Private ruling: Treatment of gains on sale of subdivided land
Date of advice: 7 October 2021
Published: November 2021
Ruling period: Income Tax year ended 31 March 20XX | Income Tax year ended 31 March 20XX | Income Tax year ended 31 March 20XX | Income Tax year ended 31 March 20XX | Income Tax year ended 31 March 20XX
Date scheme commenced: December 20XX

Ruling: Q1: When originally acquired, is it correct for the Sites to be classified as capital gains tax (CGT) assets, and not as revenue assets or trading stock? | A1: Yes | Q2: When Stage 1 of the Site was sold, should the gain on the sale be recognised as a capital gain (i.e. not a revenue gain or a disposal of trading stock)? | A2: Yes | Q3: When Stage 2 of the Site was sold, should the gain on the sale be recognised as a capital gain (i.e. not a revenue gain or a disposal of trading stock)? | A3: Yes | Q4: When Stage 3 of the Site is sold, should the gain on the sale be recognised as a capital gain (i.e. not a revenue gain or a disposal of trading stock)? | A4: Yes

Relevant facts and circumstances: General Property Division Performance of Property Division Levels of Authorisation The 'Site' Zoning of the Site Division of the Site into three stages Sale of Site Stage 1 Stage 2 Stage 3 Put and call options


Reasons for decision: Detailed Reasoning - Detailed reasoning: A 'CGT asset' is defined in section 108-5 as being: (a) Any kind of property; or (b) A legal or equitable right that is not property. Note 1 to section 108-5 includes 'land and buildings' as one example of CGT assets. Note 2 to section 108-5 states that 'an asset is not a CGT asset if the asset was last acquired before 26 June 1992 and was not an asset for the purposes of former Part IIIA of the Income Tax Assessment 1936: see section 108-5 of the Income Tax (Transitional Provisions) Act 1997. An 'asset' was defined in former section 160A of the Income Tax Assessment Act 1936 as meaning 'any form of property' (with the definition expanded to include several items that are not property in paragraphs (a) to (e). The Site is real property and therefore meets the definition of a CGT asset. However, land can also be trading stock or a revenue asset. | Detailed Reasoning - Trading Stock: 'Trading stock' has its ordinary meaning, extended by the definition in 70-10(1)to include anything produced, manufactured or acquired that is held for purposes of manufacture, sale or exchange in the ordinary course of a business. Federal Commissioner of Taxation v St. Hubert's Island Pty. Limited (in liq) (1978) 19 ALR 1 concluded that land can be trading stock according to its ordinary meaning if the land was held by an entity that was involved in selling land as part of its ordinary business activities. | Detailed Reasoning - Profit and loss in the ordinary course of business: Taxation Ruling TR 92/3 - Income tax: whether profits on isolated transactions are income (TR 92/3) sets out the Commissioner's view on the application of the principles established in Federal Commissioner of Taxation v The Myer Emporium Ltd (1987) 163 CLR 199 ( Myer ). Paragraph 32 of TR 92/3 states that a profit or gain made in the ordinary course of a business includes: • a profit or gain arising from a transaction which is itself a part of the ordinary business of a taxpayer (judged by reference to the transactions in which the taxpayer usually engages); and • a profit or gain arising from a transaction which is an ordinary incident of the business activity of the taxpayer, although not a transaction entered into directly in its main business activity. Whether profits or gains made from the disposal of real property are made in the ordinary course of business, is established by determining if a taxpayer is carrying on a business and what the nature of the business is. Taxation Ruling TR 2019/1 - Income Tax: when does a company carry on a business? (TR 2019/1), while intended for determining whether a company carries on a business for the purposes of applying section 328-110 (and section 23 of the Income Tax Rates Act 1986 ) , has general application in identifying the following as the main indicia of whether a person is carrying on a business: • whether a person intends to carry on a business • the nature of the activities, particularly whether they have a profit-making purpose • whether the activities are o repeated and regular o organised in a business-like manner, including the keeping of books, records and the use of a system • the size and scale of a company's activities including the amount of capital employed in them, and • whether the activity is better described as a hobby, or recreation. | Detailed Reasoning - Land sold in the ordinary course of business: In relation to property or land development, Taxation Determination 92/124: Income Tax: property development: in what circumstances is land treated as trading stock (TD 92/124) recognises that repetitive buying and selling of property is not necessary to establish that a business of property acquisition, development and sale is being carried on. If a 'definite and continuous cycle of operations' has been initiated, a business of property development has commenced. Once it is established that there is a business, it then follows that the profits made in the ordinary