Private ruling: Property - subdivision - development -Carrying on a business? - isolated transaction - mere realisation
Date of advice: 30 May 2016
Published: July 2016
Ruling period: Income year ending 30 June 2016 | Income year ending 30 June 2017; and | Income year ending 30 June 2018.
Date scheme commenced: 1 July 2015.

Ruling: Q1: Will the gain made on the disposal of the subdivided lot and the off the plan townhouse be assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes. | Q2: Will the gain made on the disposal of the subdivided lot and the off the plan townhouse be assessable under Parts 3-1 or 3-3 of the ITAA 1997? | A2: Yes. However, section 118-20 of the ITAA 1997 will apply to reduce the capital gain to the extent that the profit from the sale of the subdivided lot and the off the plan townhouse is otherwise included as assessable income under section 6-5 of the ITAA 1997.

Relevant facts and circumstances: Documentation has been provided with the private ruling application which should be read in conjunction with, and forms part of, the scheme. You purchased a property (the Property) with settlement occurring in 20XX. Your intention when you purchased the Property was to reside in the dwelling (the House) located on the Property as your primary principle residence. The House was rented out for around 12 months after settlement had occurred, after which you moved into the House and have continued to reside there until the present time. The House needs major repairs to restore it to a functional level. Rather than paying the amount required, to undertake the repairs, you have decided to build a new house. Due to your financial constraints, you have decided to demolish the existing House, subdivide the Property into two lots, sell one lot with an off the plan townhouse (Sale Townhouse) and use the proceeds from the sale of the Sale Townhouse to fund the building costs build a townhouse on the other subdivided lot which will be your main residence. You contacted a company (the Company) for a quotation for the demolition of the House and the construction of two townhouses (the Project). In 20YY, the Company provided a sales quotation for the Project in which it was stated that the total costs for the two townhouses was over $700,000. The estimated market value of the Property with the planning permit is over $700,000. It is estimated that the sale price of the Sale Townhouse will be around $X00,000. A planning permit application was lodged with the local council (the Council) who issued a planning permit in 20ZZ, approving the construction of two dwellings on the Property. You have not lodged an application for the subdivision of the Property. You will not personally undertake any activities in relation to the demolition, and construction of the two townhouses. You have not undertaken any activities or a similar nature in the past and do not intend to undertake any similar activities in the future. For the purposes of this ruling the following will occur: • An application for the subdivision of the Property will be lodged and the Property will be subdivided into two lots • You will engage the services of the Company who will demolish the House and construct the two townhouses in accordance with the sales quotation • You will engage the services of a real estate agent to sell one of the subdivided lots and an off the plan townhouse • You keep the other subdivided lot on which the second townhouse will be constructed, which will be your main residence; and • The two townhouses will be constructed in accordance with the planning permit issued by the Council.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 8-1 | Income Tax Assessment Act 1997 Section 118-20 | Income Tax Assessment Act 1997 Section 995-1 | Income Tax Assessment Act 1997 Part 3-1 | Income Tax Assessment Act 1997 Part 3-3 Reason for decision | Summary | You are not carrying on a business of property development because your activities do not display the salient indicator of a business, which are transactions entered into on a continuous and repetitive basis. However, any profit or loss from the sale of the Sale Townhouse off the plan will still be accounted for on revenue account as an isolated commercial transaction because you are subdividing the Property and constructing the townhouse for the primary purpose of making a profit on its sale. | Detailed reasoning | Legislative references referred to herein are from the ITAA 1997 . | Taxation treatment of property sales | There are three ways profits from property sales can be treated for taxation purposes: | 1. As ordinary income under section 6-5, on revenue account, as a result of carrying on a business of property development, involving the sale of land as trading stock; or | 2. As ordinary income under section 6-5, on revenue account, as a result of an isolated business transaction entered into by a non-business taxpayer, or outside the ordinary course of business of a taxpayer carrying on a business, which is the commercial exploitation of an asset acquired for a profit making purpose; or | 3. As statutory income under the capital gains tax (CGT) legislation, sections 10-5 and 102-5, on the basis that a mere realisation of a capital asset has occurred. | Whether the proceeds