Private ruling: Property subdivision, sale of existing dwelling, construction of new dwelling
Published: September 2014
Ruling period: Year ended 30 June 2014 | Year ending 30 June 2015
Date scheme commenced: 1 July 2013

Ruling: Q1: Will your sale of the existing house from your subdivision be treated on revenue account? | A1: Yes

Relevant facts and circumstances: You purchased the residential property, which, due to its zoning, was able to be subdivided into X blocks. You rented from the date of purchase. Months after your date of purchase, you engaged the services of an engineering firm to commence subdivision proceedings on the property, which they promptly submitted to council. Your intention, once the subdivision has been completed, is to sell the existing house located on the front property and to build a new house on the rear lot for rental. You advised by phone you initially purchased the property as an investment but decided on the subdivision after obtaining a better paid job.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 8-1 | Income Tax Assessment Act 1997 Section 10-5 | Income Tax Assessment Act 1997 Section 102-5

Reasons for decision: Summary: There are three ways profits from a land sub-division and/or property development can be treated for taxation purposes: (1) As ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997), on revenue account, as a result of carrying on a business of property development, involving the sale of land as trading stock. (2) As ordinary income under section 6-5 of the ITAA 1997, on revenue account, as a result of an isolated commercial transaction entered into by a non-business taxpayer or outside the ordinary course of business of a taxpayer carrying on a business, which is the commercial exploitation of an asset acquired for a profit making purpose. (3) As statutory income under the capital gains tax (CGT) legislation, (sections 10-5 and 102-5 of the ITAA 1997), on the basis that a mere realisation of a capital asset has occurred. Taxation Ruling TR 92/3 is about whether profits on isolated transactions are of a commercial nature that fall on revenue account. Here, in relation to the disposal of property, paragraphs 9 and 49 state: The taxpayer must have the requisite purpose at the time of entering into the relevant transaction or operation. If a transaction or operation involves the sale of property, it is usually, but not always, necessary that the taxpayer has the purpose of profit-making at the time of acquiring the property. …if the transaction involves the acquisition and disposal of property…if the property has no use other than as the subject of trade, the conclusion that the property was acquired for the purpose of trade and, therefore, that the transaction was commercial in nature, would be readily drawn… Other matters TR 92/3 states which may be relevant in considering whether an isolated transaction amounts to a business operation or commercial transaction are the following: • the nature of the entity undertaking the operation or transaction…. For example, if the taxpayer is a corporation with substantial assets rather than an individual, that may be an indication that the operation or transaction was commercial in nature. • the nature and scale of other activities undertaken by the taxpayer… • the amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained; • the nature, scale and complexity of the operation or transaction; • the manner in which the operation or transaction was entered into or carried out. This factor would include whether professional agents and advisers were used and whether the operation or transaction took place in a public market; • the nature of any connection between the relevant taxpayer and any other party to the operation or transaction. For example, the relationship between the parties may suggest that the operation or transaction was essentially a family dealing and not business or commercial in nature; • the timing of the transaction or the various steps in the transaction... For example, if the relevant transaction consists of the acquisition and disposal of property, the holding of the property for many years may indicate that the transaction was not business or commercial in nature. The mere fact a property may be rented for an interim period does not necessarily preclude it from being subject to a revenue transaction. For example, in ATO Interpretative Decision ATO ID 2003/377, the Commissioner ruled in respect to a taxpayer carrying on a business: The building was developed and otherwise held by the taxpayer as an item of trading stock. The interim rental of the building does not alter that position. Importantly, paragraphs 7 and 8 of TR 92/3 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. It is not necessary that the intention or purpose of profit-making be the sole or dominant intention or purpose for entering into the transaction. It is sufficient if profit-making is a significant purpose. In your case, based on an objective consideration of the facts and circumstances of your case, we consider the sale of the existing house from your subdivision will be a revenue transaction. This is because: (i) the property was zoned as subdividable when you purchased the property; (ii) you commenced subdivision proceedings on the property some months after its purchase (which we consider to be a relatively short period of time) and; (iii) you hope use the proceeds from the sale of the existing house to finance your construction of a rental property, which gives the impression the purpose of the existing house is for commercial trade and short term profit rather than for investing. That the existing house represents property that may be further subdivided adds to the impression it may be suitable for short term profit making. Although you contend that your intention when buying the property was for a long term investment and you decided on subdivision only after obtaining a better paid job, in weighting up the objective evidence, selling an existing dwelling (months after purchase) after subdividing the land in order to use the sale proceeds to construct a new dwelling seems not characteristic of investing but more in the nature of an enterprise or adventure in trade.