Edited version of private advice

Authorisation Number: 1052281456104

Date of advice: 30 July 2024

Ruling

Subject: CGT - subdivision

Question

Are the proceeds from the sale of the properties, Lot A and Lot B, assessable as statutory income, on capital account, as a mere realisation of a capital asset and subject to the capital gains tax (CGT) provisions in Part 3-1 and 3-3 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes. The proceeds from the sale of the property are a mere realisation of a capital asset.

This ruling applies for the following period:

Year Ending 30 June 20YY

The scheme commenced on:

1 July 20YY

Relevant facts and circumstances

Person A purchased land in September 20XX.

They subdivided the land into two blocks - Lot A and Lot B.

Lot A has the original dwelling which was knocked down then a dwelling rebuilt on its original footprint. Lot B was empty land.

Person A intended for Lot A to be their primary residence and to sell Lot B to their partner's parent.

The intention was to sell Lot B at cost price (half land costs and half development costs).

The development application for the subdivision had already been lodged by the previous owners and Person A was informed by the real estate agent that it was almost completed but needed work which should only take a few months.

The subdivision started in February 20XX and was completed in January 20XX.

Currently Lot A still has significant weeds and rubble so is still in the progress of renovations while Lot B being smaller has already been cleared and is ready for sale.

The subdivision progressed slowly due to a variety of facts including covid, the former owner having engaged surveyors, delays in council assessments, more work to be done than anticipated, delays in tradespeople, delays in engineering.

Person A's profession is in the medical industry and not property development.

Person A undertook the activity of coordinating and chasing surveyors, engineers, council, bush regenerator, driveway contractor, plumber, electrical supply and electricians, NBN, demolition work and tree fellers, and other contractors in relation the subdivision of the land.

No GST has been claimed to date.

In March 20XX Person A and their partner separated.

In 20XX Person A's ex-partner's parent moved their house onto the division they were planning to purchase.

In July 20XX Person A found another block of land for sale and has decided to sell both blocks.

They plan to sell Lot B to their ex-partner's parent at the initial agreed value when this ruling has been issued.

They plan to sell Lot A at market value through a real estate agent from January to June 20XX.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 Part 3-3

Reasons for decision

Question

Are the proceeds from the sale of Lot A and Lot B, assessable as statutory income, on capital account, as a mere realisation of a capital asset and subject to the capital gains tax (CGT) provisions in Part 3-1 and 3-3 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Detailed reasoning

Income

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

Section 6-10 of the ITAA 1997 states your assessable income also includes some amounts that are not ordinary income, which is assessable as statutory income.

There are 3 ways the proceeds from a property development can be treated for taxation purposes:

•         Assessable ordinary income under section 6-5 of the ITAA 1997 as income from carrying on a business of property development;

•         Assessable ordinary income under section 6-5 of the ITAA 1997 as income from an isolated commercial transaction with a view to profit; or

•         A mere realisation of a capital asset, assessable under Parts 3-1 and 3-3 as statutory income.

Carrying on a business

Taxation Ruling 97/11 Income tax: am I carrying on a business of primary production? (TR 97/11) provides the Commissioners view on whether a taxpayer is carrying on a business. Although TR 97/11 deals with the issues in 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 carrying on any type of business including property subdivision and development.

Paragraph 13 of TR 97/11 states that the following indicators are relevant in determining 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.

Whether a business is being carried on depends on the impression gained from looking at all the indicators against the case facts and whether these indicators provide the operations with a commercial flavour.

Isolated Transactions

Taxation Ruling 92/3 Income tax: whether profits on isolated transactions are income (TR 92/3) provides guidance in determining whether profits from isolated transactions are ordinary income and therefore assessable under section 6-5 of the ITAA 1997.

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

a)            the intention or purpose of the 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 or in carrying out a business operation or commercial transaction.

Paragraph 7 of TR 92/3 goes on to state the relevant intention or purpose of the taxpayer (of making a profit or gain) is not the subjective intention or purpose of the taxpayer. Rather, it is the taxpayer's intention or purpose discerned from an objective consideration of the facts and circumstances of the case.

Paragraph 13 of TR 92/3 states some of the matters which may be relevant in considering whether an isolated transaction amounts to a business operation or commercial transaction:

a)            the nature of the entity undertaking the operation or transaction;

b)            the nature and scale of other activities undertaken by the taxpayer;

c)            the amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained;

d)            the nature, scale and complexity of the operation or transaction;

e)            the manner in which the operation or transaction was entered into or carried out;

f)            the nature of any connection between the relevant taxpayer and any other party to the operation or transaction;

g)            if the transaction involves the acquisition and disposal of property, the nature of that property; and

h)            the timing of the transaction or the various steps in the transaction.

If a transaction satisfies the elements set out above, it is generally not a mere realisation of an investment.

Application to your situation

Person A acquired the land in September 20XX and subdivided the land into two lots. their intention was to live in one lot and sell the other lot to their partner's parent at cost price.

However, Person A's relationship broke down and they decided in July 20XX to sell both blocks of land and buy a block somewhere else.

Person A is in the medical profession, so they do not work in building or property development industry.

This is a one-off project that is not considered to being carried out in a manner similar to other property development businesses. It does not have a commercial purpose or character. There is no repetition or regularity to the activity. The activity is on a small scale in comparison to that of the ordinary trade. The activity is not planned and organised in a businesslike manner and the activity size is small and a one-off activity. The activity is not considered to be a hobby.

Hence, we consider that the activities they have undertaken do not have the indicators of carrying on a business or isolated commercial transaction.

Therefore, on consideration of the facts and circumstances of the case, it is considered that the gain that will be made on the disposal of Lot A and Lot B is not from a commercial or business transaction of Person A. It is viewed as a mere realisation of a capital asset and will be assessable under Part 3-1 and Part 3-3 the ITAA 1997.