Private ruling: Assessable income – land subdivision
Date of advice: 4 October 2018
Published: November 2018
Ruling period: Year ending 30 June 2019 | Year ending 30 June 2020 | Year ending 30 June 2021 | Year ending 30 June 2022
Date scheme commenced: 1 July 2013

Ruling: Q1: Will the proceeds from the development and sale of land be considered assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. You do not have any history of being involved in property development, nor have you demonstrated the regularity or continuity usually associated with a property development business. It is considered that you are not carrying on a business of property development and therefore the proceeds from the sale of your land will not be assessable under section 6-5 of the ITAA 1997 as either ordinary income or a profit making scheme. Further information on the factors used to determine if you are in business for tax purposes can be found in Taxation Ruling TR 97/11. | Q2: Will the proceeds from the development and sale of your land be subject to the Capital Gains Tax (CGT) provisions in Part 3-1 of the ITAA 1997? | A2: Yes. In your circumstances it is considered that the sale of your land represents a mere realisation of capital assets in the most enterprising way available so as to maximise the proceeds of sale. Accordingly, any profit on the sale of subdivided lots will fall for consideration under the CGT provisions in Part 3-1 of the ITAA 1997.

Relevant facts and circumstances: You have been operating a business as a sole trader since 20XX. You have acquired approximately XXX acres of land over a number of titles with the intention of using the land in connection with your business. The land was acquired as follows: a. Lot A, • You purchased a 50% fractional interest in this land parcel in July 20XX for $X. • You purchased the remaining 50% interest in this land parcel in March 20XX for $X. You had sole right to use the whole of Lot A in connection with your business since the acquisition of your first 50% interest in the land parcel. b. Lot B, purchased in July 20XX c. A small 2 lot subdivision bordering Lot B was bought by you in November 20XX. In 20XX, prior to this purchase, a portion of the total land area you now own (XX%) was rezoned to “Urban Growth Zone”. The Government authority has since approved high density residential development of this portion of land. The percentage of Lot A that is now in the Urban Growth Zone is XX%. The percentage of Lot B that is now in the Urban Growth Zone is XX%. The balance of the land remains as originally zoned. You had no involvement in the rezoning. At all times, you solely used the land for your business. When acquired, improvements to the land were minimal. You are considering selling the land to clear your personal debts, provide for your retirement and provide a financial endowment for your family. In late 20XX, you made contact with a local estate agent to explore the option of selling the land in its entirety. One offer was received but was not acceptable to you. The agent suggested that you might be able to maximise your return by engaging a developer to subdivide and develop the land into residential lots for separate sale to the public. You were subsequently introduced to W Pty Ltd (W), a professional land development company, and you have been in negotiations in relation to developing the land for sale. W proposed to develop the land for sale in exchange for a fee. The key terms of the proposal are as follows: a) W will attend to all matters required to effect the development and sale of the land. This will include matters such as: i. Applying for planning permits; ii. Consultation with authorities; iii. Carrying out construction works; iv. Engaging consultants, contracts, builders etc. as required; v. Marketing lots for sale, and appointing sales agents; vi. Determining minimum sale price for lots; and vii. Collecting sales proceeds and disbursing them to the client. b) You will remain owner of the land throughout the development. No title in the land will pass to W or any other entity to effect the development. You will individually enter into contracts of sales with purchasers of subdivided land lots. c) W will be responsible for initially paying all development costs. It will have the right to be reimbursed these amounts from sale proceeds only as they are received on your behalf. d) In consideration for the development services provided by W, it will be entitled to a “management fee” of X% of the proceeds for the sale of each lot and a “development fee” set at XX% of the proceeds received for the sale of each lot less the recoupment of the development costs and the management fee. W proposed to develop the land into approximately XXX lots (XX residential lots, and XX large-lots) over approximately X years. The planning, financing, and approvals phase were expected to conclude around December 20XX. The development works, marketing, and land sales were expected to commence in January 20XX and be complete by December 20XX. You entered into the development agreement with W in December 20XX. Between 20XX and 20XX sales contracts have been entered into in relation to Stage 1 of the development, located on Lot A. Stage 2 of the development is planned to commence in the near future. Lots in Stage 2 and part of Stage 3 are currently available for sale. You intend to continue to use the land in connection with your business for some time after formally committing the land subdivision. This may continue for a few years until such time as works to the land make this impossible. You have no prior direct or indirect experience in land development activity.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Part 3-1