Private ruling: Capital gains tax - subdivision - income v capital
Date of advice: 29 May 2020
Published: July 2020
Ruling period: Income year ending 30 June 2020 | Income year ending 30 June 2021 | Income year ending 30 June 2022 | Income year ending 30 June 2023
Date scheme commenced: 1 July 2019.

Ruling: Q1: Will any of the proceeds from the sale of the subdivided lots of land be treated as ordinary income under section 6 -5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. Based on the information provided, the proceeds from the sale of the subdivided lots will not be ordinary income and not assessable under section 6-5 of the ITAA 1997as either: · the carrying on of a business in accordance with the factors listed in Taxation Ruling 97/11; or · a profit-making or commercial transaction in accordance with Taxation Ruling TR 92/3. Therefore, any proceeds received on the disposal of the subdivided lots will represent a mere realisation of capital assets which will be assessed under the capital gains tax provisions contained in Parts 3-1 and 3-3 of the ITAA 1997.

Relevant facts and circumstances: You, being Persons A and B, purchased the Property after 20 September 1985. Some 20 years ago for about $300,000. The Property had a land area of XX acres with a house and a structure located on it. It was zoned Low Density Residential. The original structure was dismantled, and a new structure was constructed on the Property several years after it had been purchased. The Property adjoins your/Person A's parent's property who are now elderly and who anticipate selling their property and moving into a retirement village. As a result, you have made the decision to sell the Property and move into town. The Property was not put on the market to be sold whole. You were advised by real estate agents that a higher sale price could be realised if the Property was subdivided and the subdivided lots sold rather than sell the Property as a whole. You held informal talks with a couple of surveying companies, your accountant, and some real estate agents. You engaged the services of a surveyor, Company A to: · prepare plans for the subdivision of the Property · design and manage the activities · lodge all applications with the local council and relevant authorities · issue tenders · obtain quotes; and · engage subcontractors. The planning permit was lodged with the local council which approved the subdivision of the Property with the subdivision activities commencing during the following year. Company X provided a market appraisal for the Property prior to the subdivision activities commencing outlining that its value was $XXX,XXX - $XXX,XXX. You estimate that the cost of the subdivision activities was $XXX,XXX. You have funded the subdivision activities using your savings and borrowed funds from family members, which you will repay on the sale of the subdividing lots plus a specified rate of interest. You engaged the services of Company X when the subdivision activities commenced to sell the subdivided lots. The subdivision activities were completed during the following year after they had commenced. The subdivided lots, being Lots A to G, range in size from X,XXX to X,XXX square metres, with Lot A being the largest on which the house is located. Lots B to G have been advertised, with contracts of sale for several of them having been entered at this point. You undertook landscaping, spraying and mowing activities during the subdivision of the Property. You have not undertaken any similar activities in the past and do not have any intentions to undertake any similar activities in the future. You may consider Lot A on the market in response to your circumstances changing.

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