Private ruling: Subdivision of land
Date of advice: 23 July 2015
Published: July 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 2015

Ruling: Q1: Will the proceeds from the sale of the subdivided lots be assessable as ordinary income? | A1: No. | Q2: Will the sale of the subdivided lots be considered the mere realisation of a capital gains tax (CGT) asset? | A2: Yes.

Relevant facts and circumstances: You purchased a half share in a property prior to 1985. You and your spouse then purchased the other half share of the property prior to 1985. You and your spouse farmed the property until 1996. You and your spouse then separated and he/she left the property. You remained on the property with the children. The property settlement was finalised in particular year. Your spouse's share of the property was all transferred to you as a part of the property settlement. The marriage breakdown rollover applied to this transaction. You continued to farm the property and took on employment to meet mortgage obligations. In recent years, the surrounding properties have been developed into smaller residential lots as part of the urban sprawl. To help transition into and fund retirement, you propose to subdivide the land into X lots. You intend to retain and continue to live on the subdivided lot that contains your current residence. You also intend to retain a significant portion of the land at the rear of the property to grow crops on a small scale. You have recently retired from paid employment. You will not build anything on the land or perform any works beyond the minimum amount necessary to satisfy the development approval conditions. You have no formal business plan or timeline for completing the subdivision works and selling the subdivided lots. You have no business organisation for the subdivision. There is no office, no secretary and no letterhead in relation to the subdivision activities. You have no experience in property development and have not subdivided property in the past. You intend to use consultants and contractors to perform the subdivision activities. You expect the cost of the subdivision to be approximately $X million. You will borrow funds of approximately $X million to finance the subdivision activities and meet interest obligations. You intend to advertise the subdivided lots for sale through local real estate agents. You expect the subdivided lots to be sold for between $X and $X. You have not claimed any expenses in relation to the subdivision.

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

Reasons for decision: Summary: We need to determine whether the proceeds from the sale of the lots: • are assessable ordinary income under section 6-5 of the ITAA 1997 as you were carrying on a business of property development • are assessable ordinary income under section 6-5 of the ITAA 1997 as you conducted an isolated commercial transaction with a view to a profit, or • are a realisation of a capital asset and assessable under the CGT provisions of the ITAA 1997. | Detailed Reasoning - Carrying on a business of property development: Based on the information provided, we do not considered that any proceeds received from the sale of the subdivided land would be derived in the course of carrying on a business. | Detailed Reasoning - Profits from an isolated transaction: Profits arising from an isolated business or commercial transactions will be ordinary income if the taxpayer's purpose or intention in entering into the transaction is to make a profit, even though the transaction may not be part of the ordinary activities of the taxpayer's business ( FC of T v. Myer Emporium Ltd 1987 163 CLR 199; 87 ATC 4363; 18 ATR 693) (Myer Emporium). Taxation Ruling TR 92/3 considers the principles outlined in the Myer Emporium case and provides guidance in determining whether profits from isolated transactions are assessable under section 6-5 of the ITAA 1997 as ordinary income. Having regards to your circumstances and the factors outlined in TR 92/3, we do not consider that the proceeds from the sale of the land will be assessable under section 6-5 of the ITAA 1997. We consider that the disposal of the property will be a mere realisation of a capital asset. | Detailed Reasoning - Marriage breakdown rollover: As a general rule, CGT applies to all changes of ownership of assets acquired on or after 20 September 1985. However, if you transfer an asset to your spouse as a result of the breakdown of your marriage or relationship, there is automatic rollover in certain cases. If a CGT asset, including a share of a jointly owned asset, was transferred to you because of the breakdown of your marriage or relationship and it was acquired by the transferor before 20 September 1985, you are also taken to have acquired the asset before that date. You can disregard any capital gain or capital loss you make when you later dispose of the asset. However, if you make a major capital improvement to that asset after 20 September 1985, you may be subject to CGT when you dispose of it or another CGT event happens to that asset. In this case, you and your spouse acquired the property prior to 1985. You became the sole owner of the property in 2000 as a result of a marriage breakdown. As the marriage breakdown rollover applied, you are taken to have acquired the entire property prior to September 1985. Provided you do not make any major capital improvements to the asset, you will be entitled to disregard any capital gain made on the sale of the subdivided lots.