Edited version of private advice

Authorisation Number: 1052383440013

Date of advice: 08 April 2025

Ruling

Subject: CGT - sale of property

Question 1

Will the profit on the sale of the subdivided lots constitute assessable income under section 6-5 or section 15-5 of the Income Tax Assessment Act 1997?

Answer 1

No.

Question 2

Will the capital gains tax (CGT) provisions in Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 apply in relation to the sale of the subdivided lots?

Answer 2

Yes.

Summary

The proceeds from the sale of the subdivided property is not ordinary income and not assessable under sections 6-5 or 15-15 of the Income Tax Assessment Act 1997 (ITAA 1997). The proceeds represent a mere realisation of a capital asset which will fall for consideration under the CGT provisions in Part 3-1 of the ITAA 1997.

Detailed reasoning

Income tax provisions

Under section 6-5 of the ITAA 1997, your assessable income includes the ordinary income you derived directly or indirectly from all sources, during the income year. Additionally, section 15-15 of the ITAA 1997 includes profit arising from the carrying on or carrying out of a profit-making undertaking or plan.

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 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.

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

•                your intention or purpose 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 out a business operation or commercial transaction.

Additionally, if a taxpayer acquires an asset with the intention of using it for personal enjoyment but later decides to commit the asset, either:

•                as the capital of a business or

•                into a profit-making undertaking with the characteristics of a business operation or commercial transaction, this activity constitutes the carrying on of a business, or a business operation or commercial transaction. The profit from such activity is income even though the taxpayer did not have the purpose of profit-making at the time of acquiring the asset.

Profits on the sale of subdivided land can therefore be income according to ordinary concepts within section 6-5 of the ITAA 1997, or as a profit-making undertaking or plan within section 15-15 of the ITAA 1997, if the taxpayer's subdivisional activities have become a separate business operation or commercial transaction, or an isolated profit-making venture.

In contrast, paragraph 36 of 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.

In your case, you purchased a block of land which was suitable for building a duplex. Your intention was to build equity in the duplex to assist your children into their own homes in the future. However, due to a change in personal circumstances your intention changed.

Therefore, the proceeds you received from the sale of the property are not ordinary income and not assessable under sections 6-5 or 15-15 of the ITAA 1997. The proceeds represent a mere realisation of a capital asset which will fall for consideration under the CGT provisions in Part 3-1 and 3-3 of the ITAA 1997.

This ruling applies for the following period:

Yean ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

In 20XX you and your spouse decided to build a duplex.

Your intention was to build a house for each of your children, to build equity in them to assist your children into their own homes in the future.

In 20XX you were renting a property where you had moved for work.

You work in the mining industry, and undertake underground mining.

In XX 20XX after the 20XX/XX border lockdowns, you decided to move back into the family home.

On XX XX 20XX you and your spouse purchased a block of land suitable for building a duplex on.

You contacted a reputable builder who looked after the whole process for you including the subdivision.

You have never been involved with any previous subdivisions or development activities.

You have never lived in the built duplex properties.

On XX XX 20XX you signed a building contract for $XX with your builder this included the subdivision cost and to build premises on 2 strata titled lots.

On XX XX 20XX you received the final Occupation Certificates.

During this time your parent-in-law was diagnosed with a terminal illness, your spouse assisting them with in home care.

Due to moving back to the family home you had changed employment to a FIFO job where you had negotiated XX days on and XX days off roster.

After 10 months of working for your new employer, your employer reneged on your contract and was making you work two weeks on and one week off.

Being away from your home placed a large amount of stress on your family, and you had to resign from your fulltime position and take a part-time job to assist your wife at home.

With interest rates raises, you refinanced with a different lender to try and bring the repayments down.

Your initial loan for the purchase and building of the duplex was X% per annum had risen to X%.

You ran into financial difficulty with the loss of your fulltime wage and interest rates increases were making holding the duplexes unaffordable as all your savings were being used to make your loan repayments.

During this period, one of your tenants moved out and you had an empty property for about 8 weeks, increasing your financial stress.

You took some time to consider your situation and what you and your spouse were trying to achieve, whether to sell both duplexes to relieve all financial stress or sell one and try to keep part of your plan of obtaining long term property for each of your children.

After considering your situation you decided to sell one of the duplexes.

On XX XX 20XX the property had contracts exchanged.

On XX XX 20XX settlement occurred.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 15-15

Income Tax Assessment Act 1997 section 104-10