are treated as income or capital depends on the situation and circumstances of each particular case. | Application to your situation | You purchased the Property with the intention of living in the House as your principal place of residence. | The House was rented out for around 12 months after settlement occurred and then you moved into the House. | Your intention is to have the House demolished, subdivide the Property land into two lots, sell one of the subdivided lots with an off the plan townhouse, and use the sale proceeds to build a townhouse on the other subdivided lot, which will be your main residence. | As you are not disposing of the newly constructed townhouse in which you will reside once it has been constructed, this ruling does not consider any taxation implications in relation to that townhouse. As it will be your main residence, the general capital gains tax provisions will apply to it. | We will consider each of the ways you can make a profit as outlined above in relation to the gain made on the sale of the Sale Townhouse as follows: | Carrying on a business of property development | Section 995 of the ITAA 1997 states the term 'business' includes any profession, trade, employment, vocation, or calling, but does not include occupation as an employee. | To determine whether an activity, or series of activities, amounts to a business, the activity needs to be considered against the indicators of a business established by case law. | In the High Court of Australia case of Hope v. Bathurst City Council (1980) 144 CLR 1; (1980) 29 ALR 577; (1980) 80 ATC 4386; [1980] HCA 16, a business was described in the following ways: | It is the words "carrying on'' which imply the repetition of acts and activities which possess something of a permanent character. | …activities engaged in for the purpose of profit on a continuous and repetitive basis. | Transactions were entered into on a continuous and repetitive basis for the purpose of making a profit…manifested the essential characteristics required of a business. | For a one-off land subdivision to be considered to be of a business or commercial nature, it is usually necessary that a taxpayer has the purpose of profit-making at the time of acquiring the property. | The Commissioner's view on whether a taxpayer is carrying on a business is found in Taxation Ruling TR 97/11 (TR 97/11) which uses the following indicators to determine whether a taxpayer is carrying on a business: | • whether the activity has a significant commercial purpose or character; | • whether there is repetition and regularity of the activity; | • whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business; | • whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit; | • the size, scale and permanency of the activity; and | • whether the activity is better described as a hobby, a form of recreation or a sporting activity. | In determining whether a taxpayer is carrying on a business, no one indicator will be decisive. The indicators must be considered in combination and as a whole. Whether a business is being carried on depends on the large or general impressions gained from looking at all the indicators and whether these indicators provide the operations with a commercial flavour. | Application to your situation | In this case, the Property was purchased with the intention that it would be your main residence. You now intend demolishing the House, subdividing the Property land, and selling one of the subdivided lots with an off the plan townhouse, the Sale Townhouse. | You will engage the services of other parties to undertake the demolition of the House, subdivision of the Property, gaining of all approvals for the construction of two townhouses and the sale of the Sale Townhouse. | You have not previously undertaken any similar activities in the past and do not have any intention to undertake any similar activities in the future. | After reviewing the information and documentation provided, it is the Commissioner's view that the activities involved with the Project are not those of an entity carrying on a business of developing property. | The activities undertaken do not display the salient indicator of a business, which are transactions entered into on a continuous and repetitive basis. The building of the townhouses will be undertaken by another party and the activity is in relation to a relatively small one off project that was not carried on in a manner similar to other property development businesses. | Therefore, any gain made on the disposal of the Sale Townhouse will not be assessable income under section 6-5 as ordinary income from the carrying on of a business. | Isolated business transactions | Profits from isolated transactions will be assessable as ordinary income where 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 out a business operation or commercial transaction | Taxation Ruling TR 92/3 (TR 92/3) sets out the Commissioner's view of the general principles and factors that have been considered in determining whether an isolated transaction is of a revenue nature. | Paragraph 1 of TR 92/3 outlines that isolated transactions are: | a) those transactions outside the ordinary course of business of a taxpayer carrying on a business; and | b) those