Private ruling: Property development
Date of advice: 20 February 2018
Published: June 2018
Ruling period: Income year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Will the proceeds from the sale of the subdivided blocks of land be assessable pursuant to sections 6-5 or 15-15 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes, under section 6-5 of the ITAA 1997. | Q2: Will the proceeds from the sale of the subdivided blocks of land be taxed under the Capital Gains Tax provisions in Part 3-1 of the ITAA 1997? | A2: No, to the extent that any capital gain is reduced under section 118-20 of the ITAA 1997 because an amount is included in your assessable income under section 6-5 of the ITAA 1997 or is disregarded under section 118-25 of the ITAA 1997.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. You inherited over XX hectares of land prior to 1985. The land was used for primary production purposes. You and your husband were carrying on a primary production business on a separate property at the time that you inherited the land. You then used the inherited land for primary production purposes for many years. The land has not since been used for income producing purposes and it continues to be your place of residence. The only improvements made to land are rebuilding of some farm sheds approximately 40 years ago. The land is currently zoned as Rural and has not been rezoned during the period of ownership. As your only income during retirement consisted of investment income from your savings and your husband’s small pension, you reluctantly had to sell the land to fund your retirement. You have granted an enduring Power of Attorney to two of your adult children. You and your family have no expertise in the subdivision of land. You and your family have not been involved in the subdivision of any other land and they have no plans to subdivide any other land. Prior Development – Stage 1 You originally listed the land for sale as one undeveloped lot seeking Expressions of Interest, however no offers were made. As an alternative to selling the whole property, your real estate agent introduced you to a development consultant. Although they were not prepared to pay the asking price for the entire property, they offered that, subject to local council subdivision approval, they would coordinate and pay all the costs to subdivide the property. They were to receive a portion of the proceeds from the sale of each allotment and you were to receive an advance payment of your share of the sale proceeds. You entered into an agreement with the developer and they proceeded to attend to the Council application process and coordinate the subdivision of the land as agreed. The development of Stage 1 of the subdivision then commenced. You registered for GST with effect from 1 July 20XX after receiving advice that you were carrying on an enterprise. You continue to be registered for GST and claim input tax credits on expenses connected to the subdivision including expenses in respect of the legal action. By this time Stage 1 of the development was completed, the sale prices of the blocks had to be reduced significantly and the developer’s expected margin was no longer achievable. In addition, the Council was no longer prepared to allow the subdivision to proceed as originally planned. As a result, the developer decided to not to continue with the subdivision. After deducting the value of the land at the margin scheme land valuation and accounting for all your expenses, including the legal expenses relating to the appeals process outlined below, you did not make a profit upon the sale of the Stage 1 lots. Council approval The Council had originally approved the subdivision of the land into a number of lots subject to meeting the requirements for each stage. However, changes to Council’s planning staff resulted in a vastly different approach to the environmental issues relating to the land. A new planning approval reduced the number of lots available and imposed much stricter requirements which resulted in it being impractical to subdivide the land at all. If the Council’s decision had been accepted the value of the landholding would have been dramatically reduced due to the fact that prices are expected to be less than expected due to usage restrictions due to environmental constraints. You engaged a law firm to appeal the Council in respect of the changed Council requirements. This appeal process took a considerable amount of time with numerous appeals. The length of this appeal process was out of your control and was far lengthier than you expected. Approval was finally made many years later. The approval contained a number of new conditions and environmental restrictions relating to the development of the land. The approval contained certain time restrictions, including a requirement that the owner/developer should lodge an application for a development permit for operational works for the next stage of development by a specific deadline. If this time frame was not met, the council approval would lapse. The unexpected and unpredictable cost of the legal action amounted to a considerable amount of money. This completely exhausted your