Private ruling: CGT - land subdivision
Published: October 2014
Ruling period: Year ended 30 June 2008 | Year ended 30 June 2009 | Year ended 30 June 2010 | Year ended 30 June 2011 | Year ended 30 June 2012 | Year ended 30 June 2013 | Year ended 30 June 2014 | Year ending 30 June 2015 | Year ending 30 June 2016 | Year ending 30 June 2017 | Year ending 30 June 2018
Date scheme commenced: 1 July 200X

Ruling: Q1: 1. Will the proceeds received from the sale of the subdivided blocks of land be assessable pursuant to section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997), as a result of carrying on a business of property development? | A1: No. | Q2: 2. Will the proceeds received from the sale of subdivided blocks of land be taxed under the capital gains tax provisions of the ITAA 1997 on the basis that a mere realisation of a capital asset has occurred? | A2: Yes.

Relevant facts and circumstances: You acquired X hectares of land in 198X. You commenced farming on the land, and have held many crops on the land over the years. You ceased farming in 20XX. Approximately nine years ago, due to a lack of profitability in the farm and your own illnesses, you decided to sell the land. However there was an overall lack of interest in the property, and the property did not sell. There had been an agricultural study on the land and it was found that the land was not viable for farming. This impacted your ability to sell. The local council commissioned a 10 year strategic review of the available land in the area for residential use. The Town Planner recommended a rezoning of your land to fit in with their 10 year plan. You applied for residential rezoning of your land. You were ultimately granted subdivision approval for X blocks on X% of your land. The design of the subdivision has been kept as simple as possible. The subdivided land was chosen due to its adjacent nature to an existing gazetted road, in order to minimise amount of work to be done to crossovers, culverts and power. You have been farmers for majority of your working life, with no connection to land development. You have subdivided or developed other properties in the past. You do not have a business plan. Due to your lack of expertise in subdivision, you have engaged various professionals to undertake the different parts of the subdivision. No work, including clearing and earth works, more than what was absolutely necessary to secure approval has been completed. No site or sales office has been, or will be erected on the land. The cost of the subdivision process has amounted to $X to date. You are hoping to sell each block for approximately $Y each.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 and | Income Tax Assessment Act 1997 Part 3-1.

Reasons for decision: Summary: Under section 6-5 of the ITAA 1997, the assessable income of an Australian resident includes ordinary income derived both in and out of Australia during an income year. Ordinary income is defined as income according to ordinary concepts. In FC of T v The Myer Emporium (1987) 163 CLR 199; 87 ATC 4363; (1987) 18 ATR 693 ( Myer Emporium ), the Full High Court expressed the view that profits made by a taxpayer who enters into an isolated transaction with a profit making purpose can be assessable income. Taxation Ruling TR 92/3 considers the assessability of profits on isolated transactions in light of the principles outlined in Myer Emporium . According to Paragraph 1 of TR 92/3, the term isolated transactions refers to: • those transactions outside the ordinary course of business of a taxpayer carrying on a business, and • those transactions entered into by non-business taxpayers. Paragraph 6 of TR 92/3 provides that a profit from an isolated transaction will generally be income when both the following elements are present: • your 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. In contrast, paragraph 36 of TR 92/3 notes that 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. In your case, you do not carry on a business of buying, selling or developing land. You have owned the land since the 1980's, and continued to farm the land up until recently. You have had minimal involvement in the subdivision of the land and will only change the land to the extent that you are required for council purposes. Accordingly, the proceeds from the sale of the subdivided blocks will not be included in your ordinary income. Rather, the subdivision is considered to be a mere realisation of a capital asset and the proceeds will be subject to the capital gains tax provisions in Part 3-1 of the ITAA 1997. This will be the case even if the subdivision is outsourced to a third party.