Private ruling: Subdivision
Published: December 2013
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Will your share of the profit from the sale of the subdivided property be assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes | Q2: Will your share of the proceeds from the sale of the subdivided property be accounted for under the capital gains tax (CGT) provisions? | A2: No

Relevant facts and circumstances: You acquired a property jointly with others. The existing dwelling that was on the property was demolished and the property was subdivided into separate lots with separate titles. You engaged a builder to construct new identical dwellings on each of the lots. The building process took longer than expected. You and the other parties jointly obtained loans to fund the property development project. One of the loans was for the purchase and subdivision of the land and the other loan was for the building process. Once construction was completed, the properties were transferred so that each of the relevant parties retained one property as their main residence and the remaining property continued to be owned jointly. You had intended to retain the jointly owned property as a rental property; however, due to mortgage issues it was sold to an unrelated third party during the relevant financial year. You carry on a business in partnership; however this business was not involved in the construction of the new dwellings.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 102-5 | Income Tax Assessment Act 1997 Section 118-20

Reasons for decision: Summary: There are three ways profits from a land subdivision can be treated for taxation purposes: 1. As ordinary income under section 6-5 of the ITAA 1997, on revenue account, as a result of carrying on a business of property development, involving the sale of land as trading stock. 2. As ordinary income under section 6-5 of the ITAA 1997, 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. 3. As statutory income under the capital gains tax (CGT) legislation, (sections 10-5 and 102-5 of the ITAA 1997), on the basis that a mere realisation of a capital asset has occurred. | Detailed Reasoning - Ordinary income: In your situation, the Commissioner is satisfied you are not carrying on a business of property development. You carry on a different business in partnership; however this business was not involved in the development of the property. The repetition, scale and volume of your activity is not of the same nature as is ordinarily carried on by a property developer that is carrying on a business. However, the profits from the sale of the property may still be assessable as ordinary income, if those profits are considered to be from an isolated commercial transaction. (Taxation Ruling TR 92/3 and Miscellaneous Taxation Ruling MT 2006/1). Paragraphs 13 and 49 of TR 92/3 provide a list of factors that may be relevant when considering whether an isolated transaction amounts to a business operation or commercial transaction. These are: (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. For the purposes of determining whether the activities undertaken equate to a profit-making undertaking or scheme, MT 2006/1 aligns itself with TR 92/3 and provides a list of factors which, if present may be an indication that a profit-making undertaking or scheme is being is being carried on. These are: · 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. At paragraph 266 MT 2006/1 emphasises that '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 circumstances: In your case, you acquired an interest in a property on which a building was demolished and the land was subdivided into separate lots. New buildings were constructed on each of the lots; you each retained one property as your residences and one property was sold. You have had to carry out a number of activities such as approval for the subdivision, planning and building for the dwellings, borrowing of money to complete the construction of the dwellings and then the sale of the property in question. In accordance with the direction provided in TR 92/3 and MT 2006/1 we consider that the activities amount to more than the mere realisation of an asset to its best advantage. There was a level of development of the land beyond that necessary to secure council approval for subdivision as a new building was erected on the land. On a weighing of the facts of your case we find that the subdivision and construction of a dwelling will constitute an isolated profit-making scheme. Accordingly, your share of the profits from the transaction will be considered ordinary assessable income under section 6-5 of the ITAA 1997. | Detailed Reasoning - Capital gains tax: Section 118-20 of the ITAA 1997 primarily exists to ensure that amounts which are assessable income outside of the CGT provisions are not also taxed as capital gains. In the absence of such a provision, it is conceivable that a receipt properly characterised as ordinary income and which has also been derived as a result of a CGT event could result in the receipt being taxed twice. Therefore, whilst CGT event A1 occurred when the property was sold, any capital gain will be disregarded to the extent of any amount already included as ordinary assessable income under section 6-5 of the ITAA 1997.