funds that you had received from the sale of the XX lots in Stage 1. Current development A year after the new Council approval was made, a real estate agent approached you and your family to see if you were interested in selling the property. They were given the opportunity to seek out interested parties who would be prepared to buy the land and develop it themselves. The agent showed the property to several parties but no offers were received. As time was running out for any buyer to utilise the Council approval by the expiration date, your real estate agent introduced you and your family to a second developer. Although they were not interested in buying the land, they were interested in co-ordinating the subdivision on your behalf. They would be paid a percentage of the sale proceeds and would be reimbursed in full for all costs, including interest on funds that would need to be borrowed. The role of this developer would be to source and engage all consultants and the civil engineering contractor who would be responsible for the subdivisional work. The Council approval required input from a range of consultants due to the environmentally sensitive areas. The developer had good relationships with financiers of land subdivisions and would be able to assist with applications for finance for the next stage of the development. On advice from your accountants and lawyers, you established a Trust as it was apparent that, a separate entity would need to apply to borrow the required funds. The Trust is owned equally by four entities controlled by each of your adult children, who are also the ultimate beneficiaries of your will. You lodged an application for a development permit for operational works for the remaining subdivision, and these were subsequently approved by the Council. You and your family then entered into an Agreement with the developer. Under the Agreement you are responsible for the funding and payment of the development works. Once the subdivision of each stage of the lots is completed, you intend to engage the services of a real estate agent to list the land for sale. There will not be a sales office at the property. You and your family will not be involved in selling the blocks. The Trust took out a loan to be used for funding the development works, and other associated costs. You, along with your family members are the guarantors for the loan. The term of this loan has been extended until the lots have been sold. The Trust is registered for GST and is claiming input tax credits on the expenses that it is incurring. It will remit GST on the amount that you pay to the Trust when you receive the proceeds from sale of the subdivided lots. The development works for the next stage of the subdivision have commenced. You intend to complete each stage separately, using the sale of the previous stage to fund the next stage. The subdivision is being done this way as you do not want to borrow for an extended period to fund the development works. You have no intention to erect any buildings or structures on the subdivided land as part of the development works. All work done during the subdivision will be done to comply with the Council's requirements.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5. | Income Tax Assessment Act 1997 Section 15-15. | Income Tax Assessment Act 1997 Part 3-1. | Income Tax Assessment Act 1997 Section 102-5. | Income Tax Assessment Act 1997 Section 104-10. | Income Tax Assessment Act 1997 Section 108-5. | Income Tax Assessment Act 1997 Section 118-20. | Income Tax Assessment Act 1997 Section 118-25. | Income Tax Assessment Act 1997 Subsection 118-25(1). Summary | The proceeds from the proposed sale of land are considered to be ordinary income under section 6-5 of the ITAA 1997 as income from carrying on a business of property development. | Detailed reasoning | Section 6-5 of the ITAA 1997 includes in your assessable income, where you are an Australian resident, all ordinary income which you derive during an income year. Ordinary income is defined as income according to ordinary concepts. | Ordinary income generally includes income that arises in the ordinary course of a taxpayer’s business. In certain circumstances proceeds not within the ordinary course of the taxpayer’s business may form part of their ordinary income. | Therefore the following needs to be considered in order to determine whether the proceeds to be received from the sale of the land are: | ● assessable ordinary income under section 6-5 of the ITAA 1997 as income from carrying on a business of property development; or | ● assessable ordinary income under section 6-5 of the ITAA 1997 as income from an isolated commercial transaction with a view to a profit. | Carrying on a business of property development | The question of whether a business is being carried on is a question of fact and degree to be determined on a case by case basis. | Subsection 995-1(1) of the ITAA 1997 defines 'business' to include 'any profession, trade, employment, vocation or calling, but does not include occupation as an employee'. This definition simply states what activities may be included in a business; it does not provide any guidance for determining