Private ruling: Subdivision of properties
Date of advice: 9 October 2020
Published: November 2020
Ruling period: Income year ending 30 June 20XX | Income year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Will the proceeds from the sale of the subdivided lots located at the Properties 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 1997 as either: · the carrying on of a business in accordance with the factors listed in Taxation Ruling 97/11 as there is nothing to suggest that the subdivision of the Properties was the beginning of a continuing business of property subdivision and your activities do not display the salient indicator of a business, being transactions entered into on a continuous and repetitive basis; or · a profit-making or commercial transaction in accordance with the principles contained in Taxation Ruling TR 92/3. | Q2: Will the capital gains made from the sale of the subdivided lots located at the Properties be included in the calculation of the net capital gain that is assessable under the capital gains tax provisions in Parts 3-1 and 3-3 of the ITAA 1997? | A2: Yes. Based on the information provided the proceeds arising in relation to the subdivision activities will be the realisation of capital assets which will be assessable under the capital gains tax provisions.

Relevant facts and circumstances: You currently have various ownership interests several properties with some being used solely for rental purposes, with others being used for both private and rental purposes. Background You acquired Property A after 20 September 1985 which: · was located close to your parent's home · had a house located on it; and · was zoned R20 at the time it was purchased. You used Property A as your main residence from the time it was purchased for several years and then commenced using it as a rental property. The area around Property A was rezoned from R20 to R20/40 many years after you purchased the property. After a significant period of time you acquired Property B which: · was purchased to use as a long-term investment property that is located close to shops and beach · had a house located on it; and · was zoned R20/40 at the time it was purchased. You used Property B for rental purposes from the time it was acquired. The local council commenced rezoning the area in which Property B prior to you purchasing the property. After several years an application was lodged with the local council in relation to the construction of several townhouses on Property A. The application was approved by the council, but you did not proceed due to not being able to source the funding required to undertake the activities. You commenced residing at Property B after using it as a rental property for several years and continue to reside there until the present time. You considered reducing your property exposure and investment liabilities. You changed your plans in relation to Property A and made the decision to subdivide Property A and B (collectively referred to as the Properties) as follows: · subdivide Property A into two subdivided lots for the purpose of selling the vacant lots of land; and · subdivide Property B into two subdivided lots for the purpose of selling the vacant lot of land at the rear of the property and keeping the subdivided lot where the existing house would be located. Neither property has been put on the market to be sold. Subdivision activities Neither you, or any related entities and/or parties have undertaken any subdivision activities, or any business of land development in the past and do not have any plans to do so in the future. During the subdivision activities of the Properties you liaised with the project manager in relation to the quotes obtained from contractors and advised which ones you preferred to use. You funded the subdivision of the Properties using your personal savings. Settlement on the sale of the subdivided lots cannot occur until the titles for the subdivided lots have been issue, which you estimate will be issued during the period covered by this ruling. The following has occurred in relation to the subdivision of the properties: Property A Company X lodged an application for the subdivision of Property A on your behalf which included the following information: · two proposed subdivided lots to be used for residential purposes; and · one residence and several structures to be demolished and a swimming pool to be removed. You entered into a subdivision management agreement with Company X to project manage the subdivision activities at Property A. The existing house located on Property A was demolished and the land was subdivided into two lots, being Lots 1 and 2. Company X undertook the activities in relation to the sale of the subdivided lots. You received an offer of $XXX,XXX for Lot 1, which you have accepted. You estimate that the total costs for the subdivision of Property A was $XX,XXX. You estimate that the market value of Property A prior to the subdivision activities was $XXX,XXX and you anticipate receiving $XXX,XXX each for both Lots 1 and 2 after paying all costs. Property B A subdivision application was lodged on your behalf to subdivide Property B into several lots, with the existing house being located on one of them. The back of Property B was cleared. Property B was subdivided into two lots with the house located on the front lot (the House lot) and the rear lot, being Lot 3, a vacant lot of land to be sold. Prior to the subdivision commencing Company X provided an estimate of $XX,XXX for the costs of the proposed subdivision of Property B. You estimate that the total costs to subdivide the Property B were $XX,XXX. You estimate that the market value of Property B prior to the subdivision activities was $XXX,XXX. Lot s has an estimated selling value of $XXX,XXX, with the House lot having a market value of $XXX,XXX. Company X have undertaken the activities in relation to the sale of Lot 3. You received an offer of $XXX,XXX for Lot 3 which you have accepted. You anticipate receiving around $XXX,XXX for Lot 3 after paying all costs. You have, and will, continue to reside in the house located on the House lot following the subdivision activities. Assumption: For the purpose of this ruling you will enter into a contract to sell the remaining Lot during the period covered by this ruling.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 8-1 | Income Tax Assessment Act 1997 Section 995-1 | Income Tax Assessment Act 1997 Part 3-1 | Income Tax Assessment Act 1997 Part 3-3