $X! to $X!.

The subdivision costs will be funded by a combination of borrowings from your home loan account, savings and a loan from the Bank. Your original loan was from Bank A, however, by the time the Development Plan was approved, Bank A had altered their loan requirements and could no longer approve your application. The Bank have formally approved your application.

The subdivided Lots will be held in the name of Person A and Person B.

The existing house will be on X square metres, with the other X Lots varying in size between X to X square metres.

The estimated value of the subdivided Lots will be approximately $X! per lot.

You intend on selling X Lots for a total of $X! million.

You intend to keep one of the Lots for construction of a smaller energy efficient home for yourselves.

You would also like to keep the existing house on the X square metre Lot, but you may have to sell it to help repay some of the subdivision costs incurred.

One or two of the Lots may be sold by word of mouth however you have engaged a local Real Estate Agent to sell the Lots. You have received deposits for the sale of two Lots.

You are hopeful that subdivision activities will be complete by the end of 20XX.

You have identified a potential delay with a sewage discharge connection on an adjacent property. This is unrelated to your development and you have no control over the resolution of the decision.

You have not undertaken any subdivision activities or any business of land development in the past.

You do not have any plans to undertake subdivision activities or any business land development in the future.

Your land as a whole has not been on the market for sale during your period of ownership.

You are not registered for GST.

Assumptions

For the purpose of this ruling it is assumed that the sale of the Lots will occur during the period of 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