Private ruling: Property subdivision - income versus capital
Date of advice: 2 March 2022
Published: May 2022
Ruling period: Income year ending 30 June 20XX. | Income year ending 30 June 20XX. | Income year ending 30 June 20XX.
Date scheme commenced: 1 July 20XX.

Ruling: Q1: Will any of the proceeds from the sale of the proposed subdivided lots of theProperty 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 proposed subdivided lots will not be ordinary income and not assessable under section 6-5 of the ITAA 1997as either: • the carrying on of a business in accordance with the factors listed in Taxation Ruling 97/11; or • a profit-making or commercial transaction in accordance with the principles contained in Taxation Ruling TR 92/3. Therefore, any proceeds received on the disposal of the proposed subdivided lots will represent a mere realisation of capital assets which will be assessed under the capital gains tax provisions contained in Parts 3-1 and 3-3 of the ITAA 1997.

Relevant facts and circumstances: You purchased a property (the Property) after 20 September 1985. The Property was purchased to use as a rental property. You were aware when you purchased the Property that there was to be a rezoning proposal for the area in which the Property is located. You hoped the land would increase in value over time when you eventually sold the Property. The Property was zoned Residential R20 when it was purchased but was later rezoned to Residential R20/40 in accordance with the local council's planning scheme. After many years, you determined that the rate of return from the rental of the Property was insufficient and that you would like to realise your investment. You calculated that your financial return after costs was low and you considered that you could achieve a better rate of return for your investment by disposing of the Property and investing the funds into a share index investment fund, without the extra work associated with management and maintenance of the Property. The existing house was in fair condition, but due to its age was due for substantial maintenance. The real estate market in the area the Property is located experienced an upturn and you wished to take advantage of it. You noticed that there was a trend within the local suburb to subdivide land and sell the lots of vacant land which had prompted you to make enquires as to the current value of the Property and the returns you might receive if it was subdivided and sold as vacant lots of land. You engaged the services of a surveyor to undertake a preliminary survey and prepare a draft drawing of the proposed subdivision of the Property into several lots. No subdivision activities have been undertaken from the beginning of the ruling period until the present time. The Property has been rented out continuously since it was purchased, currently being tenanted under a periodic lease that requires you to give the tenant a specified period of notice to vacate. The house on the Property has not been demolished at this point, but it is expected to be demolished during the first income year in the ruling period It is anticipated that: • the subdivision application will be lodged during the first income year in the ruling period • the subdivision activities will be completed during the second income year in the ruling period, with the following to occur during that income year: - field surveys - activities by Licensed Valuer - lodgement of plans and registration of new land titles - demolition of house on the Property - approval and installation of services and utilities, such as water, drainage, power and NBN - marketing of subdivided lots by real estate agent - sale and settlement of subdivided lots • during the final income year in the ruling period, the sale and settlement of any remaining lots will occur. You have estimated the following: • current market value of the Property prior to the subdivision activities being undertaken of $XXX,XXX to $XXX,XXX; and • anticipated sale proceeds from the sale of the proposed subdivided lots, being higher than the market value of the whole property, of $XXX,XXX to $XXX,XXX. • You estimate that the costs for the subdivision activities, including the demolition of the house, and the selling and marketing costs to sell the lots will be $XXX,XXX. The services of professionals will be engaged to undertake activities in relation to surveying and planning submissions, demolition of the existing house, water and drainage, electricity, real estate services and conveyancing. You will use the services of a real estate agent to market and sell the subdivided lots. You will coordinate service providers to conduct the activities associated with the demolition of the house, lodgement of the subdivision application with the council, the subdivision of the Property and the sale of the subdivided lots. For each of these services you will seek one or more proposals from the service providers, will evaluate proposals and select the preferred provider. Where practicable you will co-ordinate the timing of services to minimise the impact of service providers on each other. You will fund the costs to demolish the house and undertake the subdivision activities using your personal savings and will not borrow any funds. You own another investment property but do not have any plans to dispose of it currently. Neither you, nor any related entities/parties, have under any subdivision activities or been involved in the business of land development in the past, except for several instances involving a related trust investing in managed property investment opportunities.

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