Private ruling: Capital gains tax - subdivision of land
Date of advice: 28 April 2017
Published: September 2017
Ruling period: The year ended 30 June 20VV. | The year ending 30 June 20WW. | The year ending 30 June 20YY. | The year ending 30 June 20ZZ.
Date scheme commenced: 20XX.

Ruling: Q1: Will the proceeds from the sale of the subdivided lots be subject to the capital gains tax (CGT) provisions in Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 (ITAA)? | A1: Yes. | Q2: Will the proceeds from the sale of the subdivided lots be assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A2: No.

Relevant facts and circumstances: You acquired a property in 20XX. You acquired the property from a family member upon retirement from active farming. Your family member owned the property for several years and used the property as part of a larger farming operation. The size of the property (unsubdivided) is several acres. You used the property as a hobby farm, raising cattle. You held a trading facility relation to your hobby farm. The property did not produce sufficient income to cover the outgoings associated with grazing and breeding cattle. You continued running the hobby farm for some years, when you began the process of ensuring the land was fit for subdivision. You were unable to maintain the property due to work and your family commitments. From when you ceased running the farm until now, family members have looked after the property. During this period, the property remained effectively dormant. Since you acquired the property, it has been zoned 'Rural/Residential - Township'. The property has been subject to this zoning for a number of years, and you have not made any rezoning applications. You are subsequently subdividing the property into a number of lots over 2 stages. You have engaged the services of a company as subdivision managers. Stage one is comprised of some lots having entry from one street. Stage two will include the remaining lots. Relevant infrastructure activities carried out include the supply of: ● Electricity; ● Water; and ● Telephone services. You have engaged the services of contractors to order to prepare stage one to be listed on the market. You anticipate using the same contractors for works on stage two of the subdivision. You are generally not involved in the subdivision process apart from the installation of the watering system in accordance with the landscaping requirements, and the overall management. It is anticipated you will have similar involvement with respect to stage two of the subdivision. You have obtained a valuation report with respect to one of the lots you have sold. The remaining lots in stage one are currently listed on the market with a real estate agent. These lots are been on the market for several months, with various listed prices. A similar block located nearby was recently sold for an amount, and you therefore expect to receive a similar amount per lot. The rest of the lots will be sold in the coming 2 - 3 years. You are financing the subdivision by the use of your personal savings. You have provided details expenses in relation to the subdivision process. The improvements and works at the property are being carried out to meet the requirements contained in the Plan Permit issued in relation to the subdivision. You or any related entities have not previously been involved in any subdivision or property development activities. You or any related entities do not intend to be involved in any future subdivision or property development activities.

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

Reasons for decision: Summary: The sale of the subdivided lots will be subject to the capital gains tax (CGT) provisions in Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 (ITAA 1997). | Detailed Reasoning - Detailed reasoning: There are three ways profits from property sales can be treated for taxation purposes: 1. As ordinary income under section 6-5 of the ITAA, on revenue account, as a result of carrying on a business of property development, involving the sale of land as trading stock; or 2. As ordinary income under section 6-5 of the ITAA, on revenue account, as a result of an isolated business 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; or 3. As statutory income under the capital gains tax legislation. 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 have held the property for substantial period of time, during which time you operated a hobby farm before the property was left dormant. You will have minimal involvement in the subdivision of the land. The subdivision is not being carrying out a business operation of commercial transaction, and is funded by your own personal savings. The improvements and works including infrastructure and landscaping are being carried out to meet the requirements contained in the Plan Permit issued in relation to the subdivision. You contend that you experienced difficulty in disposing of the property as a single block of land, and therefore engaged the services of contractor to subdivide the land in order to quickly sell off the land. The sale of the subdivided lots is considered to be a mere realisation of a capital asset and the proceeds will be subject to the capital gains tax provisions in Parts 3-1 and 3-3 of the ITAA 1997. Proceeds from the sale of the subdivided lots will not be included in your ordinary income.