course of carrying on that business constitute income. This principle has been discussed in many court cases, generally in the context of distinguishing between income and capital receipts. Californian Copper Syndicate (Limited & Reduced) v. Harris (1904) 5 T.C. 159 ( Californian Copper Syndicate )has been cited with authority in many Australian court cases as the leading case regarding these principles. In Californian Copper Syndicate Lord Justice Clerk stated at 165-166 that: It is quite a well-settled principle in dealing with questions of assessment to income-tax, that where the owner of an ordinary investment chooses to realise it, and obtains a greater price for it than that for which he originally acquired it, the enhanced price is not profit... But it is equally well established that enhanced values obtained from realisation or conversion of securities may be so assessable, where what is done is not merely a realisation or change of investment, but an act done in what is truly the carrying on, or carrying out, of a business. [...] What is the line which separates the two classes of cases it may be difficult to define, and each case must be considered according to its facts, the question to be determined being, is the sum of the gain that has been made a mere enhancement of value by realising a security, or is it a gain made by an operation of business in carrying out a scheme for profit-making. In London Australia Investment Company Limited v Federal Commissioner of Taxation 77 ATC 4398 ( London Australia ), Gibbs J, in discussing the above principles, stated: Their Honours [in Colonial Mutual Life Assurance Society Ltd v Federal Commissioner of Taxation (1945) 73 CLR 604] went on to point out that not all of the proceeds of a business carried on by a taxpayer are income for the purposes of the [Income Tax Assessment] Act; they will be so only if they are income 'in accordance with the ordinary usages and concepts of mankind, except in so far as the Act states or indicates an intention that receipts which are not income in ordinary parlance are to be treated as income' (see at p. 615). However it is in my opinion established by this and many other cases in which Californian Copper Syndicate v. Harris has been applied that if the sale in question is a business operation, carried out in the course of the business of profit-making, the profit arising on the sale will be of an income character. To apply this criterion it is necessary 'to make both a wide survey and an exact scrutiny of the taxpayer's activities': Western Goldmines N.L. v. C. of T. (W.A.) (1938) 59 C.L.R. 729 at p. 740. Gibbs J also noted that the test in Californian Copper Syndicate is applicable to any business. Similarly, in Myer , the High Court stated that: Although it is well settled that a profit or gain made in the ordinary course of carrying on a business constitutes income, it does not follow that a profit or gain made in a transaction entered into otherwise than in the ordinary course of carrying on the taxpayer's business is not income. Because a business is carried on with a view to profit, a gain made in the ordinary course of carrying on the business is invested with the profit-making purpose, thereby stamping the profit with the character of income. | Detailed Reasoning - Revenue Assets: It is necessary to consider whether the land asset is a 'revenue asset'. A CGT asset can be a revenue asset under 977-50 where: (a) The profit or loss on your disposing of the asset, ceasing to own it, or otherwise realising it, would be taken into account, in calculating your assessable income or tax loss, otherwise than as a capital gain or a capital loss; and (b) The asset is neither trading stock nor a depreciating asset. From paragraph (a) above, a CGT asset can be a revenue asset if the realisation of it will be used to calculate assessable income or tax losses. As paragraph (b) precludes trading stock from being a revenue asset (and trading stock are assets held for sale in the ordinary course of a business, as described above), then a CGT asset may be a revenue asset if it is held for the purpose of realising a profit upon its disposal, in an isolated transaction. | Detailed Reasoning - Isolated transaction with a profit-making intention: In some instances, a profit or gain made from an isolated or commercial transaction could constitute ordinary income if the taxpayer's purpose or intention in entering into the transaction was to make a profit, notwithstanding that the transaction was not part of its daily business activities. This was discussed in Myer , where the full bench of the High Court stated that: But a gain made otherwise than in the ordinary course of carrying on the business which nevertheless arises from a transaction entered into by the taxpayer with the intention or purpose of making a profit or gain may well constitute income. Whether it does depends very much on the circumstances of the case. Generally speaking, however, it may be said that if the circumstances are such as to give rise to the inference that the taxpayer's intention or purpose in entering into the transaction was to make a profit or gain, the profit or gain will be income, notwithstanding that the transaction was extraordinary judged by reference to the ordinary course of the taxpayer's business. Nor does the fact that a profit or gain is made as the result of an isolated venture or a "one-off" transaction preclude it from being properly characterized as income ( F.C. of T. v. Whitford's Beach Pty. Ltd . 