transactions entered into by non-business taxpayers. | The ruling outlines at paragraph 6 that whether a profit from an isolated transaction will be ordinary income will depend on the circumstances of the case, however a profit from an isolated transaction will be ordinary income when: | a) the intention or purpose of a taxpayer in entering into the transaction was to make a profit or gain; and | b) the transaction was entered into, and the profit was made in the course of carrying on a business operation or commercial transaction. | TR 92/3 outlines that the relevant intention or purpose of the taxpayer, of making a profit or gain, is not the subjective intention or purpose of the taxpayer. Rather, it is the taxpayer's intention or purpose discerned from an objective consideration of the facts and circumstances of the case. | If a transaction or operation is outside the ordinary course of a taxpayer's business, the intention or purpose of profit-making must exist in relation to the transaction or operation in question. | The transaction may take place in the course of carrying on a business even if the transaction is outside the ordinary course of the taxpayer's business. | Paragraphs 41 and 42 of the ruling outline that where a taxpayer acquires an asset with the intention of using it for personal enjoyment but later decides to venture or commit the asset into a profit-making undertaking or scheme with the characteristics of a business operation or commercial transaction, the activity of the taxpayer constitutes the carrying on of a business operation or commercial transaction carrying out a profit-making scheme, as the case may be. | Whether a particular transaction has a business or commercial character depends very much on the circumstances of the case. Paragraph 13 of the ruling outlines the following factors which may be relevant when considering whether an isolated transaction amounts to a business operation or commercial transaction: | • the nature of the entity undertaking the operation or transaction | • the nature and scale of other activities undertaken by the taxpayer | • the amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained | • the nature, scale and complexity of the operation or transaction | • the manner in which the operation or transaction was entered into or carried out | • the nature of any connection between the relevant taxpayer and any other party to the operation or transaction | • if the transaction involves the acquisition and disposal of property, the nature of the property, and | • the timing of the transaction or the various steps in the transaction. | The direction provided within TR 92/3 and the above cases indicates that profits in this context are more likely to be considered ordinary income if they are made in the ordinary course of carrying on a business. Further, ordinary income may be derived from an isolated transaction which becomes commercial in nature, or as a result of profits on a transaction in which the initial intention was to make a profit on sale. | Miscellaneous Taxation Ruling MT 2006/1 provides a list of specific factors relevant to isolated transactions and sales of real property. If several of the factors are present, it may be an indication that a business or an adventure or concern in the nature of trade is being carried on. These factors are as follows: | • there is a change of purpose for which the land is held; | • additional land is acquired to be added to the original parcel of land; | • the parcel of land is brought into account as a business asset; | • there is a coherent plan for the subdivision of the land; | • there is a business organisation - for example a manager, office and letterhead; | • borrowed funds financed the acquisition or subdivision; | • interest on money borrowed to defray subdivisional costs was claimed as a business expense; | • there is a level of development of the land beyond that necessary to secure council approval for the subdivision; and | • buildings have been erected on the land. | In determining whether activities relating to isolated transactions are an enterprise or are the mere realisation of a capital asset, it is necessary to examine the facts and circumstances of each particular case. This may require a consideration of the factors outlined above; however there may also be other relevant factors that need to be weighed up as part of the process of reaching an overall conclusion. No single factor will be determinative; rather it will be a combination of factors that will lead to a conclusion as to the character of the activities. | Application to your situation | In this case, it was your intention to use the Property as your main residence, which it was after you moved into in 20XY. | You will demolish the House, subdivide the Property land, sell the Sale Townhouse and keep the other subdivided lot on which you will build a new townhouse that will be your main residence. | The estimated market value of the Property with the planning permit is over $700,000. | The total cost for the demolition of the House and the construction of the two townhouses is over $700,000. It is estimated that the sale price for the Sale Townhouse will be around $X00,000. | In very general terms, a transaction or operation has