Private ruling: CGT - subdivision - Income or capital
Date of advice: 1 September 2015
Published: September 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 property be assessable income under sections 6-5 or 15-15 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. | Q2: Will the proceeds from the sale of the property be capital proceeds for the purposes of the capital gain tax (CGT) provisions? | A2: 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 104-10. | Income Tax Assessment Act 1997 - Subsection 104-10(5).

Reasons for decision: Summary: The proceeds from the sale of the subdivided land are not ordinary income or profits from a profit-making undertaking and therefore are not assessable under sections 6-5 or 15-15 of the ITAA 1997. The proceeds represent a mere realisation of a capital asset which will fall for consideration under the CGT provisions in Part 3-1 of the ITAA 1997. However, as the land was acquired before 20 September 1985, any capital gain or capital loss for each subdivided block will be disregarded for CGT purposes. Also, the capital improvements made to the land will not be separate assets subject to CGT where the capital improvement expenditure applicable to each subdivided block is less than the improvement threshold. | Detailed Reasoning - Income tax provisions: Under section 6-5 of the ITAA 1997, your assessable income includes the ordinary income you derived directly or indirectly from all sources, during the income year. Although the legislation does not define income according to ordinary concepts, a substantial body of case law has evolved to identify various factors that indicate the nature of ordinary income. Ordinary income includes amongst other things, income from salary and wages, income from the provision of services, income from property and business operations. Additionally, section 15-15 of the ITAA 1997 includes profit arising from the carrying on or carrying out of a profit-making undertaking or plan. However, this provision does not apply to a profit that is assessable as ordinary income under section 6-5 of the ITAA 1997, or which arises in respect of the sale of property acquired on or after 20 September 1985. | Detailed Reasoning - Carrying on a business: The question of whether a business is being carried on is a question of fact and degree. Taxation Ruling TR 97/11 provides the Commissioner's view of the factors used to determine if a taxpayer is in business for tax purposes. These factors are: • whether the activity has a significant commercial purpose or character • whether the taxpayer has more than just an intention to engage in business • whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity • whether there is regularity and repetition of the activity • whether the activity is of the same kind and carried on in a similar manner to that of ordinary trade in that line of business • whether the activity is planned, organised and carried on in a business-like manner such that it is described as making a profit • the size, scale and permanency of the activity, and • whether the activity is better described as a hobby, a form of recreation, or sporting activity. In determining whether a taxpayer is carrying on a business, no one indicator will be decisive. The indicators must be considered in combination and as a whole. Whether a business is being carried on depends on the large or general impression gained from looking at all the indicators and whether these indicators provide the operations with a commercial flavour. In applying these factors to your situation, you have no prior history or expertise relevant to subdivision activities. In addition, you do not hold any licences or qualifications and are not members of any relevant organisations. You do not have a business plan and your intention is to realise the value of the property by doing a simple subdivision. You have undertaken some research into the profitability of the subdivision and intend to keep records in relation to the development. These factors on their own, do not indicate a business in being carried on. The development is a one-off arrangement. Your involvement in the development is limited to seeking town planning approval and paying for the development costs. You have engaged a project manager to organise the subdividing of the land, organise the contractors/subcontractors to undertake the work and prepare and submit plans for approval of the subdivision. The size and scale of the subdivision is relatively small. Therefore it is considered that you are not carrying on a business of subdividing land and the receipts derived from the selling of land is not ordinary income. | Detailed Reasoning - Isolated transactions: In Federal Commissioner of Taxation v The Myer Emporium (1987) 163 CLR 199; 87 ATC 4363; (1987) 18 ATR 693 ( Myer Emporium ), the Full High Court expressed the view that profits made by a taxpayer who enters into an isolated transaction with a profit making purpose can be assessable income. Taxation Ruling TR 92/3 considers the assessability of profits on isolated transactions in light of the principles outlined in Myer Emporium . According to Paragraph 1 of TR 92/3, the term isolated transactions refers to: • those transactions outside the ordinary course of business of a taxpayer carrying on a business, and • those transactions entered into by non-business taxpayers. Paragraph 6 of TR 92/3 provides that a profit from an isolated transaction will generally be income when both the following elements are present: • your intention or purpose 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. Additionally, if a taxpayer acquires an asset with the intention of using it for personal enjoyment but later decides to commit the asset, either: • as the