Private ruling: Capital gains tax - subdivision - mere realisation
Date of advice: 24 January 2017
Published: July 2017
Ruling period: Year ending 30 June 2017 | Year ending 30 June 2018 | Year ending 30 June 2019
Date scheme commenced: 1 July 2016

Ruling: Q1: Will the profit from the sale of Lot X be treated as ordinary income under section 6 -5 of the Income Tax Assessment Act 1997 (ITAA 1997) as a result of the taxpayer carrying on a business of property development? | A1: No. | Q2: Will the profit from the sale of Lot X be treated as ordinary income under section 6-5 ITAA 1997 as a result of an "isolated transaction" carried out for profit and commercial in character? | A2: No. | Q3: Will the profit from the sale of Lot X be treated as statutory income under the capital gains tax provisions in Parts 3-1 and 3-3 of the ITAA 1997? | A3: Yes.


Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 15-15 | Income Tax Assessment Act 1997 Section 102-20 | Income Tax Assessment Act 1997 Section 104-10 | Income Tax Assessment Act 1997 Subsection 104-10(3) | Income Tax Assessment Act 1997 Section 112-25 | Income Tax Assessment Act 1997 Section 995-1 | Income Tax Assessment Act 1997 Part 3-1 | Income Tax Assessment Act 1997 Part 3-3

Reasons for decision: Detailed Reasoning - Income or capital: As a general principle, profits from property sales will either be assessable as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) or statutory income under the capital gains tax (CGT) provisions of the ITAA 1997. Where the profit has been made as a result of a taxpayer carrying on a business of property development or as a result of a taxpayer entering into an isolated business transaction, the profit will be assessable as ordinary income. However, where the profit is a mere realisation of a capital asset, the profit will be assessable under the CGT provisions of the ITAA 1997. There have been several cases in which the courts have addressed the question of whether the proceeds received for the sale of an asset are revenue or capital in nature. The decision in each case depended on its own facts, and very often will be a matter of degree. The extent of the personal involvement of the taxpayer in much of the planning, organisation and management of the activities has been held to be significant factors in the determination of whether or not a business was being carried out. For example: ● In Stevenson v FC of T (1991) 91 ATC 4476; (1991) 22 ATR 56; (1991) 29 FCR 282 (Stevenson) the degree of the taxpayer's involvement was seen as an indicator of a business being conducted; and ● The lack of personal taxpayer involvement was seen as a relevant to the finding that a business was not being conducted in the cases of Stratham V FCT 89 ATC 4070, McCorkell v FCT 98 ATC 2199 (McCorkell) and Casimaty v FCT 97 ATC 5 (Casimaty). From the cases involving the subdivision of land and from Taxation Ruling TR 92/3 (TR 92/3), it would appear that the following are the most important factors to consider when determining whether profits made as a result of an isolated business transaction are assessable income: a) the intention or purpose of the 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 out a business operation or commercial transaction. In determining whether an isolated transaction amounts to a business operation or commercial transaction the following factors are relevant: 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. 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. Application to your situation In your case, you acquired your ownership interest in the land and built your main residence. There is nothing to suggest that the subdivision of Lot XY into two separate lots and the purchaser /developer seeking approval to further develop Lot X as a condition of sale of Lot X to them was the beginning of a continuing business of property subdivision. Your activities do not display the salient indicator of a business, being transactions entered into on a continuous and repetitive basis. Therefore, it is the Commissioner's view that your activities in relation to the subdivision of the land are not those of an entity carrying on a business of buying, subdividing and selling subdivided land. Making an overall assessment on the factors set out in TR 92/3, it is the Commissioner's view that the subdivision of Lot XY into two blocks and the sale of one of them to a developer will not be considered commercial in nature but will be a mere realisation of a capital asset, being a long-held privately owned property. Therefore, as it is not viewed that you are carrying on a business, or that the subdivision activity will be an isolated transaction, any profit arising from the sale of Lot X will not be assessable under section 6-5 of the ITAA 1997. | Detailed Reasoning - Mere realisation: The capital gains tax (CGT) provisions are contained in Part 3-1. Broadly, the provisions include in your assessable income any assessable gain or loss made when a CGT event happens to a CGT asset that you own. CGT event A1 happens if you dispose a CGT asset. A CGT asset is any kind of property or a legal or equitable right that is not property. When a CGT asset (the original asset) is split into 2 or more assets (the new assets), such as when land is subdivided, the subdivision of the land into subdivided lots is not a CGT event, according to subsection 112-25(2). Each new subdivided lot will be viewed as having been acquired on the same date that the original asset was acquired. The mere realisation of a capital asset has been described as “liquidating or realising the old assets” ( Commissioner of Taxes v Melbourne Trust Limited [1914] AC 1001). In the High Court of Australia case of Federal Commissioner of Taxation v NF Williams 72 ATC 4188; (1972) 127 CLR 226, at ATC 4194-4195; CLR 249, Gibbs J explained mere realisation of land as follows: An owner of land who holds it until the price of land has risen and then subdivides and sells it is not thereby engaging in an adventure in the nature of trade, or carrying out a profit-making scheme. The situation is not altered by the fact that the landowner seeks and acts upon the advice of an expert as to the best method of subdivision and sale or by the fact that he carries out work such as grading, levelling, road-building and the provision of reticulation for water and power to enable the land to be sold to its best advantage. The proceeds resulting from the mere realization of a capital asset are not income either in accordance with ordinary concepts…even though the realization is carried out in an enterprising way so as to secure the best price… In the Federal Court of Australia case of Casimaty v Federal Commissioner of Taxation 97 ATC 5135, at 97 ATC 5152, Ryan J described a salient characteristic of the mere realisation of land as follows: …[to not] undertake any works on, or development of, the land beyond what was necessary to secure the approval by the municipal authorities of the successive plans of subdivision and enhance the presentation of individual allotments for sale as vacant blocks. In distinguishing mere realisation from a commercial transaction, Ryan J further said: Had he constructed dwelling houses, internal fencing or other improvements, it would have been easier to impute to him an intention to carry on a business of land development and improvement. Application to your situation In this case, you and your spouse acquired your ownership interest in the land and built your main residence. To enable the contract of sale of Lot X, the land known as Lot XY has to be subdivided into two separate lots and approval obtained for the further subdivision of Lot X. These are conditions of the sale. It is emphasised that the further subdivision of Lot X will be undertaken by the developer and not you. The one and only subdivided lot that you are selling is the block known as Lot X. As your activities are not viewed as being either those of someone carrying on a business of subdivision and sale of land, or undertaking an activity of a commercial nature, it is considered that any gain made on the disposal of your ownership interest in Lot X will represent a mere realisation of the land to its best advantage. Therefore, any gain arising from the sale of your ownership interest in Lot X will be accounted for under the CGT provisions in Part 3-1 and Part 3-3 of the ITAA 1997. Lot X will be viewed as having been acquired on the same date that Lot XY was acquired.