the character of a business operation or commercial transaction if the transaction or operation would constitute the carrying on of a business except that it does not occur as part of repetitious or recurring transactions or operations. | In your case, the Commissioner is satisfied that the proceeds from the sale of the Townhouse will be those from an isolated transaction as you are not carrying on a business of property development. The Project will be undertaken by another entity, the activities lack repetition and regularity of activities of a person conducting a business operation and the activity comprises of only two townhouses. | You intend keeping one of the subdivided lots and building a new townhouse on which you will build a townhouse which will be your main residence. That townhouse will retain its capital nature. | However, your intention in relation to the Property changed when you decided to subdivide the Property and sell one of the subdivided lots with an off the plan townhouse. Your intention, or purpose, when you entered into the scheme of selling the Sale Townhouse was to make a profit or gain. | There is a coherent plan of subdivision and a demonstrated intention to profit as you are subdividing the Property and selling the Sale Townhouse specifically for the purpose of selling it to make a gain. | You have approached the Project in a businesslike way by seeking advice from the Company in relation to the demolition of the House, and the construction of the townhouses. | You did not acquire the Property for resale at a profit. However, you are now venturing into a profit making scheme. Your purpose in carrying out the Project is to enable you to use the proceeds from the off the plan sale of the Sale Townhouse to construct a new townhouse, which will be your main residence. | If you had sold the property as it is, any gain would be a mere realisation. However, in your case you are going beyond what is required to merely realise the value of the Property. In particular: | • You would be able to sell the Property for a profit without subdividing it | • The subdivision and planning permits are enhancing the value of the Property | • You have approached the Project in a businesslike way; and | • You intend to make a profit from the off the plan sale of the Sale Townhouse | Accordingly, your activities will have the characteristics of a commercial transaction. As you will be carrying out an isolated commercial transaction with a view to a profit, the profit made will be ordinary income under section 6-5 of the ITAA 1997. | Capital gains tax | The capital gains tax (CGT) provisions are contained in Part 3-1 of the ITAA 1997. Broadly, the provisions include in your assessable income any assessable gain or loss made when a CGT event happens to a CGT asset that you own. | CGT event A1 under section 104-10 happens if you dispose a CGT asset. A CGT asset is any kind of property or a legal or equitable right that is not property. | You make a capital gain or loss as a result of a CGT event happening to a CGT asset. CGT assets include real estate acquired on or after 20 September 1985. | You make a capital gain if the capital proceeds from the sale of a CGT asset are greater than the cost base of that asset, for example, if you receive more for an asset than you paid for it. | You make a capital loss if the reduced cost base of an asset is greater than the capital proceeds resulting from the sale of the asset, for example, if you receive less for an asset than you paid for it. | Where an asset is split into 2 or more assets, and you are the owner of both the original asset and the 'new' asset or assets, section 112-25 provides that the split is not a CGT event and the cost base is apportioned to each 'new' asset in a reasonable way. | The inclusion of the profit or gain on the sale of a CGT asset as ordinary income does not mean that a CGT event does not happen in relation to the asset. However, section 118-20 of the ITAA 1997 operates to ensure that amounts which are assessable income outside of the CGT provisions are not also taxed as capital gains. Therefore, while a CGT event will occur when an asset is sold (CGT event A1), any capital gain will be reduced by the amount included as ordinary assessable income under section 6-5 of the ITAA 1997. | Application to your situation | In your case, no CGT event will occur when the Property is subdivided into two lots and both of the subdivided lots will be treated for CGT purposes as if they had both been acquired when the Property was acquired. | Making an overall assessment on the factors set out in TR 93/2, it is the Commissioner's view that the off the plan sale of the Sale Townhouse will not be a mere realisation of a capital asset. | Therefore, as the disposal of the Sale Townhouse is viewed as an isolated transaction, any profit made on its sale will be included in your assessable income under section 6-5. | CGT event A1 will occur on the off the plan sale of the Sale Townhouse. However, as the disposal of the Sale Townhouse is viewed as being an isolated transaction, any capital gain arising from this CGT event will be reduced to the extent that the profit from the sale of the Sale Townhouse is included in your assessable income under section 6-5.

