Private ruling: Property - subdivision - Am I in business? - isolated transaction - mere realisation
Date of advice: 28 April 2016
Published: June 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 profit from the sale of the subdivided blocks of land be treated as ordinary income under section 6 -5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. | Q2: Will the profit from the sale of subdivided blocks of land be treated as statutory income under the capital gains tax provisions in Parts 3-1 and 3-3 of the ITAA 1997? | A2: Yes. | Q3: Will you be able to fully disregard any capital gain made on the disposal of your ownership interest in the subdivided blocks of land? | A3: Yes.

Relevant facts and circumstances: Documentation has been provided with the private ruling which should be read in conjunction with, and forms part of, the scheme. You purchased the Property before 20 September 1985. The land area of the Property is more than 3 hectares. You purchased the Property for the purpose of building a house on it. However, you travelled overseas for a number of months after you had purchased the Property and had opened a business when you returned from your travels, at which point you did not have enough funds to build a house on the Property. The Property was zoned as "special rural" when it was purchased. The township near the Property has expanded and the property has been rezoned as "residential" as part of an Outline Development Plan (ODP) for all land situation in the street where the Property is located. From the time you purchased the Property until the present time, you have not purchased any additional land or private dwellings, and have resided in rental properties. The Property has been vacant since it was purchased and has not been used to produce assessable income. Over twenty years after you purchased the Property, you listed it with a real estate agent for a number of months. However you did not receive any offers to purchase the whole property. The Property continued to be listed with the real estate agent as an 'open agency' for a further period of around 12 months. You received numerous enquiries from interested parties who had not wanted to purchase, the whole Property, but who were interested in purchasing smaller lots. You have recently retired from full-time employment and require funds to build your main residence, as you are still renting. The Property is too large for you to manage at your stage of life. As you could not sell the Property as a whole, you are now subdividing the Property and selling the subdivided blocks of land (the Project). The market value of the Property prior to the commencement of the Project is estimated to be over $1,500,000. The Project will be financed by a bank loan secured by taking out a mortgage over the Property. The loan is conditional upon the pre-sale of a predetermined number of the proposed subdivided blocks of land. You have engaged the services of a company (the Company) to manage the subdivision of the Property, who: • will manage the Project and undertake the following activities in relation to the Project: • Appointment and management of project consultants; • Obtain estimates of development costs; • Conduct preliminary feasibility analysis; • Liaise with potential financiers/banks to secure funding for the project; • Liaise with local Council, approval and statutory authorities and stakeholders prior to facilitating lodgement and processing of the development and construction approvals for the project; • Appointment and management of selling agents/implement pre-sales marketing program; • Commission pre-sale contracts; • Work with project consultants to ensure design intent and approval conditions are met and project budget is maintained; • Appointment and management of civil contractors in conjunction with the project engineer to ensure quality construction outcome, on time and on budget; and • Final clearances and titling of the completed. • advised that the Property would be subdivided into a specified number of blocks of land, with one open space; and • advised that their fees for the Project management were around 5%, plus Goods and Services Tax (GST) of the total gross realisations (inclusive of GST) for the Project. An application for the subdivision of the Property was lodged by the Company, with approval for the subdivision being given a number of months later for a specified number of subdivided blocks and a public open space lot. In accordance with the subdivision approval, the following infrastructure work will be undertaken on the Property: • internal subdivision road; • kerbing and drainage; • underground power; • water supply; • telecom communications; and • internal Public Access Way. You will not have any involvement in the Project other than attending meetings and addressing enquiries with the Company. You do not intend to keep any of the subdivided blocks of land unless they cannot be sold on the open market. It is anticipated that the Project will be completed in the relevant income year, with over $3,500,000 in gross sale proceeds on the sale of the subdivided blocks of land being received, with the Company receiving over $1,500,000 of the gross sale proceeds and you receiving over $2,000,000 of the gross sale proceeds. The services of real estate agents will be engaged to sell the subdivided blocks of land. The proposed subdivided blocks of land were put on the market around two months after the subdivision approval was granted, for "off the plan" sales of the subdivided blocks of land. At this point some of the proposed subdivided blocks of land have been sold. You have not undertaken any land subdivision and sale activities in the past and do not intend any similar activities in the future. For the purposes of this private ruling: • You will sell the required number of proposed subdivided blocks of land to enable the bank loan to be obtained to finance the subdivision of the Property; • You will use the services of other parties to undertake the management and co-ordination of the subdivision of the Property; • You will not undertake any activities in relation to the subdivision of the Property; • Only the absolute minimum that council requires to satisfy the development application will be undertaken in relation to the subdivision of the Property; and • The services of real estate agent/s will be engaged to sell the subdivided blocks of land.