whether the nature, extent, and manner of undertaking those activities amount to the carrying on of a business. | Profits made on the sale of land can be considered ordinary income under section 6-5 of the ITAA of 1997 if the activities become a separate business operation. Taxation Ruling TR 92/3 Income Tax: whether profits on isolated transactions are income , at paragraph 11 states: | The transaction may take place in the course of carrying on a business even if the transaction is outside the ordinary course of the taxpayer’s business. | Further, Gibbs CJ in Whitfords Beach Pty Ltd v FC of T (1983) 14 ATR 247 at 253 provided the following commentary: | On the day that the shares were transferred…. ‘the taxpayer was transformed from a company which held land for the domestic purposes of its shareholders to a company whose purpose was to engage in a commercial venture with a view to profit.’ (page 4039) | The purpose of those controlling the taxpayer company was to engage in a business venture with a view to profit: ‘Counsel for the taxpayer submitted that it was not permissible to blur the distinction between the company and its shareholders. That of course is true, but in deciding whether what was done was an operation of business, it is relevant to consider the purpose with which the taxpayer acted, and, since the taxpayer is a company, the purposes of those who control it are its purposes.’ (page 4039) | Paragraph 13 of Taxation Ruling TR 97/11 Income Tax: am I carrying on a business of primary production states that the courts have held that the following indicators are relevant to whether or not a person is carrying on a business: | a) does the activity have a significant commercial purpose or character? | b) does the taxpayer have more than a mere intention to engage in business? | c) is there an intention to make a profit or a genuine belief that a profit will be made? Will the activity be profitable? | d) is there repetition and regularity in the activity? i.e., how often is the activity engaged in? | e) is the activity of the same kind and carried on in a similar way to that of the ordinary trade? | f) is the activity organised in a businesslike manner? | g) what is the size or scale of the activity? | h) is the activity better described as a hobby, a form of recreation or a sporting activity? | Application to your circumstances | The following considers the above indicators for your circumstances: | a) Significant commercial purpose or character | The 'significant commercial purpose or character' indicator is closely linked to the other indicators and is a generalisation drawn from the interaction of the other indicators. It is particularly linked to the size and scale of activity, the repetition and regularity of activity and the profit indicators. | Paragraph 29 of TR 97/11 provides that a way of establishing that a significant commercial purpose or character exists is to compare the activities with those of a taxpayer who is carrying on a similar activity that is a business. | Any knowledge, previous experience or skill of the taxpayer in the activity, and any advice taken by the taxpayer in the conduct of the business should also be considered but are not necessarily determinative. Although it is recognised that you and your family have no prior experience in developing land, this factor is not enough to support the view that you are not engaged in the business of land development. | Paragraph 30 of TR 97/11 outlines numerous factors that support the view that there is a significant commercial purpose or character. The following discussion addresses the factors. | You have registered for GST in respect of the subdivision. You are charging GST on the sale of the subdivided lots, and claiming your input tax credits in relation to your expenses. Registering for GST requires you to carry on an enterprise. While it is acknowledged that the requirements for carrying on an enterprise differs to those for carrying on a business, the fact that you are registered for GST contributes to the view that you have a significant commercial purpose. | You have received expert advice from relevant authorities, in the form of lawyers, real estate agents, valuers, land developers and various other authorities. These authorities provided you with professional advice and acted on your behalf in respect of the development. | Other facts in your situation discussed below in respect of the remaining factors also contribute to the fact you display a significant commercial purpose or character. These include factors such as the size and scale of the activity, the lengthy appeals process involved, the funding of the development works and your financial risk in the development and your intention to make a profit. All of these activities combined display a significant commercial purpose or character. | The Commissioner considers this to be a positive indicator of carrying on a business of land development. | b) Intention to engage in a business | In Inglis v. FC of T 80 ATC 4001 at 4004-4005; (1979) 10 ATR 493 at 496-497 , Brennan J stated: | The carrying on of a business is not a matter merely of intention. It is a matter of activity.... At