Private ruling: Subdivision of land
Published: November 2014
Ruling period: Year ending 30 June 2015 | Year ending 30 June 2016 | Year ending 30 June 2017 | Year ending 30 June 2018 | Year ending 30 June 2019 | Year ending 30 June 2020
Date scheme commenced: 1 July 2014

Ruling: Questions and answers | 1. Will the proceeds of the sale of the subdivided lots, resulting from the subdivision of your property, be assessable as ordinary income? | No. | 2. Will the proceeds of the sale of the subdivided lots, resulting from the subdivision of your property, be assessable under the capital gains tax provisions? | Yes.

Relevant facts and circumstances: You acquired the property prior to 20 September 1985. The property is approximately XX acres. The property was purchased with the following intentions: • To provide a rural environment for your family to live • To conduct hobby farming activities and • An appropriate space to park a work vehicle You built your home on the property prior to 20 September 1985. The property is largely vacant with associated out buildings used for private purposes and for you to park your work vehicles. You used the property for grazing activities as a hobby not for a business. You have retired from work. The property has become difficult to manage due to its size and your failing health. The land surrounding your property has been developed into residential estates. You intend to sub-divide the land into a number of blocks. You will retain the land which has your current residence on it and you will remain living there for as long as possible. You will not carry out any of the redevelopment yourself and intend on engaging a developer to carry out all works associated with the redevelopment of the land. The cost of the development is expected to be $X and you expect the proceeds to be $XX. You will sell the subdivided blocks and you will not carry out any construction on the blocks. There are Y stages in the development. You expect to commence the development within 12 months. It is estimated that the first stage will be completed within 6 months of commencement and all stages will be completed within Z years of commencement. It is expected that each stage of the development (other than the first stage) will be funded from the proceeds of earlier completed stages. You are not in the business of land development and you have never done anything like this in the past.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5.