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) | Income Tax Assessment Act 1997 Section 112-25 | Income Tax Assessment Act 1997 Section 995-1 | Income Tax Assessment Act 1997 Part 3-1 | Income Tax Assessment Act 1997 Part 3-3

Reasons for decision: Summary: Legislative references referred to herein are from the ITAA 1997 . The proceeds from the sale of the subdivided blocks of land will not be ordinary income and not assessable under section 6-5. The proceeds represent a mere realisation of capital assets which will fall for consideration under the capital gains tax provisions in Part 3-1. You acquired the Property before 20 September 1985, therefore the subdivided blocks of land will also be viewed as having been acquired before 20 September 1985, being pre-CGT. As the subdivided blocks of land are pre-CGT assets, any capital gain made on their disposal can be disregarded. | 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). From the cases involving the subdivision of land and from Taxation Ruling TR 92/3 (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; and (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. 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. | Detailed Reasoning - Application to your situation: In your case, the Property was purchased before 20 September 1985 with the intention of building a home on it. This did not occur and the Property has remained vacant and has not been used to produce assessable income since it was purchased. Due to your retirement and the size of the Property, you made the decision to sell the Property as a whole. You put the Property on the market, without success. Numerous people had approached you and had expressed the desire to buy small blocks of land. You still want to sell the Property and have decided to subdivide it into subdivided blocks of land in an effort to sell the Property. You have engaged the services of the Company to manage the subdivision of the Property and you will not undertake any activities in relation to the subdivision of the Property. Only the minimum activities required under the development application will be undertaken in relation to the subdivision No other subdivision activities have been undertaken by you in the past and you do not intend to undertake any similar activities in the future. Based on the information provided, there is nothing to suggest that the subdivision of the Property was the beginning of a continuing business of property subdivision. Your activities do not display the salient indicator of a business, being transactions entered into on a continuous and repetitive basis. Therefore, it is the Commissioner's view that your activities in relation to the subdivision are not those of an entity carrying on a business of buying, subdividing and selling subdivided land. Making an overall assessment on the factors set out in TR 93/2, it is the Commissioner's view that the subdivision of the Property and sale of the subdivided blocks of land will not be considered commercial in nature but will be a mere realisation of a capital asset, being a long-held privately owned property. In conclusion, the activities involved in the subdivision and sale of the subdivided blocks of land will not amount to carrying on a business. The transactions will not have the character of business operations or commercial transactions. There is no indication that your subdivision activities will become a separate business operation or commercial transaction, or that you will be carrying on, or carrying out a profit-making undertaking or plan. Therefore, as it is not viewed that you are carrying on a business, or that the subdivision activities will be an isolated transaction, any profit arising from the sale of the subdivided blocks of land, but that it will be a mere realisation of your Property which will be accounted for under the capital gains tax provisions in Part 3-1. | Detailed Reasoning - Capital gains tax: The capital gains tax (CGT) provisions are contained in Part 3-1. 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 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. However, any capital gain or capital loss made on the disposal of a CGT asset will be disregarded if the asset was acquired before 20 September 1985. When a CGT asset (the original asset) is split into 2 or more assets (the new assets), such as when land is subdivided, the subdivision of the land into subdivided blocks is not a CGT event, according to subsection 112-25(2). Where the original land was acquired before 20 September 1985, each new block retains its pre-CGT status. | Detailed Reasoning - Application to your situation: In this case you acquired the Property before 20 September 1985. Therefore, the Property is a CGT asset. When the Property is subdivided, the subdivided blocks of land will retain the CGT status of the Property. That is, each subdivided block of land will be a pre-CGT asset. While CGT event A1 will occur when the sale contract on each subdivided block of land is entered into, as each subdivided block of land is a pre-CGT asset, any capital gain made on the disposal of the subdivided blocks of land will be disregarded.