the end of the day, the extent of activity determines whether the business is being carried on. That is a question of fact and degree. | We accept that at the time you inherited the land from your family, your intention was to reside on the land and to use it for primary production purposes. It is clear that you did not, nor did you have any intention to, carry on a business of land development when you acquired the land. | However, paragraph 42 of TR 92/3 provides that a taxpayer’s intention may change to profit-making after the time of acquisition. This is supported by the decision of the Federal Court in Stevenson v Commission of Taxation (1991) FCR 282 where doubt was raised in relation to the position that a landowner may only form a profit-making intention in respect of any asset at the time of acquisition. Although the landowner in Stevenson did not acquire land with an intention to resell it many years later, the landowner subdivided his land into 180 lots and the scale of the borrowings used to finance the subdivision and sale of the land resulted in the commitment of the use of the land to a profit-making undertaking scheme or business activity. | You claim that your situation differs to that of Stevenson as you have not taken an active role in the development. However, we note that your sons via their power of attorney have taken a role in the development on your behalf. Although this level of involvement may have not been to the scale as evidenced in Stevenson, your sons have engaged a range of professionals to act on behalf of you and your family, and it is via these professionals that you and your family has taken an active role in the development. | This view is supported by Abeles & Anor v FC of T (1991) 91 ATC 4756; (1991) 22 ATR 504, where the fact that the subdivision was largely carried out by an agent acting on behalf of the taxpayers was not an impediment to a finding that the resulting profits were on revenue account. At 4763, O’Loughlin J stated that the taxpayers could not hide behind their agent. “He was their agent and his conduct was their conduct." | In FC of T v. Whitfords Beach Pty Ltd (1982) 150 CLR 355; (1982) 82 ATC 4031; [1982] HCA 8 (‘Whitfords Beach’) land previously held as a capital asset was subdivided and sold. The High Court held that the taxpayer’s actions amounted to more than a mere realisation of a capital asset and as such constituted the carrying on of a business of land development. In this case Mason J noted, ‘[w]here the planned subdivision takes place on a massive scale, involving the laying-out and construction of roads, the provision of parklands, services and other improvements. All this amounts to development and improvement of the land to such a marked degree that it is impossible to say that it is mere realization of an asset.’ | Having regard to the scale of activities and the degree of development and improvement of the land, the Commissioner considers that your intention for the land has changed from that of a mere realisation of the land, to one of developing the property for sale in the business of property development. | The Commissioner considers this to be a positive indicator of carrying on a business of land development. | c) Is there an intention to make a profit or a genuine belief that a profit will be made? | Stronger evidence of an intention to make a profit occurs when you have conducted research into your proposed activity, consulted experts or received advice on the running of the activity and the profitability of it before setting up the business. | You have stated that you intend to sell the lots to provide for your retirement as your only income consisted of investment income from your savings and your husband’s pension. Your landholding precluded you and your husband from other pension income entitlements due to the assets test. This statement supports the view that your goal in undertaking the subdivision is to make a significant profit from the sale of the subdivided lots. | You have engaged professionals to act on your behalf in respect of the development. You have also had two valuations conducted on the land in order for you to calculate an amount in respect of GST and to project profits. | The figures prepared show that the next stage of the development is expected to be sold for a substantial amount of profit. | The Commissioner considers that you have intentions to make profit from the activity. You have conducted research into your proposed activity, consulted experts or received advice on the running of the activity and the profitability of it before starting the business. These are all positive indicators of carrying on a business of land development. | The fact that you did not actually make a profit from the Stage 1 development does not alter this view. Paragraph 48 of TR 97/11 provides that it is not necessary for the primary production activities to make a profit in every year of income in order to classify the activities as a business of primary production. This is supported by Ferguson at ATC 4264; ATR 876 where Bowen CJ and Franki J stated that ‘…an immediate purpose of profit-making in a particular income year does not appear to be