Private ruling: Capital gains tax - subdivision - income v capital
Date of advice: 15 January 2016
Published: March 2016
Ruling period: Income year ending 30 June 2016 | Income year ending 30 June 2017 | Income year ending 30 June 2018 | Income year ending 30 June 2019 | Income year ending 30 June 2020; and | Income year ending 30 June 2021.
Date scheme commenced: 1 July 2015

Ruling: Q1: Will the sale of the land be assessable as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) or otherwise assessable under section 15-15 of the ITAA 1997? | A1: No. | Q2: Will the loan received from the developer be considered to be capital proceeds received in relation to the disposal of the land? | A2: Yes. | Q3: Will you be able to fully disregard any capital gain made on the disposal of your ownership interest in the land? | A3: Yes.

Relevant facts and circumstances: Documents have been provided with this private ruling application and those documents for part of, and should be read in conjunction with the private ruling. Your parents purchased the property (Property A) and continued to own it until they passed away and you and your siblings inherited the property prior to 20 September 1985. The property was used for various primary production purposes. The property is currently vacant and no business activities have been undertaken by you and your siblings for around 10 years. The property has been zoned as residential for over 20 years. Distant relatives (Family A) of you and your siblings own the adjoining property (Property B). You and your siblings and Family A had submitted a development application in relation to both properties over 25 years after you and your siblings had inherited Property A, for the development of the two properties into allotments. The development application was approved by the City of Salisbury around four years after the development application had been submitted. A developer (the Developer) approached you and your siblings and Family A with a proposal to develop both properties (the land) by subdividing Property A and Property B and selling the vacant blocks of land. The Developer is in the business of undertaking residential developments. Property A has not previously been put on the market for sale. You and your siblings have considered disposing of Property A as an outright sale, and have had a number of discussions with land agents in the area. An offer of purchase for Property A was made prior to the submission of the development application by a purchaser wanting to undertake a similar land division to the one proposed by the Developer, however, you and your siblings turned the offer down. After looking at alternative ways to dispose of Property A, the proposal put forward by the Developer is most likely to provide the greatest financial return for you and your siblings and the best means of realising your asset. You and your siblings have not undertaken any land subdivision or property development of the nature of this proposed land development project. A draft agreement (the Draft Development Agreement) has been drawn up between the Developer, you and your siblings, and Family A under which the following is proposed: • The Developer will: • Undertake the management of the development • will develop the land in a two stage process as a staged subdivision to and is expected to create over 70 vacant residential lots • be responsible for the carrying out of all development works including all design, documentation and works • will incur (to the extent reasonably practicable) and fund all of the development costs • loan the landowners that amount of money, which will be interest free • undertake the marketing and sales of the allotments • will receive a set percentage fee(including Goods and Services Tax) on the Allotment Sale Proceeds; and • maintain insurance for the land, and the development works, in their name or a related entity's name • you and your siblings and Family A: • will receive a set percentage of the Allotment Sale Proceeds • will remain the registered owners of the land until the settlement date on the sale of the Allotments, or in the case of land that is not an Allotment, the settlement of the transfer of that portion of land in accordance with the Draft Development Agreement; and • will repay the loan received from the Developer from the proceeds received from the first few Allotment sales until the loan is repaid in full. For the purposes of this private ruling, the development of Property A will be undertaken in accordance with the Draft Development Agreement.

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 102-20 | Income Tax Assessment Act 1997 Section 104-10 | Income Tax Assessment Act 1997 Subsection 104-10(3)

Reasons for decision: Detailed Reasoning - Income or capital: As a general principle, profits from property sales will either be assessable as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) or statutory income under the capital gains tax (CGT) provisions of the ITAA 1997. Where the profit has been made as a result of a taxpayer carrying on a business of property development or as a result of a taxpayer entering into an isolated business transaction, the profit will be assessable as ordinary income. However, where the profit is a mere realisation of a capital asset, the profit will be assessable under the CGT provisions of the ITAA 1997. There have been several cases in which the courts have addressed the question of whether the proceeds received for the sale of an asset are revenue or capital in nature. The decision in each case depended on its own facts, and very often will be a matter of degree. The extent of the personal involvement of the taxpayer in much of the planning, organisation and management of the activities has been held to be significant factors in the determination of whether or not a business was being carried out. For example: • In Stevenson v FC of T (1991) 91 ATC 4476; (1991) 22 ATR 56; (1991) 29 FCR 282 (Stevenson) the degree of the taxpayer's involvement was seen as an indicator of a business being conducted; and • The lack of personal taxpayer involvement was seen as a relevant to the finding that a business was not being conducted in the cases of Stratham V FCT 89 ATC 4070, McCorkell v FCT 98 ATC 2199 (McCorkell) and Casimaty v FCT 97 ATC 5 (Casimaty). Taxation Ruling TR 92/3 (TR 92/3) considers whether profits made as a result of an isolated business transaction are income. From the cases involving the subdivision of land and from Taxation Ruling TR 92/3, it would appear that the following are the most important factors to consider when determining whether profits made as a result of an isolated business transaction are assessable income: (a) the intention or purpose of the taxpayer in entering into the transaction was to make a profit or gain (b) 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 determining whether an isolated transaction amounts to a business operation or commercial transaction the following factors are relevant: 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. Application to your circumstances Based on the information and documentation provided, it is viewed that you and your siblings are not in the business of buying, selling or developing and have never previously been involved in carrying on a business of this nature. You and your siblings have held the land since before 20 September 1985, and have used the land for primary production purposes. The amounts of money involved in the transaction are significant and the magnitude of profit will also be very substantial, however the Developer will provide their own funding. The development of the land will all be undertaken by the Developer and overall it would appear that you and your siblings will have minimal personal involvement in the process. You and your siblings and Family A are providing the land for sale, however, the Developer will be relied upon to undertake the marketing, sale and other activities associated with the subdivision. Based on these factors we have concluded that the project is the mere realisation of a capital asset and any profits made will be considered under the CGT provisions. | Detailed Reasoning - CGT event on disposal: Section 102-20 of the ITAA 1997 provides that you make a capital gain or capital loss if, and only if, a CGT event happens to a CGT asset that you own. In accordance with section 104-10 of the ITAA 1997, CGT event A1 happens when you dispose of an asset to someone else. Subsection 104-10(3) of the ITAA 1997 considers the timing of the event. The time of the event is either when you enter into a contract for the disposal, of if there is no contract, when the change of ownership occurs. Application to your situation In your situation, CGT event A1 will occur when the sale contract on each developed lot is entered into. As you and your siblings acquired your ownership interests in Property A before 20 September 1985, your ownership interests are considered to be pre-CGT assets. Therefore, any capital gain made on the disposal of you and your sibling's ownership interests in the land will be disregarded. Loan of money from the Developer In accordance with the Development Agreement, the Developer will collectively loan you and your siblings and Family A an interest free loan. This loan will be repaid to the Developer from the proceeds received from the sale of the first subdivided lots, until the loan is repaid. Based on the information provided, we consider that the loan that you and your siblings Family A will collectively receive from the Developer will merely be an advance of capital proceeds that you collectively would otherwise be entitled to receive under the agreement.