Relevant facts: The arrangement that is subject of the private ruling is described below. This description is based on the following documents. These documents form part of, and are to be read with this description. | You and your spouse acquired a block of land less than 2 hectares in size. | You and your spouse constructed your main residence on the land. (The dwelling) | The dwelling was used to produce assessable income for a number of years. | You and your spouse have resided in the dwelling for a number of years. | Surrounding blocks have been developed and as a result you were required to undertake some earthworks to your land as a result of the development. | You and your spouse have received some offers in relation to the potential sale of land and subsequent subdivision. | The market value of the land is $X. | You and your spouse have accepted an offer from 'Y' Pty Ltd (The developer). | The contract for sale is: | ● for the sale of a portion of land described as Lot X to the developer; and | ● allows you to retain a portion of land Lot Y on which you will construct a new dwelling; | The sale of Lot X is conditional upon the remaining land being re-configured into Lot Y and Lot X (stage 1) and approval for the further re-configuration of Lot X into residential lots (stage 2). Title to Lot X will not be transferred to the developer until the local authority has approved the plan for the residential lots. | The developer will pay for all of the costs associated with the reconfiguration of Lot XY into Lot Y and Lot X and for any costs associated with obtaining approval for stage 2. These costs will be for the minimum amount of work required to achieve Lot XY being sub-divided into two lots and for obtaining approval to further subdivide Lot X. | The existing dwelling will be demolished as a road will need to be constructed where it stands. | You and your spouse do not have a property development agreement with the developer. | You and the developer are not related and it is not a joint venture. | You and your spouse will not receive any additional proceeds from the developer for the subsequent sale of the subdivided lots resulting from stage 2.