essential…’ | d) Is there repetition and regularity in the activity? | It is often a feature of a business that similar sorts of activities are repeated on a regular basis. The repetition of activities by the same person over a period of time on a regular basis helps to determine whether there is the 'carrying on' of a business. | While it is recognised that the sale of the subdivided lots cannot be an infinite business, there is some repetition and regularity to the sale of the subdivided lots in stages as it is expected that the development of each subsequent stage will commence upon the completion of the relevant preceding stage. | Although Stage 1 of the subdivision was completed considerably earlier than the remaining stages, this was due to the extensive legal action with the Council which was largely out of your control. The delay was not attributable to your lack of carrying on the business or unwillingness to proceed with the development. | The Commissioner considers these to be positive indicators of carrying on a business of land development. | e) Is the activity of the same kind and carried on in a similar way to that of the ordinary trade? | An activity is more likely to be a business when it is carried on in a manner similar to that in which other participants in the same industry carry on their activities. The following discussion addresses the factors listed in paragraph 64 of TR 97/11 which might be compared with the characteristics of others engaged in the same type of business. | The volume of sales of the subdivided lots is expected to be consistent with other subdivisions. Over the development of the whole land, there will be numerous lots developed. The lots will be sold to the general public by a real estate agent at a considerable profit, which again is consistent with other developments. | You have engaged a range of professionals to assist you with the development of the land. You have engaged the developer, an experienced developer to carry out all of the works in relation to the subdivision. You have also engaged a real estate agent to sell the subdivided lots and lawyers throughout the appeals process. | Under the agreement with the developer, you are funding the development works of the development and therefore you are assuming the financial risk of the development. You have borrowed funds to fund your legal expenses incurred during the appeals process with the Council, and you have claimed your expenses in your returns in respect of these borrowed funds. You have also established a fixed unit trust to apply for these loans. | You have a considerable amount of control over the development. The agreement with the developer provides that the timing of the development works will be at your absolute discretion, and you also have the discretion to sell any or all the stages prior to or during completion of the development works. The agreement provides that the developer will consult with you in respect of its listed obligations in relation to the administration of the project. | The development of your land cannot be likened to that of a keen amateur. A keen amateur would not invest the amount of funds that you have invested into the development. They also would not have engaged the amount of professional services that you have, nor registered for GST and formed a Trust. | The Commissioner contends that all of these factors have been carried out in a manner similar to other land developers. | The Commissioner considers that these are positive indicators of carrying on a business of land development. | f) Is the activity organised in a businesslike manner? | As outlined in paragraph 68 of TR 97/11, a business is characteristically carried on in a systematic and organised manner rather than on an ad hoc basis. An activity should generally conform with ordinary commercial principles to amount to the carrying on of a business. | You had plans drawn up to subdivide the land in its entirety from the outset. Although the development will be done in a number of stages, the details of each of those stages, including the layout of the lots and building envelopes, easements roads and parklands were designed and determined before the development had begun. You engaged several different professional services to draw up these plans at a cost to you. This fact clearly shows that the development will not be done on an ad hoc basis, albeit in several stages. | It is expected that sufficient records are being kept documenting the development of the land for the purposes of preparing and lodging your activity statements. The developer is tracking all the expenses in relation to the development works on your behalf. | Similarly, it would be expected that the real estate agent would be tracking the sales proceeds from the sale of the subdivided lots including the GST charged, as would other professionals in relation to various expenses in respect of the development. All these records will be maintained in a businesslike manner. | The Commissioner considers that this is a positive indicator of carrying on a business of land development. | g) What is the size or scale of the activity? | The size or scale of the activity is not