Private ruling: Property subdivision, pre-CGT
Date of advice: 19 February 2019
Published: May 2019
Ruling period: 1 July 2018 to 30 June 2019
Date scheme commenced: 1 July 2018

Ruling: Q1: Will the profit from the sale of the subdivided lots be treated as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) as either a result of carrying on a business of property development or as a result of an “isolated transaction” carried out for profit and commercial in character? | A1: No, the activities related to the subdivision of the property are not commercial in nature or part of carrying on a business. | Q2: Will the subdivision of the blocks constitute the mere realisation of a capital gain tax (CGT) asset acquired prior to 20 September 1985 and hence not subject to CGT? | A2: Yes, the proceeds represent a mere realisation of a capital asset under the CGT provisions in Part 3-1 of the ITAA 1997. However, as the land was acquired before 20 September 1985, any capital gain or capital loss will also be disregarded for CGT purposes. | Q3: Will the sale of the subdivided blocks constitute taxable supplies and hence be subject to goods and services tax (GST) under section 9-5 of A New Tax System (Goods and Services Tax) Act 1999 ? | A3: No, having applied all the principles in Miscellaneous Taxation Ruling MT 2006/1 to the present circumstances, we conclude that the sale of the lots does not amount to an enterprise for GST purposes. The sale of the lots will be regarded as the mere realisation of a capital asset. | Q4: After the property is split, will the property containing the original residence still be an asset acquired before 20 September 1985 for CGT purposes? | A4: Yes, as per section 100-25 of the ITAA 1997, as the property was purchased pre-CGT the share in the property that is retained will remain pre-CGT in nature.

Relevant facts and circumstances: You and your spouse (you) purchased the property as joint tenants before 20 September 1985. The property was established with a dwelling which has remained your main residence. You provided the value of the property at its acquisition. Before 20 September 1985, you purchased the adjoining land to your property as joint tenants. You provided the value of the adjoining land at its acquisition. No part of the property has been used to generate assessable income. Post 20 September 1985, you applied for planning approval to amalgamate the two blocks and this was approved. Since then you have held the amalgamated block as joint tenants. You provided the size of the block. The end of the block contains the residence. The remainder of the block is lawn. The land is currently zoned R35 and no rezoning is required. You intend on subdividing the block retaining the front portion for private use with your existing residence. The remainder of the block will be subdivided into several blocks. All the blocks will be accessed via a single driveway. You provided the expected value of the blocks. As part of the planning approval, you will be required to connect electricity, gas, telephone and water to each block. All such services currently run down both streets. You will require appropriately qualified and licensed parties to conduct this work. You will also be required to construct a communal driveway to allow access to each block. You provided the combined cost of all subdivision works. A bank loan will be required to fund these activities. The subdivision is currently at a draft concept stage. No formal application for development with the local municipal council has been lodged. The subdivision activities are expected to commence shortly and be completed in a year’s time approximately. You will sell the blocks using a real estate agent. You are self-funded retirees. One of you has their financial affairs handled by your children under an enduring power of attorney. You have never been registered for GST. You have no history of participating in subdivisions or property development. You have no skills in the building industry. One of your children is involved in the property industry.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 10-5 | Income Tax Assessment Act 1997 section 102-5 | Income Tax Assessment Act 1997 section 100-25 | Income Tax Assessment Act 1997 section 104-10 | Income Tax Assessment Act 1997 section 112-25 | A New Tax System (Goods and Services Tax) Act 1999 section 9-5 | A New Tax System (Goods and Services Tax) Act 1999 section 9-10 | A New Tax System (Goods and Services Tax) Act 1999 subsection 9-20(1) | A New Tax System (Goods and Services Tax) Act 1999 section 195-1