82 ATC 4031 at pp. 4036-4037, 4042; (1982) 150 C.L.R. 355 at pp. 366-367, 376). The authorities establish that a profit or gain so made will constitute income if the property generating the profit or gain was acquired in a business operation or commercial transaction for the purpose of profit-making by the means giving rise to the profit. And further: The important proposition to be derived from [ Californian Copper Syndicate ] and [ Ducker v. Rees Roturbo Development Syndicate Ltd (1928) A.C. 132] is that a receipt may constitute income, if it arises from an isolated business operation or commercial transaction entered into otherwise than in the ordinary course of the carrying on of the taxpayer's business, so long as the taxpayer entered into the transaction with the intention or purpose of making a relevant profit or gain from the transaction. And further: The proposition that a mere realization or change of investment is not income requires some elaboration. First, the emphasis is on the adjective "mere" ( Whitfords Beach , at ATC pp. 4046-4047; C.L.R. p. 383). Secondly, profits made on a realization or change of investments may constitute income if the investments were initially acquired as part of a business with the intention or purpose that they be realized subsequently in order to capture the profit arising from their expected increase in value - see the discussion by Gibbs J. in London Australia , at ATC pp. 4403-4404; C.L.R. pp. 116-118. It is one thing if the decision to sell an asset is taken after its acquisition, there having been no intention or purpose at the time of acquisition of acquiring for the purpose of profit-making by sale. Then, if the asset be not a revenue asset on other grounds, the profit made is capital because it proceeds from a mere realization. But it is quite another thing if the decision to sell is taken by way of implementation of an intention or purpose, existing at the time of acquisition, of profit-making by sale, at least in the context of carrying on a business or carrying out a business operation or commercial transaction. TR 92/3 also provides that profits from an isolated transaction will be income when: • the 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. Even where the requisite intention may not exist on entering into the transaction, the High Court held in Whitfords Beach Pty Ltd v Federal Commissioner of Taxation (1983) 14 ATR 247 ( Whitfords ) there can be a change of intention. In Whitfords there was a change of intention at the time a company holding a large parcel of land originally acquired for long-term investment, adopted a new set of articles that changed the intended usage of the land. In Rosgoe Pty Ltd v Commissioner of Taxation (2015) FCA 1231, Logan J reinforced that the intent at acquisition and later, on sale of the property should be considered separately and the transactions as distinct activities: When, later, the property was sold, the profit here arose not from the purchase but from the sale and because the sale was not part of the profit-making scheme the profit did not arise 'from the carrying on or carrying out' of that scheme. The intention and purpose need to be carefully considered in each and every case. In Westfield Ltd v Federal Commissioner of Taxation (1991) 28 FCR 333 ( Westfield ), Hill J said: What was said in Myer has been applied in a number of cases in this court since. Among them are Moana Sand Pty Limited v Federal Commissioner of Taxation (1988) 88 ATC 4897, and Federal Commissioner of Taxation v Cooling (1990) 22 FCR 42. It does not, however, follow from the judgment in Myer , or for that matter, from the judgments in any later cases, that every profit made by a Taxpayer in the course of his business activity will be of an income nature. To so express the proposition is to express it too widely, and to eliminate the distinction between an income and a capital profit. The relevant intention or purpose of the taxpayer (of making a profit or gain) is the taxpayer's intention or purpose discerned from an objective consideration of the facts and circumstances of the case. Generally, in cases where a person's subjective purpose or intention is a relevant issue, the person's evidence as to their subjective purpose or intention can be considered but it must be tested closely and received with the greatest caution. | Detailed Reasoning - Application to Company A: The Site was originally acquired for manufacturing purposes. Evidence supporting that original purpose is provided by the subsequent actions of Company A, in using that land for those purposes. This is strengthened further by the substantial passage of time in which the land was used for those original purposes (i.e. several decades), before the current scheme was considered and commenced. The Commissioner accepts as fact the land was not, at that time, held to be sold as part of its ordinary business or ordinary business activities, and therefore was not trading stock at the time it was