Private ruling: Capital gains tax
Published: June 2014
Ruling period: Year ending 30 June 2015 | Year ending 30 June 2016 | Year ending 30 June 2017 | Year ending 30 June 2018
Date scheme commenced: 1 July 2014

Ruling: Q1: Are the proceeds from the sale of the subdivided land considered a mere realisation of a capital asset for income tax purposes? | A1: Yes.

Relevant facts and circumstances: You and your spouse purchased a block of land prior to 20 September 1985. The property has been used as a principle place of residence for the entire ownership period. It has never been used to conduct business activities. You and your spouse are looking to dispose of the land to a developer who intends to construct new homes. The land is currently held on one title; however you and your spouse intend to subdivide the land into X equal titles which will be purchased separately. The transactions will occur over the next four years. The land will not be subdivided any further by you and your spouse. Once these transactions have been completed, there will be no further interaction between you and your spouse and the developer. The purchaser has requested early access to the property to perform some infrastructure works, but you and your spouse will not be involved. You and your spouse will not borrow funds to complete the subdivision. You and your spouse have submitted applications to council for the subdivision, but have not yet received approvals. You and your spouse have applied for the X title allotment as well as the permit for the major residential development.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 paragraph 104-10(5)(a) | Income Tax Assessment Act 1997 section 120-20

Reasons for decision: Summary: Under section 120-20 of the Income Tax Assessment Act 1997 (ITAA 1997), an entity will make a capital gain or a capital loss if a CGT event happens to a CGT asset. A capital gain on the disposal of an asset can be disregarded under paragraph 104-10(5)(a) of the ITAA 1997 if it was acquired prior to 20 September 1985. If you subdivide a block of land, each block that results is registered with a separate title. For CGT purposes, the original land parcel is divided into two or more separate assets. Subdividing land does not result in a capital gains tax (CGT) event if you retain ownership of the subdivided blocks. In this case, you and your spouse intend to subdivide the land into X blocks. There is no CGT event when the subdivision occurs, therefore the blocks will retain their pre CGT status. Profits from an isolated transaction Profits arising from an isolated business or commercial transaction will be ordinary income if the taxpayer's purpose or intention in entering into the transaction is to make a profit, even though the transaction may not be part of the ordinary activities of the taxpayer's business ( FC of T v. Myer Emporium Ltd 1987 163 CLR 199; 87 ATC 4363; 18 ATR 693) (Myer Emporium). Taxation Ruling TR 92/3 considers the principles outlined in the Myer Emporium case and provides guidance in determining whether profits from isolated transactions are assessable under section 6-5 of the ITAA 1997 as ordinary income. If a taxpayer makes a profit from a transaction or operation, that profit is income if the transaction or operation is not in the course of the taxpayers business but: • the intention or purpose of the taxpayer in entering into the profit-making transaction or operation was to make a profit or gain, and • the transaction or operation was entered into, and the profit was made, in carrying out a business operation or commercial transaction. Whether an isolated transaction is business or commercial in character will depend on the circumstances of each case. Where a taxpayer's activities have become a separate business operation or commercial transaction, the profits on the sale of subdivided land can be assessed as ordinary income within section 6-5 of the ITAA 1997. TR 92/3 lists the following factors to be considered: a) the nature of the entity undertaking the operation or transaction b) the nature and scale of other activities undertaken by the taxpayer c) the amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained d) the nature, scale and complexity of the operation or transaction e) the manner in which the operation or transaction was entered into or carried out f) the nature of any connection between the relevant taxpayer and any other party to the operation or transaction g) if the transaction involves the acquisition and disposal of property, the nature of that property, and h) the timing of the transaction or the various steps in the 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. Miscellaneous Taxation Ruling MT 2006/1 provides a list of specific factors relevant to isolated transactions and sales of real property. If several of the factors are present, it may be an indication that a business or an adventure or concern in the nature of trade is being carried on. These factors are as follows: • there is a change of purpose for which the land is held; • additional land is acquired to be added to the original parcel of land; • the parcel of land is brought into account as a business asset; • there is a coherent plan for the subdivision of the land; • there is a business organisation - for example a manager, office and letterhead; • borrowed funds financed the acquisition or subdivision; • interest on money borrowed to defray subdivisional costs was claimed as a business expense; • there is a level of development of the land beyond that necessary to secure council approval for the subdivision; and • buildings have been erected on the land. No single factor is determinative; rather it will be a combination of factors that will lead to a conclusion as to the character of the activities. | Detailed Reasoning - Application to your circumstances: In this case, given the scale of the activity, the time involved in the subdivision process and your level of involvement, any proceeds from the sale of the subdivided land will represent a mere realisation of a capital asset. As the land was acquired prior to 20 September 1985, any capital gain made on the sale of the blocks can be disregarded.