Private ruling: CGT - land subdivision
Published: June 2014
Ruling period: Year ending 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: 1. Will the proceeds received from the sale of the subdivided blocks be assessable pursuant to section 6-5 or section 15-15 of the Income Tax Assessment Act 1997 (ITAA 1997)? Answer: No 2. Will the proceeds received from the sale of subdivided blocks of land be taxed under the capital gains tax provisions of the ITAA 1997? Answer: Yes 3. Does the land qualify as an active asset for the purposes of the CGT small business concessions? Answer: Yes

Relevant facts and circumstances: In 199X, you inherited a block of farming land. In which you took over the farming business. You are trade qualified, and you continued to be employed on a full time basis following the farm acquisition. You looked after the farm in your spare time and whilst on leave from your employment. In 200X, there was a significant increase in the kangaroo population in the area due to drought. You tried to keep the kangaroos off the land but your efforts were unsuccessful and the kangaroos continued to eat the feed. Due to the kangaroo problems and the significant additional expenditure that would be required to keep the kangaroos off the land, you decided the farm was no longer economically viable and you ceased to carry on the farming business. In 200X, you also became aware that the land had been rezoned. Following discussions with the council, you decided to subdivide the land into a number of lots. The subdivided lots were sold by 20XX. You never intended you make a profit from the sale of the land. Prior to becoming aware of the change in zoning, you had never intended that the land be subdivided.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5, | Income Tax Assessment Act 1997 Subsection 104-10(5), | Income Tax Assessment Act 1997 Subsection 108-70(3), | Income Tax Assessment Act 1997 Section 108-80, | Income Tax Assessment Act 1997 Subsection 128-50(2), and | Income Tax Assessment Act 1997 Section 152-35.

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. You inherited the property and continued to use it for farming. Accordingly, the proceeds from the sale of the subdivided blocks will not be included in your ordinary income. Rather, the subdivision is considered to be a mere realisation of a capital asset and the proceeds will be subject to the capital gains tax provisions in Part 3-1 of the ITAA 1997. | Detailed Reasoning - Active asset test: The active asset test is contained in section 152-35 of the ITAA 1997. The active asset test is satisfied if: • you have owned the asset for 15 years or less and the asset was an active asset of yours for a total of at least half of the test period detailed below, or • you have owned the asset for more than 15 years and the asset was an active asset of yours for a total of at least 7.5 years during the test period. The test period is from when the asset is acquired until the CGT event. If the business ceases within the 12 months before the CGT event (or such longer time as the Commissioner allows) the relevant period is from acquisition until the business ceases. In this case, the business ceased more than 12 months before the CGT event occurred. Accordingly, the relevant period is from the acquisition date to the CGT event. As you have owned the property for less than 15 years, the property will need to have been active for at least half of this period. A CGT asset is an active asset if it is owned by you and is used or held ready for use in a business carried on (whether alone or in partnership) by you, your affiliate, your spouse or child, or an entity connected with you. You ran a farm on the land. It follows that the land was an active asset as it was used in a business carried on by you for just over X years. You owned the land for over XX years. Therefore, as the land was an active asset for more than half of the period that you owned it, it will pass the active asset test under section 152-35 of the ITAA 1997.