Private ruling: Capital gains tax – subdivision of property – mere realisation
Date of advice: 30 November 2017
Published: April 2018
Ruling period: Income year ended 30 June 2018
Date scheme commenced: 1 July 2017

Ruling: Q1: Will the gain (or loss) from the sale of two subdivided lots be treated as the mere realisation of a capital asset? | A1: Yes

Relevant facts and circumstances: You have not previously been involved in property subdivision or development. You purchased the dwelling in 200X as joint tenant with your child. You purchased the property with an investment loan. The dwelling was your child’s main residence for a period of approximately X years. The dwelling has been rented out since that time but is now rundown and vacant. The property is listed on the market in its present state. You have not received any offers to purchase the property in its present state. You received advice from your real estate agent that the sale of the property could be more profitable if you demolish the existing dwelling and subdivide the land. You have engaged a surveyor. You have not engaged the services of a project manager or property developer. You approached the Council for information about how to subdivide the land. You have not applied to have the land rezoned to allow for the subdivision. You were granted development consent to subdivide the block into two equal lots in September 201X. The conditions listed in the Development Approval were that: ● The subdivision be completed in accordance with the plans provided by the surveyor as part of the application. ● Existing structures be removed from the proposed allotments. ● Financial requirements in relation to the provision of water and sewerage. ● Water piping which crosses the allotment boundaries be severed or redirected at your expense. ● A final plan to be lodged with the Development Assessment Commission for Division Certificate purposes. You will not undertake any additional works or construct any new buildings or structures on the lots before they are sold. You intend to finance the subdivision costs from your own finances, as they arise. The subdivided blocks will be marketed and sold by a real estate agent.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5. | Income Tax Assessment Act 1997 Section 6-10. | Income Tax Assessment Act 1997 Section 102-5. | Income Tax Assessment Act 1997 Section 104-10.

Reasons for decision: Summary: For taxation purposes, profits from a land subdivision can be treated either as ordinary income as a result of carrying on a business of property development, or because a non-business taxpayer has entered into an isolated commercial transaction outside the course of business, or as a capital gain from the mere realisation of a capital asset. The term 'business' ordinarily refers to trade engaged in on a regular or continuous basis. An isolated (one-off) commercial transaction does not amount to a business, but has the characteristics of a ‘business deal’. It is usually necessary for the taxpayer to have the purpose of profit-making at the time of acquiring the property and that the property has no use other than as the subject of trade. In your case, the sale of the subdivided lots will be a mere realisation of a capital asset and subject to CGT rather than taxable as ordinary income, as you are not carrying on a business of property development and we do not consider the activity to be a commercial transaction.