Reasons for decision: Summary: You are not carrying on a business of property development because your activities do not display the salient indicator of a business, which are transactions entered into on a continuous and repetitive basis. However, any profit or loss from the sale of the Sale Townhouse off the plan will still be accounted for on revenue account as an isolated commercial transaction because you are subdividing the Property and constructing the townhouse for the primary purpose of making a profit on its sale. | Detailed Reasoning - Detailed reasoning: Legislative references referred to herein are from the ITAA 1997 . | Detailed Reasoning - Taxation treatment of property sales: There are three ways profits from property sales can be treated for taxation purposes: 1. As ordinary income under section 6-5, on revenue account, as a result of carrying on a business of property development, involving the sale of land as trading stock; or 2. As ordinary income under section 6-5, on revenue account, as a result of an isolated business transaction entered into by a non-business taxpayer, or outside the ordinary course of business of a taxpayer carrying on a business, which is the commercial exploitation of an asset acquired for a profit making purpose; or 3. As statutory income under the capital gains tax (CGT) legislation, sections 10-5 and 102-5, on the basis that a mere realisation of a capital asset has occurred. Whether the proceeds are treated as income or capital depends on the situation and circumstances of each particular case. | Detailed Reasoning - Application to your situation: You purchased the Property with the intention of living in the House as your principal place of residence. The House was rented out for around 12 months after settlement occurred and then you moved into the House. Your intention is to have the House demolished, subdivide the Property land into two lots, sell one of the subdivided lots with an off the plan townhouse, and use the sale proceeds to build a townhouse on the other subdivided lot, which will be your main residence. As you are not disposing of the newly constructed townhouse in which you will reside once it has been constructed, this ruling does not consider any taxation implications in relation to that townhouse. As it will be your main residence, the general capital gains tax provisions will apply to it. We will consider each of the ways you can make a profit as outlined above in relation to the gain made on the sale of the Sale Townhouse as follows: | Detailed Reasoning - Carrying on a business of property development: Section 995 of the ITAA 1997 states the term 'business' includes any profession, trade, employment, vocation, or calling, but does not include occupation as an employee. To determine whether an activity, or series of activities, amounts to a business, the activity needs to be considered against the indicators of a business established by case law. In the High Court of Australia case of Hope v. Bathurst City Council (1980) 144 CLR 1; (1980) 29 ALR 577; (1980) 80 ATC 4386; [1980] HCA 16, a business was described in the following ways: It is the words "carrying on'' which imply the repetition of acts and activities which possess something of a permanent character. …activities engaged in for the purpose of profit on a continuous and repetitive basis. Transactions were entered into on a continuous and repetitive basis for the purpose of making a profit…manifested the essential characteristics required of a business. For a one-off land subdivision to be considered to be of a business or commercial nature, it is usually necessary that a taxpayer has the purpose of profit-making at the time of acquiring the property. The Commissioner's view on whether a taxpayer is carrying on a business is found in Taxation Ruling TR 97/11 (TR 97/11) which uses the following indicators to determine whether a taxpayer is carrying on a business: • whether the activity has a significant commercial purpose or character; • whether there is repetition and regularity of the activity; • whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business; • whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit; • the size, scale and permanency of the activity; and • whether the activity is better described as a hobby, a form of recreation or a sporting activity. In determining whether a taxpayer is carrying on a business, no one indicator will be decisive. The indicators must be considered in combination and as a whole. Whether a business is being carried on depends on the large or general impressions gained from looking at all the indicators and whether these indicators provide the operations with a commercial flavour. | Detailed Reasoning - Application to your situation: In this case, the Property was purchased with the intention that it would be your main residence. You now intend demolishing the House, subdividing the Property land, and selling one of the subdivided lots with an off the plan townhouse, the Sale Townhouse. You will engage the services of other parties to undertake the demolition of the House, subdivision of the Property, gaining of all approvals for the construction of two townhouses and the sale of the Sale Townhouse. You have not previously undertaken any similar activities in the past and do not have any intention to undertake any similar activities in the future. After reviewing the information and documentation provided, it is the Commissioner's view that the activities involved with the Project are not those of an entity carrying on a business of developing property. The activities undertaken do not display the salient indicator of a business, which are transactions entered into on a continuous and repetitive basis. The