Private ruling: CGT - land development - mere realisation
Published: October 2014
Ruling period: Year ending 30 June 2015 | Year ending 30 June 2016 | Year ending 30 June 2017 | Year ending 30 June 2018
Date scheme commenced: 1 July 2014

Ruling: Q1: Will the sale proceeds from the proposed subdivided land be assessable as ordinary income? | A1: No | Q2: Will the sale proceeds from the proposed subdivided land be a mere realisation of a capital asset and accounted for under the capital gains tax (CGT) provisions? | A2: Yes

Relevant facts and circumstances: You own an interest in land that you inherited. The land has been used in your family's business activities for over 50 years. The land you inherited consists of multiple titles, reflecting acquisitions by previous owners and some acquisitions by your family member. Your sibling also inherited some land and you both continue to carry out business activities on some of the land. Since inheriting the land, you have had to sell off part of the land to fund business costs and to maintain a satisfactory standard of living. The land is surrounded by environmentally protected land, national parks and coastal holiday towns. Accordingly, over time the local councils supported plans by the state government to rezone land in the region for residential development, including some of the land you own. This was not something you or your sibling sought or had any influence over. Following professional advice, you and your sibling sold a portion of jointly owned land to companies that you each controlled respectively. The companies jointly developed and sold the land. The companies obtained approval to develop, approximately X lots and due to demand and cost effectiveness the development has occurred in small stages. Your company has no employees or plant and relies entirely on outside contractors and advisors. The sales, management, subdivision, regulatory approvals and management of contractors is all undertaken by an independent planning firm which is paid a fee based on sales. Your company carries on no other land development activities; it does not advertise to buy or develop land. The proposed land in question is jointly owned by you and your sibling. While you own part of the land surrounding the proposed land, the land to the North is owned by third parties and has already been developed into residential lots. It is proposed to subdivide part of the proposed land into approximately X lots. More of the land in question is zoned as suitable for residential however you do not have any intention of developing further blocks at this point in time. Development will be managed by independent professionals and the development works will be carried out by independent contractors. The development will be carried out in stages in the most cost effective manner. You may need to obtain a loan to carry out the subdivision, depending on the costs of development. However, it is anticipated that any debt would be repaid from the development proceeds. The development work that will be carried out will be the minimum required to sell the subdivided blocks. You (and your sibling) will continue to carry out business activities on a large portion of the remaining land.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Part 3-1 | Income Tax Assessment Act 1997 Section 104-10

Reasons for decision: Summary: Under section 6-5 of the ITAA 1997, the assessable income of an Australian resident includes ordinary income derived both in and out of Australia during an income year. Ordinary income is defined as income according to ordinary concepts. In FC of T 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. 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 buying, selling or developing land. The initial property has been in your family for an extended period of time and has been used in your family's business activities. The land is no longer suitable for the business because of urban and residential encroachment in the surrounding area. The development will be managed by independent professionals and the development works will be carried out by independent contractors. Accordingly, the proceeds from the sale of the subdivided blocks will not be included in your ordinary income. Rather, the sale will be considered a capital transaction subject to the capital gains tax provisions in Part 3-1 of the ITAA 1997.