capital of a business or • into a profit-making undertaking with the characteristics of a business operation or commercial transaction, this activity constitutes the carrying on of a business, or a business operation or commercial transaction. The profit from such activity is income even though the taxpayer did not have the purpose of profit-making at the time of acquiring the asset. Some of the factors to consider when looking at whether an isolated transaction amounts to a business operation or commercial transaction are listed at paragraph 13 of TR 92/3. They are: (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. Profits on the sale of subdivided land can therefore be income according to ordinary concepts within section 6-5 of the ITAA 1997, or as a profit making undertaking or plan within section 15-15 of the ITAA 1997, if the taxpayer's activities have become a separate business operation or commercial transaction, or an isolated profit making venture. In contrast, paragraph 36 of TR 92/3 notes that 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. In your case, you do not carry on a business of developing subdivisions. At the time of purchasing the property your intention was to use the property solely as a place of residence and not to enter into the transaction to make a profit from the sale of the land. You have never been in the business of land development and the development is a one off arrangement. You will have no involvement in the development of the subdivision as you have engaged a project manager to organise the subdividing of the land, the contractors/subcontractors to undertake the work and to prepare and submit the plans for approval. In addition the sale of the developed lots will be affected through a licensed real estate agent. The size and scale of the development is relatively small. Based on the information provided the proceeds from the sale of the subdivided land will not be ordinary income or profits from a profit-making undertaking and therefore are not assessable under sections 6-5 or 15-15 of the ITAA 1997. The proceeds represent a mere realisation of a capital asset which will fall for consideration under the CGT provisions in Part 3-1 of the ITAA 1997. | Detailed Reasoning - CGT provisions: Land, or an interest in land, is a CGT asset The sale of each subdivided block will give rise to CGT event A1 under section 104-10 of the ITAA 1997. Where a CGT event A1 happens upon the disposal of each subdivided block which was acquired before 20 September 1985 (pre-CGT), the capital gain or loss will be disregarded under subsection 104-10(5) of the ITAA 1997. However, any post CGT capital improvements to pre-CGT land, such as those relating to the subdivision, may be subject to CGT in certain circumstances. Under subsection 108-70(3) of the ITAA 1997, capital improvements to a pre-CGT asset that are related to each other may be treated as a separate CGT asset if the total of their cost bases when a CGT event (for example a disposal) happens in relation to the asset is: • more than the improvement threshold for the relevant income year and • more than 5% of the capital proceeds from the event. The total costs of the subdivision will need to be apportioned to each block at the time of disposal to determine whether section 108-70 of the ITAA 1997 is satisfied. If the capital improvement expenditure applicable to each subdivided block is less than the improvement threshold for the relevant year (subsection 108-85(3) of the ITAA 1997) or 5% of the capital proceeds then, for the purposes of any subsequent disposal by you of any of the blocks of land, the capital improvement is not taken to be a separate CGT asset. Therefore any gains or losses you make on the subdivided lots will be disregarded in accordance with subsection 104-10(5) of the ITAA 1997.

Relevant facts: You and your spouse (you) purchased a property (the property) before 20 September 1985. | Your intention at the time of purchasing the property was to use the property as your principal place of residence. | Due to suburban creep and your age you both wish to dispose of the property. | You believe a better way to realise the value of the property is to do a simple subdivision. | You have sought estimates and quotes from for a number of consultants as to the approximate costs of developing a subdivision. | You will not be undertaking or be involved in any of the work in developing the subdivision as a project manager has been engaged to undertake the following activities: | • organising the subdivision of the land | • organising contractors/subcontractors to undertake the development of the infrastructure of the subdivision | • preparing and submitting the plans for approval of the subdivision. | You intend to pay the project manager a fee for their services. | The proposed subdivision and development will result in a small number of individual blocks being developed. | The sales of the subdivided blocks of land will be affected through, and by, licensed real estate agents. | There will be no construction of any dwellings as part of the proposed subdivision development. | You will fund the subdivision development using your own funds from time to time and by borrowing funds from financial institutions. | You expect to make a profit from the sale of the blocks of land. | You have not been engaged in any land subdivision activities or acquiring and realising real estate for profit previously. | You will keep all receipts, bank records and contracts that relate to the proposed subdivision and sale. | You do not have, or hold any licences or qualifications relevant to land subdivision and/or development, nor are you members of any relevant organisations. | The proposed subdivision is a one-off arrangement.