acquired The Commissioner also accepts as a fact the land at the Site was not originally acquired for a purpose of re-sale, or for the purpose of developing with view to making a profit, as part of an isolated profit-making transaction. At the time of acquisition, the Site is correctly classified as a CGT asset under section 108-5, that is neither trading stock nor a revenue asset. | Detailed Reasoning - Questions 2 to 5: The following reasoning is applicable to each of the decisions for questions 2 to 5 (inclusive) of the ruling application. | Detailed Reasoning - Detailed reasoning: In general, proceeds from the sale of land will be taxed for income tax purposes in one of the following ways: • as ordinary income under section 6-5, where the land is held as trading stock and sold as part of carrying on a business of property development; subsection 118-25(1) operates to disregard a capital gain or loss from a CGT asset where the asset, at the time of a CGT event, is trading stock. (The requisites for a CGT asset to be 'trading stock' are provided under that heading in the detailed reasoning provided for Question 1.) • as ordinary income under section 6-5, where land is not trading stock and is sold as part of an isolated commercial transaction entered into with a profit-making intention; (the requisites for a CGT asset to be treated as a 'revenue asset' under such a transaction are provided under that heading in the detailed reasoning provided for Question 1.) • as statutory income under the CGT provisions in Part 3-1 and Part 3-3, where the land is neither trading stock nor the subject of an isolated profit-making scheme or undertaking and the proceeds of sale are the mere realisation of a capital asset. The operation of subsection 6-25(2) and section 10-5 ensures that assessable income from net capital gains calculated under Division 102 must be determined before the concept of 'ordinary income' under Division 6 is applied. Where the land is sold as part of carrying on a business of property development or as part of an isolated profit-making scheme, the proceeds will be included in assessable income in accordance with subsection 6-5(1). Where the sale of the land is considered to be the mere realisation of a capital asset, only the net capital gain will be included in assessable income in accordance with subsection 6-10(1). | Detailed Reasoning - Capital gain from mere realisation: For CGT to apply there needs to be a CGT event that happens to a CGT asset. A CGT asset is defined in section 108-5, with note 1 indicating that land is a CGT asset. Division 104 sets out the CGT events that can happen to a CGT asset and section 104-10 provides that CGT event A1 occurs on the disposal of an asset. As a consequence of CGT event A1, subsection 104-10(4) provides that you make a capital gain if the capital proceeds from the disposal are more than the assets cost base or conversely you make a capital loss if the capital proceeds are less than the assets reduced cost base. Where the sale is a 'mere realisation', the sale is on capital account to which the CGT rules will generally apply. These proceeds are not ordinary income. The expression 'mere realisation' is used to distinguish a mere realisation from a business operation or a commercial transaction carrying out a profit-making scheme. In Westfield , the company was in the business of designing, constructing, letting and managing shopping centres. The company acquired land in the early 1970s and further land via an option which it subsequently sold and realised at a substantial gain. The Full Federal Court held that the disposal of land was on capital account as the necessary intention or purpose of making a profit on the sale of the land was absent. This was because the main aim of the company was to secure contracts to design, develop and operate/manage a shopping centre on the land. The disposal of the land was incidental to these purposes. The fact that the transaction was commercial, or a business transaction was, of itself, insufficient. The Full Federal Court in reaching its decision considered the judgement in Myer . Hill J. stated that Myer 'emphasises that where a transaction occurs outside the scope of ordinary business activities, it will be necessary to find, not merely that the transaction is "commercial" but also that there was, at the time it was entered into, the intention or purposes of making a relevant profit'. Other aspects of the judgement in Westfield discussed when profits from transactions outside the ordinary course of business of an entity constituted ordinary income: Once it is clear that the activity of buying and selling, which generated the profit, was not an activity in the ordinary course of business, or, for that matter, an ordinary incident of some other business activity, the profit in question will only form part of the assessable income of the appellant, by virtue of its being income in accordance with the ordinary concepts of mankind, if the appellant had a purpose of profit-making at the time of acquisition. And further: While a profit-making scheme may lack specificity of detail, the mode of achieving that profit must be one contemplated by the taxpayer as at least one of the alternatives by which the profit could be