ATO ID 2005/157: Capital Allowances: project pools - project amount - taxable purpose
Date of decision: 6 May 2005
Year of income: Year ended 30 June 2005
Business line: Public Groups and International

Issue
Does the taxpayer's subdivision of their parcel of land which will make them a capital gain when realised constitute a project carried on for a taxable purpose within the project pooling provisions of Subdivision 40-I of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision
No. The project is not a project being carried on for a taxable purpose by the taxpayer within the project pooling provisions of Subdivision 40-I of the ITAA 1997.

Facts
The taxpayer owns a parcel of land on which they carried on a primary production business. Subsequently, the taxpayer commenced to subdivide the land into two parcels to maximise the return on the sale of the property. The taxpayer incurred expenditure on legal advice and various consultants in relation to the subdivision. The amount received by the taxpayer from the realisation of the subdivision will be taken into account in working out a net capital gain to be included in the taxpayer's assessable income.

Reasons for decision
Summary: Section 40-830 of the ITAA 1997 allows a deduction over the project life for project amounts allocated to a project pool. To be a 'project amount' under subsection 40-840(2) of the ITAA 1997, an amount must be capital expenditure which, in addition to satisfying paragraphs 40-840(2)(a) and 40-840(2)(b) of the ITAA 1997, must also satisfy paragraph 40-840(2)(c) of the ITAA 1997; namely, that it must be directly connected with a project that the taxpayer carries on or proposes to carry on for a taxable purpose. 'Taxable purpose' is defined in subsection 40-25(7) of the ITAA 1997 to be the purpose of producing assessable income; the purpose of exploration or prospecting; the purpose of mining site rehabilitation; or environmental protection activities. The phrase 'purpose of producing assessable income' is defined in subsection 995-1(1) of the ITAA 1997 to mean something done: Therefore, a project is carried on or proposed to be carried on for the purpose of producing assessable income if it is carried on or proposed to be carried on: Accordingly, to satisfy the 'taxable purpose' requirement, a taxpayer's project must be an income-producing activity. In this case, the taxpayer's project is subdividing and selling a capital asset, being their former farming land. As stated in paragraph 36 of Taxation Ruling TR 92/3, 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 ( Californian Copper Syndicate (Limited and Reduced) v. Harris (1904) 5 TC 159; Allied Pastoral Holdings Pty Ltd v. FC of T 83 ATC 4015; (1983) 13 ATR 835; Statham & Anor v. FC of T 89 ATC 4070; (1989) 20 ATR 228). The amount the taxpayer receives from the sale of the subdivided land will be taken into account in working out a net capital gain to be included in their assessable income. In this case, the holding of a parcel of land as an investment which makes a capital gain upon realisation means that the asset is not being used to gain or produce assessable income for the taxable purpose required by the project pooling provisions even though a net capital gain is statutorily required to be included in assessable income. As the test in paragraph 40-840(2)(c) of the ITAA 1997 is not satisfied, there is no project being carried on for a taxable purpose within the project pooling provisions of Subdivision 40-I of the ITAA 1997.

Legislative references: Income Tax Assessment Act 1997 Subdivision 40-I subsection 40-25(7) section 40-830 subsection 40-840(2) paragraph 40-840(2)(a) paragraph 40-840(2)(b) paragraph 40-840(2)(c) paragraph 40-840(2)(d) subsection 995-1(1)
Case references: Californian Copper Syndicate (Limited and Reduced) v. Harris (1904) 5 TC 159
Related public rulings and determinations: Taxation Ruling TR 92/3 | Taxation Ruling TR 2005/4
Related ATO interpretative decisions: ATO ID 2003/206 | ATO ID 2003/1090
Subject references: Capital Allowances CoE Project amount Project pool Taxable purpose Uniform capital allowances system