Reasons for decision: Summary: Under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997), your assessable income includes the ordinary income you derived directly or indirectly from all sources, during the income year. A capital receipt is not ordinary income and therefore not assessable under section 6-5 of the ITAA 1997. It is often difficult to distinguish between a capital receipt and income. | Detailed Reasoning - Isolated transactions can be ordinary income: Taxation Ruling TR 92/3: Income tax: whether profits on isolated transactions are income (TR 92/3) discusses profits on isolated transactions and states that profits on isolated transaction may be ordinary income. In most circumstances, profit from an isolated transaction will be ordinary income when: (a) the intention or purpose of a taxpayer in entering into the transaction was to make a profit or gain; and (b) The transaction was entered into, and the profit was made, in the course of carrying on a business or in carrying on a business operation or commercial transaction. For a transaction to be characterised as a business operation or a commercial transaction, it is sufficient that the transaction is business or commercial in nature. Some of the factors to consider when looking at whether an isolated transaction is business or commercial in nature are listed at paragraph 13 of TR 92/3. They are: (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. | Detailed Reasoning - Profits of the sale of subdivided land can be income: Profits on the sale of subdivided land can be income according to ordinary concepts within section 6-5 of the ITAA 1997, if the taxpayers' subdivisional activities have become a separate business operation or commercial transaction, or an isolated profit making venture. In Scottish Australian Mining Co Ltd v FC of T (1950) 9 ATD 135; (1950) 81 CLR 188 (at ATD p 140; CLR p195) his Honour, Williams J, in considering whether the subdivision of land was a profit making venture, said: The facts would, in my opinion, have to be very strong indeed before a court could be induced to hold that a company which had not purchased or otherwise acquired land for the purpose of profit-making by sale was engaged in the business of selling land and not merely realizing it when all that the company had done was to take the necessary steps to realize the land to the best advantage, especially land which had been acquired and used for a different purpose which it was no longer businesslike to carry out. In Statham & Anor v FC of T 89 ATC 4070 (Statham's case) the Full Federal Court considered the subdivision of rural land which involved a large scale subdivision of 105 lots with a substantial outlay to obtain a large profit. It was considered that the mere magnitude of the realisation does not convert the activity into a business, undertaking or scheme. The Court considered the size of the subdivision, the amount of money involved, the involvement of the parties and the length of time the subdivision was to be developed over to determine whether the activities amounted to more than a mere realisation of assets. The Court determined that the owners were not in the business of selling land and that the activities amounted to a mere realisation of the asset by the most advantageous means. In FC of T v Williams 72 ATC 4188; (1972) 127 CLR 226 (Williams's case) the High Court considered that development carried out on land to be subdivided, such as grading, levelling, road building and provision for water and power, was to enable the owner to secure the best price for the land and did not amount to carrying out a profit making scheme. The proceeds resulted from the mere realisation of a capital asset and were not income. Casimaty v FC of T 97 ATC 5135; (1997) 37 ATR 358 (Casimaty's case) considered the sale of farming land. The proceeds were held to not be income according to ordinary concepts, but rather constituted the mere realisation of a capital asset, carried out in an enterprising way so as to secure the best price. Consequently, the profit derived from the subdivision and sale of the land by the taxpayer was not assessable income under section 6-5 of the ITAA 1997. In Stevenson v FC of T 91 ATC 4476; (1991) 22 ATR 56; (1991) 29 FCR 282 (Stevenson's case) the court considered that the magnitude of the subdivision and the degree of involvement in the planning and managing of the subdivisional activities amount to the carrying on of a business. The facts in this case involved a 220 block subdivision and the taxpayer was actively involved in the planning, employment of contractors and marketing of the blocks. In FC of T v Whitfords Beach Pty Ltd 82 ATC 4031; (1982) 150 CLR 355; (1982) 12 ATR 692; (1982) 39 ALR 521; (1982) 56 ALJR 240 (the Whitfords Beach case) where the court found that the taxpayer's activities in relation to the subdivision of the land amounted to more than realisation of a capital asset and constituted the carrying on of a business of land development. The taxpayer in this case was a company which was originally formed to acquire land to secure the shareholders continued access to their properties and at some stage subdivide the land and give each shareholder a separate title to a lot. | Detailed Reasoning - Application to your circumstances: The factors listed at paragraph 13 of TR 92/3 need to be considered in relation to your activities in subdividing your land to determine whether the proceeds are income in nature. | Detailed Reasoning - a) The nature of the entity undertaking the operation or transaction: You purchased the property pre 1985 to use as your main residence and hobby farm. You constructed a house on the property. You have continued to live in the residence since it finished being built pre 1985. We are satisfied that from the long use of the property as a main residence and a hobby farm that your intention at the time of purchase was not to make a profit from the subdivision and sale of the property. | Detailed Reasoning - b) The nature and scale of other activities undertaken by the taxpayer: You have never been involved in a sub-division before and you owned and operated your own business up until you retired recently. | Detailed Reasoning - c) The amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained: You intend to fund the sub-division from the sale of the land sales. Whilst the amounts are significant, this is not determinative and is merely listed in TR 92/3 as a factor to be considered. Furthermore, these amounts are small when compared with cases where subdivisions have been held to be profit raking schemes, for example the Whitfords Beach case where CPI indexed profits was $39,000,000. In McCorkell v Commissioner of Taxation 1998 AATA 562, the taxpayer borrowed money to conduct subdivision activities. In that case, the existence of borrowed funds did not mean the taxpayer's activities amounted to a profit making undertaking or scheme - the Court was satisfied that the taxpayer was merely realising a capital asset. | Detailed Reasoning - d) The nature, scale and complexity of the operation or transaction: You intend to subdivide your property into XXX lots. You will only carry out the minimum work as required and no construction will be carried out on the blocks. There are a significant number of authorities where developments of a larger scale have been held not to constitute a commercial or profit making undertaking (e.g. Allied Pastoral Holdings v FCT 83 ATC 4015 (the Allied Pastoral case), Statham's case, Case No QT96/187 and Casimaty's case). In the Allied Pastora l case, a project that generated a profit of approximately $648,000 in 1974 was held not to be a profit making undertaking. In real terms, the projected 'profit' anticipated by the Applicant on the subdivision and sale of the land will be far less than in Allied Pastoral . In Casimaty's case, the land was subdivided into a total of 80 lots which were developed in eight separate stages involving internal road works, the court considered that the profits from the subdivision and sale were capital receipts and not ordinary income. It can be argued in your case that the nature and scale of your operation can be characterised as merely realising a capital asset in order for you to assist with your retirement. | Detailed Reasoning - e) The manner in which the operation or transaction was entered into or carried out: You will engage experts to carry out the majority of the work. | Detailed Reasoning - f) The nature of any connection between the relevant taxpayer and any other party to the operation or transaction: You will engage professionals to undertake all necessary work involved in the subdivision. | Detailed Reasoning - g) If the transaction involves the acquisition and disposal of property, the nature of that property: The property was used by you as a main residence and hobby farm. The property is becoming too much for you to look after and the area surrounding your property has undergone residential development you have decided to realise the land as a capital asset. | Detailed Reasoning - h) The timing of the transaction or the various steps in the transaction: You have held an interest in the land for many years, and used it as your main residence for the vast majority of the time and as a hobby farm. The reasons for the decision to realise the land relate to your retirement and not being able to manage all of the land. It can be argued that the length of time involved coupled with the scale of the subdivision is not consistent with a businesslike approach and supports the contention that the development is simply the ordered realisation of a capital asset. | Detailed Reasoning - Conclusion: Unlike the circumstances in the Whitfords Beach case, the property in your case was purchased to use as your main residence and as a hobby farm which is indicative that the subdivision and sale of the property is a realisation of a capital asset. The fact that you have not been in the business of land development before adds further weight to this contention. The circumstances of your case suggest that the subdivision of the land is not ordinary income under section 6-5 of the ITAA 1997 it is a capital receipt as you have merely realised capital asset. Therefore, the proceeds of the sale of the subdivided lots will not be assessable as ordinary income. | Detailed Reasoning - Capital gains tax: You make a capital gain or loss as a result of a capital gains tax (CGT) event happening to a CGT asset. CGT assets include real estate acquired on or after 20 September 1985. CGT events are those transactions that occur to a CGT asset that result in you either making a capital gain or capital loss. You make a capital gain if your capital proceeds from the sale of a CGT asset are greater than the cost base for the purchase of that asset, for example, if you receive more for an asset than you paid for it. You make a capital loss if your reduced cost base for the purchase of that asset is greater than the capital proceeds resulting from the sale of that asset, for example, if you receive less for an asset than you paid for it. Capital gains tax is not a separate tax, it forms part of your assessable income and is taxed at your marginal tax rate. CGT event A1 occurs when you dispose of a CGT asset. When you dispose of the blocks of land CGT event A1 will occur. This CGT event will be disregarded under section 104-10(5) as the land was purchased by you pre 1985 and is pre CGT. Pre CGT land that is sub-divided into separate titles maintains its pre CGT acquisition date and the actual sub-division does not trigger a CGT event. Any improvements that are carried out to the blocks as the result of the sub-division such as road works, drainage, supply of water etc. may be subject to the capital gains provisions under section 108-70(2) and therefore the CGT will not be disregarded.