realised. Such was the case in [ Steinberg v Federal Commissioner of Taxation (1972-5) 134 CLR 640]. But, even if that goes too far, it is difficult to conceive of a case where a taxpayer would be said to have made a profit from the carrying on, or carrying out, of a profit-making scheme, where, in the case of a scheme involving the acquisition and resale of land, there was, at the time of acquisition, no purpose of resale of land, but only the possibility (present, one may observe, in the case of every acquisition of land) that the land may be resold. The same may be said to be the case where s. 25(1) of the Act is involved. As the court observed in Myer , in the passage already set out, the property, which generates the gain, must be acquired in an operation of business or commercial transaction: "... for the purpose of profit-making by the means giving rise to the profit." In determining whether a receipt is on revenue or capital account, the authorities establish that it is necessary to conduct "a wide survey and an exact scrutiny of the taxpayer's activities": Commissioner of Taxation v Stone (2005) 222 CLR 289 at [19]; Federal Commissioner of Taxation v Montgomery (1999) 198 CLR 639 at 663 [69]; both citing Western Gold Mines NL v Commissioner of Taxation (WA) (1938) 59 CLR 729 at 740 per Dixon and Evatt JJ. This 'wide survey' is particularly important where the sale of the asset is by a taxpayer conducting a business. Jacobs J noted in London Australia : The identification and characterization of the business carried on by the taxpayer is the essential task. Under the principle in Grollo Nominees Pty Ltd v Commissioner of Taxation (1997) 73 FCR 452, there will be occasions when it is appropriate to take into account the activities of the broader group of which the taxpayer is a part. | Detailed Reasoning - Application to Company A with regard to sale of the Site: On balance of evidence, the profits and gains from the sale of the various stages of the Site have not been (and will not be) obtained in the 'ordinary course of business', and the sale of land at the Site does not represent the disposal of land that is 'trading stock' of a business of selling land. The balance of evidence does not support an argument that the subdivision project was driven by a profit-first motive that would necessitate the land at the Site to be recognised in profit and loss (i.e. as a revenue asset). The gains made on sale of the subdivided land at the Site therefore represent the realisation of a CGT asset.

This ruling applies for the following period periods : | Company A is an Australian incorporated company listed on the Australian Securities Exchange (ASX). Company A is the head company of the Company A income tax consolidated group. | The Company A group is active in Australia and New Zealand. The principal activities of Company A are manufacturing, and sale of manufactured products. | Own manufacturing sites, given the significant capital investment and long-term tenure required at these locations, and | Lease properties for retail, warehouse and distribution purposes. | Company A's various business units are responsible for the daily management and operation of the leasehold and freehold sites. Given the large number of sites which Company A owns and leases there is a dedicated Property Division. | The Property Division assists in overseeing the property portfolio and provide advice and expertise in relation to the challenges and opportunities the business faces on property related matters. | Business support for current sites | Advice regarding impact on business operations | An annual financial target based on forecast property earnings before interest and tax (EBIT) is determined for the Property Division. | Considering management recommendations on proposed acquisitions, divestments and significant capital expenditure; | Considering the environmental impact of Company A's activities and monitoring compliance with Company A's sustainability policies and practices; and | Monitoring internal governance including delegated authorities. | Asset disposals above a certain level must be authorised by the Company A Board. | Due to the financial magnitude of the commitments, the subdivision and sale of the Site over the three stages have been endorsed by the GM of Group Property, approved by the CFO and Managing Director, and authorised by the Company A Board. | The Company A Board and the authorised employee always needs to be satisfied that a proposal to sell a site, is in line with the strategy of Company A's Manufacturing Division and allows for its future growth. Priority is given to the Manufacturing Division before management provides the Property Team with approval to sell a site. | The entire Site was previously one single lot. | Company A has owned the entire Site since 19XX. | The land was originally acquired with consideration to its suitability for Company A's main business purposes in the manufacturing sector. | The land is currently zoned Industrial (prior to early 20XXs it was zoned rural). | The Site was rezoned from rural to predominately 'General Industrial' by the relevant State Government as part of that state's Planning Policy. | The requirements and restrictions placed on Company A (as the