Private ruling: CGT - Subdivision of land
Published: April 2014
Ruling period: Year ended 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: 1. Will the proceeds received from the sale of the subdivided blocks be assessable pursuant to section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A3: Yes.

Relevant facts and circumstances: You purchased your main residence prior to the introduction of capital gains. You approached a real estate agent to discuss the sale of the property. They suggested subdividing the land into smaller lots as it could possibly make the sale easier in the current economic climate, rather than trying to sell the larger property in its present state. You contacted the relevant authority and subsequently applied for subdivision and were granted approval subject to certain conditions. You are not in the business of buying, selling or developing land and you are not registered for GST. You have not subdivided any land before, and you do not have plans to subdivide any other land.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5, | Income Tax Assessment Act 1997 Subsection 104-10(5), | Income Tax Assessment Act 1997 Subsection 108-70(3) and | Income Tax Assessment Act 1997 Section 108-80.

Reasons for decision: Summary: Under section 6-5 of the ITAA 1997, the assessable income of an Australian resident includes ordinary income derived both in and out of Australia during an income year. Ordinary income is defined as income according to ordinary concepts. 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. 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. However, if a transaction satisfies the elements set out above it is generally not a mere realisation of an investment. In your case, you do not carry on a business of buying, selling or developing land. You purchased the property as your main residence. You will have minimal involvement in the subdivision of the land and will only change the land to the extent that you are required for council purposes. Accordingly, the proceeds from the sale of the subdivided blocks will not be included in your ordinary income. Rather, the subdivision is considered to be a mere realisation of a capital asset and the proceeds will be subject to the capital gains tax provisions in Part 3-1 of the ITAA 1997. | Detailed Reasoning - Capital gains tax: As the land was acquired before 20 September 1985, it is a pre-CGT asset. Disposal of a pre-CGT asset does not give rise to a taxable capital gain in accordance with paragraph 104-10(5)(a) of the ITAA 1997. Furthermore, subdivision of the land does not alter its pre-CGT status. Taxation Determination TD 7 states: Where pre-CGT land is subdivided after 19 September 1985 the land will maintain its pre-CGT acquisition date because no CGT event has happened. The subdividing of the land is not itself a CGT event: section 112-25 of the ITAA 97. However, under subsection 108-70(3) of the ITAA 1997, capital improvements to a pre-CGT asset that are related to each other may be treated as a separate CGT asset if the total of their cost bases when a CGT event happens (for example a disposal) in relation to the asset is: • more than the improvement threshold for the relevant income year (for the year ended 30 June 2013, the threshold was $134,200), and • more than 5% of the capital proceeds from the event. In your case, the total subdivision and land development costs are considered related to each other in accordance with section 108-80 of the ITAA 1997. The total cost of these capital improvements is to be allocated over all of the subdivided blocks when determining if the capital improvements will be treated as a separate CGT asset. Your estimated expenditure of the subdivision indicates that the expenditure apportioned to each subdivided block will be significantly less than the improvement threshold for the relevant year. Accordingly, where this is the case, the capital improvement expenditure for the purposes of any subsequent disposal of any of these blocks of land will not be taken to be a separate CGT asset. Subsequently, as the capital improvements will not be treated as a separate CGT asset, the entire capital gain made on the disposal of the subdivided blocks will be disregarded under subsection 104-10(5) of the ITAA 1997.

2. Will the proceeds received from the sale of subdivided blocks be taxed under the capital gains tax provisions of the ITAA 1997? | 3. Will any capital gain or capital loss you make on the disposal of each subdivided block be disregarded for CGT purposes?