building of the townhouses will be undertaken by another party and the activity is in relation to a relatively small one off project that was not carried on in a manner similar to other property development businesses. Therefore, any gain made on the disposal of the Sale Townhouse will not be assessable income under section 6-5 as ordinary income from the carrying on of a business. | Detailed Reasoning - Isolated business transactions: Profits from isolated transactions will be assessable as ordinary income where 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 out a business operation or commercial transaction Taxation Ruling TR 92/3 (TR 92/3) sets out the Commissioner's view of the general principles and factors that have been considered in determining whether an isolated transaction is of a revenue nature. Paragraph 1 of TR 92/3 outlines that isolated transactions are: a) those transactions outside the ordinary course of business of a taxpayer carrying on a business; and b) those transactions entered into by non-business taxpayers. The ruling outlines at paragraph 6 that whether a profit from an isolated transaction will be ordinary income will depend on the circumstances of the case, however a profit from an isolated transaction will be ordinary income when: a) the intention or purpose of a taxpayer in entering into the transaction was to make a profit or gain; and b) the transaction was entered into, and the profit was made in the course of carrying on a business operation or commercial transaction. TR 92/3 outlines that the relevant intention or purpose of the taxpayer, of making a profit or gain, is not the subjective intention or purpose of the taxpayer. Rather, it is the taxpayer's intention or purpose discerned from an objective consideration of the facts and circumstances of the case. If a transaction or operation is outside the ordinary course of a taxpayer's business, the intention or purpose of profit-making must exist in relation to the transaction or operation in question. The transaction may take place in the course of carrying on a business even if the transaction is outside the ordinary course of the taxpayer's business. Paragraphs 41 and 42 of the ruling outline that where a taxpayer acquires an asset with the intention of using it for personal enjoyment but later decides to venture or commit the asset into a profit-making undertaking or scheme with the characteristics of a business operation or commercial transaction, the activity of the taxpayer constitutes the carrying on of a business operation or commercial transaction carrying out a profit-making scheme, as the case may be. Whether a particular transaction has a business or commercial character depends very much on the circumstances of the case. Paragraph 13 of the ruling outlines the following factors which may be relevant when considering whether an isolated transaction amounts to a business operation or commercial transaction: • the nature of the entity undertaking the operation or transaction • the nature and scale of other activities undertaken by the taxpayer • the amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained • the nature, scale and complexity of the operation or transaction • the manner in which the operation or transaction was entered into or carried out • the nature of any connection between the relevant taxpayer and any other party to the operation or transaction • if the transaction involves the acquisition and disposal of property, the nature of the property, and • the timing of the transaction or the various steps in the transaction. The direction provided within TR 92/3 and the above cases indicates that profits in this context are more likely to be considered ordinary income if they are made in the ordinary course of carrying on a business. Further, ordinary income may be derived from an isolated transaction which becomes commercial in nature, or as a result of profits on a transaction in which the initial intention was to make a profit on sale. Miscellaneous Taxation Ruling MT 2006/1 provides a list of specific factors relevant to isolated transactions and sales of real property. If several of the factors are present, it may be an indication that a business or an adventure or concern in the nature of trade is being carried on. These factors are as follows: • there is a change of purpose for which the land is held; • additional land is acquired to be added to the original parcel of land; • the parcel of land is brought into account as a business asset; • there is a coherent plan for the subdivision of the land; • there is a business organisation - for example a manager, office and letterhead; • borrowed funds financed the acquisition or subdivision; • interest on money borrowed to defray subdivisional costs was claimed as a business expense; • there is a level of development of the land beyond that necessary to secure council approval for the subdivision; and • buildings have been erected on the land. In determining whether activities relating to isolated transactions are an enterprise or are the mere realisation of a capital asset, it is necessary to examine the facts and circumstances of each particular case. This may require a consideration of the factors outlined above; however there may also be other relevant factors that need to be weighed up as part of the process of reaching an overall conclusion. No single factor will be determinative; rather it will be a combination of factors that will lead to a conclusion as to the character of the activities. | Detailed Reasoning - Application to your situation: In this case, it was your intention to use the Property as your main residence, which it was after you moved into in 20XY. You will demolish the House, subdivide