Private ruling: Assessable income vs capital gains.
Published: June 2015
Ruling period: 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 2008.

Ruling: Q1: Will the sale proceeds received from the development and sale of title, be ordinary income within the meaning of section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. | Q2: Will the development and sale of title amount to the carrying on of a profit making undertaking for the purposes of section 15-15 of the ITAA 1997? | A2: No. | Q3: If improvements are made to the subdivided land, will the improvements constitute separate CGT assets under section 108-70(2) of the ITAA 1997 and therefore subject to the CGT provisions? | A3: The capital improvements are related improvements and treated under section 108-70(3) of the ITAA 1997. For capital improvements to be a separate asset the total of their cost bases for each block must exceed the improvement threshold for the relevant income year and also exceed more than 5% of the capital proceeds from the event.

Relevant facts and circumstances: You acquired land in the 1970's. At the time the land was purchased there was a gazetted road on the plan. On the basis of the gazetted road, you successfully applied to have the land broken up into a number of lots. Lot was sold as one lot in the 1970's. You farmed the remaining lots. During this time the property was used only for various primary production purposes. Lot was subdivided into more than 10 lots and then sold. You retained one of these lots. Since then it has been held as vacant land. You were injured whilst working. It took you from 4 to 6 months to fully recover. As a result of the injuries and time it took to recover you decided to wind down the farming operations. Since then the farming operations ceased, the property has been used as your main residence. You have recently completed a subdivision of the property into less than 20 lots (title) and all but 1 of the new lots has been sold. A private ruling in relation to title was completed early December 20XX. An application to subdivide title was lodged. Approval took approximately 12 months You intend to sell all but 1 lot on which your main residence is situated. The way in which you propose to implement the subdivision is a follows: Undertake construction works required to implement the subdivision, including: i. private roads, curbing and channelling within the subdivision; ii. water; iii. electricity and telephone; and iv. headwork and council costs. You will engage independent sub contractors for the subdivision work and will not be actively involved. You will engage real estate agents and other agents to handle the marketing and sale of the lots. You also purchased land adjoining the property with the intention of expanding the farm in partnership with your relative. Your relative became a partner in the farming venture. Your relative was injured and as a result can no longer perform the heavy physical work required. The accidents have meant that you and your relative could no longer operate the farm and were unable to continue with the intended farming partnership. Therefore, the adjoining land was developed and sold. In regard to the adjoining land the facts are as follows: a. The previous owner of the adjoining land originally obtained the subdivision approval for the adjoining land prior to you purchasing it. The date of submission to Council and approval by Council is therefore unknown. b. Construction works required to implement the subdivision included: upgrades to an existing road; construction of a new 1.2 km road; and the provision of power, bores and access entry for each site. c. Independent contractors were engaged for the work. d. You were not actively involved in the work. Title has been subdivided but several lots remain unsold. The reason behind the unexpected delay in selling the lots is due to a significant fall in buyer demand. At the time of the original ruling, buyer demand was very high. Demand has fallen away considerably since that time. Particularly for your lots which are in a rural location. You have finalised all surveys, roads, power and infrastructure for the unsold lots. The only additional costs on the remaining lots are for bores, soil tests and council fees which will only be spent subject to demand. You expect it could take up to 5 years to sell the remaining lots.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5. | Income Tax Assessment Act 1997 section 15-15. | Income Tax Assessment Act 1997 subsection 108-70(2).

Reasons for decision: Detailed Reasoning - Questions 1 & 2: Section 6-5 of the ITAA 1997 provides that assessable income includes income according to ordinary concepts. Typical examples of ordinary income include salary and wages, proceeds from carrying on a business, rent, interest and dividends. Profits from the sale of a capital asset are generally not income, although they may be assessable as statutory income under the capital gains provisions. Section 15-15 of the ITAA 1997 provides that your assessable income also includes profit arising from the carrying on, or carrying out, of a profit-making undertaking or plan. Subsection 15-15(2) of the ITAA 1997 goes on to say that this section does not apply to a profit that is assessable as ordinary income under section 6-5 of the ITAA 1997 or arises in respect of the sale of property acquired on or after 20 September 1985. Taxation Ruling TR 92/3 (TR 92/3) deals with determining whether profits on isolated transactions are income. According to TR 92/3, a profit from an isolated transaction is generally income if the intention or purpose of the taxpayer 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. Having regard to your full set of circumstances and the factors outlined above, it is considered that the profit which is derived from the subdivision and subsequent sale of the land is not assessable as ordinary income. Further, we do not consider that the profits derived were as a result of a profit making undertaking. Therefore, the profits are not assessable under section 15-15 of the ITAA 1997. | Detailed Reasoning - Question 3: Section 108-70 of the ITAA 1997 outlines the tests to be satisfied for a capital improvement to be considered a separate asset. In order to apply these tests it has to be determined whether the capital improvements are related to each other. Section 108-80 of the ITAA 1997 outlines the factors to be considered in deciding whether the capital improvements to the pre-CGT assets are related to each other. These factors include: • the nature of the CGT asset to which the improvements are made; • the nature, location, size, value, quality, composition and utility of each improvement; • whether the improvement depends on a physical, economic, commercial or practical sense on another improvement; • whether the improvements are part of an overall project; • whether the improvements are of the same kind; and, • whether the improvements are made within a reasonable period of time of each other. Having considered the relevant factors above and the specific improvements to be undertaken in regards to your subdivision development, the improvements to the blocks of land in your circumstances are related to each other in accordance with section 108-80 of the ITAA 1997. Subsection 108-70(3) of the ITAA 1997 applies to related improvements to pre CGT assets to determine whether capital improvements are a separate asset. For capital improvements to be a separate asset the total of their cost bases for each block must exceed the improvement threshold for the relevant income year and also exceed more than 5% of the capital proceeds from the event.