a determinative test, and a person may carry on a business in a small way, see Thomas at ATC 4099; ATR 171 . However, if the scale of the activities result in more than is required for your own domestic needs combined with an intention to profit from the activities and a reasonable expectation of doing so, a business may be carried on despite the scale. | Mason J in Whitfords Beach Pty Ltd v FC of T (1982) ATC 4031 made the following comments at paragraph 37: | I do not agree with the proposition which appears to be founded on remarks in some of the judgments that sale of land which has been subdivided is necessarily no more than the realization of an asset merely because it is an enterprising way of realizing the asset to the best advantage. That may be so in the case where an area of land is merely divided into several allotments. But it is not so in a case such as the present where the planned subdivision takes place on a massive scale, involving the laying out and construction of roads, the provision of parklands, services and other improvements. All this amounts to development and improvement of the land to such a marked degree that it is impossible to say that it is mere realization of an asset. We need to bear in mind that the subdivision of broad acres into marketable residential allotments involves much more in the way of planning, development and improvement than was formerly the case. | The size of your development is considerable, with over XX hectares to be subdivided in addition to a provision for considerable parkland. This amount of land is obviously more than you require personally. | Although figures are not available for the entire development, the estimated net profit of the lots sold in the next stage is expected to be considerable. When these figures are taken into account for the remaining stages of the subdivision, it is expected that your profit will be a considerable amount. | Additionally, the length of time and expenses incurred in relation to the appeals process with the Council, goes far beyond what a person who is not carrying on a business of land development would incur. | The Commissioner contends that the scale of the activities and the improvements to the land goes beyond merely realising the asset in the most enterprising way. | The Commissioner considers that this is a positive indicator of carrying on a business of land development. | h) Is the activity better described as a hobby, a form of recreation or a sporting activity? | The pursuit of a hobby is not the carrying on of a business for taxation purposes. Money derived from the pursuit of a hobby is not regarded as income and therefore is not assessable. | Paragraph 87 of TR 97/11 outlines a number of factors that may be present when an activity is more likely to be a hobby rather than a business activity. Your activities do not satisfy any of those factors and consequently the Commissioner considers that your activities are not a hobby or a form of recreation. | Casimaty v FC of T 97 ATC 5135 | You claim that your case is similar to Casimaty v FC of T 97 ATC 5135 (Casimaty) and therefore the sale of the subdivided land will be a mere realisation of a capital asset and will not be assessable under section 6-5 of the ITAA 1997. | In Casimaty the taxpayer acquired a farming property as a gift from his father in 1955. The next year he purchased more land on which he erected a homestead. For the next 20 years, the taxpayer conducted a farming business on the land but because of growing debt and ill health, he subdivided and sold off a large part of the property. From about 1975 to 1996, approximately 60 allotments were sold off from time to time in eight separate subdivisions. The only works carried out to prepare the land for sale were those required by council for the subdivision. The taxpayer did not claim deductions for costs incurred in subdividing. | The court held that the sales from the subdivisions occurred as part of the mere realisation of a capital asset of the taxpayer. In reaching this conclusion, Ryan J considered the following matters: | ● The indisputable fact that the taxpayer acquired and continued to hold the property for use as a residence and conduct of a business of primary production, there being nothing to suggest a change in the purpose or object with which the property was held (distinguishing Whitfords Beach); | ● The taxpayer did not acquire other land to be added to the original land; | ● The taxpayer had previously carried on farming and fencing business activities with his wife and son respectively but did not attempt to bring the property to account as a partnership asset. Nor did he seek to claim as a business expense the interest on moneys borrowed to finance the subdivisional costs | ● The subdivision was undertaken piecemeal in response to the exigencies of increasing debt and deteriorating health. No coherent plan was conceived at the outset for the development; | ● The taxpayer did not undertake any development or works beyond that necessary to secure the council approval for the subdivisions and enhance the presentation of the various lots; and | ● He did not set up a sales organisation or advertise