the Property land, sell the Sale Townhouse and keep the other subdivided lot on which you will build a new townhouse that will be your main residence. The estimated market value of the Property with the planning permit is over $700,000. The total cost for the demolition of the House and the construction of the two townhouses is over $700,000. It is estimated that the sale price for the Sale Townhouse will be around $X00,000. In very general terms, a transaction or operation has the character of a business operation or commercial transaction if the transaction or operation would constitute the carrying on of a business except that it does not occur as part of repetitious or recurring transactions or operations. In your case, the Commissioner is satisfied that the proceeds from the sale of the Townhouse will be those from an isolated transaction as you are not carrying on a business of property development. The Project will be undertaken by another entity, the activities lack repetition and regularity of activities of a person conducting a business operation and the activity comprises of only two townhouses. You intend keeping one of the subdivided lots and building a new townhouse on which you will build a townhouse which will be your main residence. That townhouse will retain its capital nature. However, your intention in relation to the Property changed when you decided to subdivide the Property and sell one of the subdivided lots with an off the plan townhouse. Your intention, or purpose, when you entered into the scheme of selling the Sale Townhouse was to make a profit or gain. There is a coherent plan of subdivision and a demonstrated intention to profit as you are subdividing the Property and selling the Sale Townhouse specifically for the purpose of selling it to make a gain. You have approached the Project in a businesslike way by seeking advice from the Company in relation to the demolition of the House, and the construction of the townhouses. You did not acquire the Property for resale at a profit. However, you are now venturing into a profit making scheme. Your purpose in carrying out the Project is to enable you to use the proceeds from the off the plan sale of the Sale Townhouse to construct a new townhouse, which will be your main residence. If you had sold the property as it is, any gain would be a mere realisation. However, in your case you are going beyond what is required to merely realise the value of the Property. In particular: • You would be able to sell the Property for a profit without subdividing it • The subdivision and planning permits are enhancing the value of the Property • You have approached the Project in a businesslike way; and • You intend to make a profit from the off the plan sale of the Sale Townhouse Accordingly, your activities will have the characteristics of a commercial transaction. As you will be carrying out an isolated commercial transaction with a view to a profit, the profit made will be ordinary income under section 6-5 of the ITAA 1997. | Detailed Reasoning - Capital gains tax: The capital gains tax (CGT) provisions are contained in Part 3-1 of the ITAA 1997. Broadly, the provisions include in your assessable income any assessable gain or loss made when a CGT event happens to a CGT asset that you own. CGT event A1 under section 104-10 happens if you dispose a CGT asset. A CGT asset is any kind of property or a legal or equitable right that is not property. You make a capital gain or loss as a result of a CGT event happening to a CGT asset. CGT assets include real estate acquired on or after 20 September 1985. You make a capital gain if the capital proceeds from the sale of a CGT asset are greater than the cost base of that asset, for example, if you receive more for an asset than you paid for it. You make a capital loss if the reduced cost base of an asset is greater than the capital proceeds resulting from the sale of the asset, for example, if you receive less for an asset than you paid for it. Where an asset is split into 2 or more assets, and you are the owner of both the original asset and the 'new' asset or assets, section 112-25 provides that the split is not a CGT event and the cost base is apportioned to each 'new' asset in a reasonable way. The inclusion of the profit or gain on the sale of a CGT asset as ordinary income does not mean that a CGT event does not happen in relation to the asset. However, section 118-20 of the ITAA 1997 operates to ensure that amounts which are assessable income outside of the CGT provisions are not also taxed as capital gains. Therefore, while a CGT event will occur when an asset is sold (CGT event A1), any capital gain will be reduced by the amount included as ordinary assessable income under section 6-5 of the ITAA 1997. | Detailed Reasoning - Application to your situation: In your case, no CGT event will occur when the Property is subdivided into two lots and both of the subdivided lots will be treated for CGT purposes as if they had both been acquired when the Property was acquired. Making an overall assessment on the factors set out in TR 93/2, it is the Commissioner's view that the off the plan sale of the Sale Townhouse will not be a mere realisation of a capital asset. Therefore, as the disposal of the Sale Townhouse is viewed as an isolated transaction, any profit made on its sale will be included in your assessable income under section 6-5. CGT event A1 will occur on the off the plan sale of the Sale Townhouse. However, as the disposal of the Sale Townhouse is viewed as being an isolated transaction, any capital gain arising from this CGT event will be reduced to the extent that the profit from the sale of the Sale Townhouse is included in your assessable income under section 6-5.