result of rezoning) are set out in the Policy. The Policy prescribes the permitted uses for the land and consent requirements for subdivision, demolition of a building, developing near zone boundaries, earthworks, and clearing native vegetation. | The Site was previously one single lot. | Due to different factors associated with the site, Company A had no further use of that portion of land. Accordingly, Company A sought to subdivide the land to sell the surplus portion. | In December 201x, Company A lodged a DA with the local council for the subdivision of the land in three stages to create various lots for future industrial purposes and a lot for environmental conservation land. | Company A was not satisfied with Council's draft conditions and appealed to the relevant authority. That authority upheld the appeal and approved the DA in October 201x subject to various conditions that must be satisfied for subdivision to be approved. | At the time of obtaining the DA there was no intention to close the manufacturing plant. | The subdivision of the site was proposed in three stages to facilitate the rehabilitation of the site in Stage 1 and 2, while the manufacturing could continue to operate in Stage 3. | A reduction to the number of lots to be created from the subdivision. | On this basis, Company A undertook the remediation of Stage 1 and Stage 2, in preparation for its subdivision and sale. | Company A has subdivided land to sell Stages 1 and 2 with civil infrastructure works conducted to install roads, sewage, electricity and water as required for subdivision. | After obtaining the DA, Company A received several unsolicited offers for the purchase of Stage 1. An agent was engaged to represent Company A in negotiations with the interested parties. Company A was unable to agree terms with any of the initial inquiries due to the lack of available infrastructure (e.g. sewer, power and road access was not available to the site). | an unsolicited offer was made in January 201x which Company A accepted, and contracts were entered into in June of that year. Company A undertook to perform all works under the DA, including provide services to each lot, including sewer, power, storm water and road infrastructure. | Company A applied to remove an area of trees, which took several years to resolve with the Federal Government. The delay meant that the contractual sunset dates had been reached and the deal with the bidder fell through, releasing each party from their respective obligations. | Once the trees issue was resolved, marketing for the sale of Stage 1 commenced. | An offer was received from a party in October of the following year. The top bidder was selected and after extensive contractual negotiations, a contract for sale was executed. | It was impossible for Company A to sell Stage 1 in an un-remediated state. This is because the subdivision of Stage 1 from the rest of the Site was conditional on the remediation. | Company A consented to the bidder lodging a DA whilst Company A still owned Stage 1. The bidder received development approval for Stage 1. The sales price in the sales contract was not conditional on the approval of the DA. | Various civil infrastructure works were completed on the site (e.g. sewage, water, electricity, access roads, etc.). | Various civil infrastructure works were completed (e.g. sewage, water, electricity, access roads, etc.). However, this was the standard required by council and the DA. The construction of roads was a requirement which needed to be fulfilled before subdivision could occur. | Marketing for sale commenced in 201x. | No rezoning application was lodged by Company A in relation to Stage 2. | Stage 3 had the land last used by Company A in its operations in 202x. | An external business management consultant firm was engaged by Company A to undertake a strategic review and in 202x presented their findings to the Company A Board. The review found that the Site was not part of an optimised future network of Company A. The Company A Board resolved to endorse the proposed future network strategy which consisted, amongst other things, of potentially relocating its specialty products to an alternate location enabling a sale of the final stage of the Site. | Following the network review, Company A decided they would exit the Site by 202x. This in conjunction with the receipt of an unsolicited offer to buy Stage 3 resulted in a decision by the Company A Board to sell Stage 3. | Registration of the plan of subdivision and Company A serving the grantee with the Registration Notice. | Practical completion of all the works required pursuant to the development approval to subdivide the land and Company A serving the grantee with the Notice of Practical Completion; and | Company A obtaining the Geotechnical Compliance Certificate and Site Audit Statement and serving these Certifications to the grantee. | If all of the above conditions are not satisfied by Company A by the sunset date specified in the put and call option, the put and call option can be terminated, and it is possible that a sales contract will not be entered into. | Reasons for decision: Legislation in the following reasoning refers to the Income Tax Assessment Act 1997 (' ITAA 1997 '), unless otherwise indicated.