or conduct sales himself. | We agree that your situation contains some similarities to that in Casimaty. Like Casimaty, you inherited land which was originally used for farming purposes and you commenced the process of development due to your financial position. | However, there are also some major differences that do not allow you to rely on it to support the conclusion that the sale of the subdivided lots is a mere realisation of a capital asset. Casimaty can be can be distinguished from your situation for the following reasons: | ● The development is carried on in a businesslike manner. You have a plan of subdivision for the entire land at the outset of the development. | ● The scale of activity, with the development encompassing significant earthworks, construction and the provision of services associated with high density residential developments, as opposed to Casimaty , which had limited earthworks, construction and provision of services that one associates with low density rural/farmland subdivisions. | ● You have engaged a number of professionals to act on your behalf. | ● The amount of resources committed to the planning approval and the appeals process. You incurred considerable legal expenses to appeal the planning approval, and this process took a considerable amount of time; | ● You are responsible for funding the development works and you have undertaken borrowings to fund these works which mean you are taking on the financial risk of the project; | ● You have established a unit trust to enter into the development agreement with the developer and to undertake borrowings; | ● You and the unit trust have claimed interest on your borrowings in your activity statements, along with other related costs; | ● You are registered for GST in respect of the development and are charging GST on the sale of the developed lots; and | ● The development agreement gives you a certain amount of control over the development. | Conclusion | Weighing all of the evidence together, on balance, it is more likely than not that the proposed sale of the subdivided property does not constitute a mere realisation of a CGT asset. In contrast, the proceeds from the sale of land are considered to be income from carrying on a business of property development and therefore ordinary income under section 6-5 of the ITAA 1997. | As the Commissioner considers that the sale proceeds are ordinary income from carrying on a business of property development and assessable under section 6-5 of the ITAA 1997, it is not necessary to consider whether your activity would generate profits from an isolated transaction that are assessable income under section 15-15 of the ITAA 1997. | Question 2 | Summary | Any capital gain that arises on each disposal will be disregarded under section 118-25 of the ITAA 1997 or be reduced to the extent that the amount is included in assessable income under section 118-20 of the ITAA 1997. | Detailed reasoning | The capital gains tax provisions apply when a CGT event happens to a CGT asset. Land, or an interest in land and property, is a CGT asset (section 108-5 of the ITAA 1997). The disposal of a CGT asset such as land and property is a CGT event A1 under section 104-10 of the ITAA 1997. | However, a capital gain or loss made from the disposal of an asset that was acquired prior to 20 September 1985 is generally exempt from CGT. | When you dispose of the subdivided lots, CGT event A1 occurs. The time of the event is when you enter into each contract for disposal. If there is no contract, the CGT event A1 happens when the change of ownership in the asset occurs. You make a capital gain if the capital proceeds (that is, the amount received) from the disposal of the CGT asset is more than its cost base. | Subsection 118-25(1) of the ITAA 1997 applies to disregard any capital gain or loss made from a CGT asset which is considered to be trading stock. It states: | A *capital gain or *capital loss you make from a *CGT asset is disregarded if, at the time of the *CGT event, the asset is: | (a) your *trading stock; or | (b) if you are a partner, trading stock of the partnership; or | (c) if you are absolutely entitled to the asset as against the trustee of a trust (disregarding any legal disability), trading stock of the trustee. | Therefore, even though CGT event A1 will occur on sale of the subdivided lots, subsection 118-25(1) of the ITAA 1997 applies to disregard any capital gain or loss where the asset is held as trading stock. | Alternatively, if the CGT asset is not your trading stock, but nevertheless the proceeds from sale of the subdivided lots are assessable as ordinary income under section 6-5 of the ITAA 1997, then section 118-20 of ITAA 1997 would apply to reduce any capital gain by the amount otherwise included in your assessable income. | Section 118-20 of the ITAA 1997 provides that a capital gain will be reduced if the amount is otherwise assessable under another provision of the ITAA 1997. | Therefore, whilst a CGT event may in fact happen, if an amount is otherwise included as ordinary assessable income under section 6-5 of the ITAA 1997, any capital gain will be reduced to the extent of that ordinary income included.