Private ruling: Land subdivision
Published: July 2012
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: 1. Will the proceeds received from the disposal of the subdivided lots be assessable pursuant to section 6-5 of the ITAA 1997 as a business activity? | A3: No.


Relevant legislative provisions: Income Tax Assessment Act 1997 - section 6-5 | Income Tax Assessment Act 1997 - section 104-10

Reasons for decision: Summary: Proceeds from the sale of property for tax purposes are treated as either: · income according to ordinary concepts under section 6-5 derived: · in the course of carrying on a business, or · from an isolated transaction for the purpose of profit making, or · subject to capital gains tax. Whether the proceeds are treated as income or capital depends on the situation and circumstances of each particular case. | Detailed Reasoning - Carrying on a business: You have stated that you and your family members have no expertise relevant to property subdivision activities and have not been involved in any type of subdivision before. Therefore, it is considered that the proceeds received from the sale of the subdivided land were not derived in the course of carrying on a business. | Detailed Reasoning - Isolated profit making transaction: Profits arising from an isolated business or commercial transaction will be ordinary income if the taxpayer's purpose or intention in entering into the transaction is to make a profit, even though the transaction may not be part of the ordinary activities of the taxpayer's business ( FC of T v. Myer Emporium Ltd 1987 163 CLR 199; 87 ATC 4363; 18 ATR 693) (Myer Emporium). Taxation Ruling TR 92/3 considers the principles outlined in the Myer Emporium case and provides guidance in determining whether profits from isolated transactions are assessable under section 6-5 of the ITAA 1997 as ordinary income. TR 92/3 defines the term 'isolated transactions' as: · transactions outside the ordinary course of business of a taxpayer carrying on a business, and · transactions entered into by non business taxpayers. It is not necessary that the intention or purpose of profit-making be the sole or dominant intention or purpose for entering into the transaction. It is sufficient if profit-making is a significant purpose. If a taxpayer makes a profit from a transaction or operation, that profit is income if the transaction or operation is not in the course of the taxpayers business but: · the intention or purpose of the taxpayer in entering into the profit-making transaction or operation was to make a profit or gain, and · the transaction or operation was entered into, and the profit was made, in carrying out a business operation or commercial transaction. The taxpayer must have the requisite purpose at the time of entering into the relevant transaction or operation. If a transaction or operation involves the sale of property, it is usually necessary that the taxpayer has the purpose of profit-making at the time of acquiring the property. Whether an isolated transaction is business or commercial in character will depend on the circumstances of each case. Where a taxpayer's activities have become a separate business operation or commercial transaction, the profits on the sale of subdivided land can be assessed as ordinary income within section 6-5 of the ITAA 1997. In your case, you and three others purchased a parcel of land for the purpose of subdividing. Your intention was for two of the subdivided lots to be held for private purposes and the remaining lots to be sold. The subdivision is relatively small in scale and complexity and has been carried out over a short period of time, with the purchase and subdivision being completed within 12 months. You will make a profit on the lots sold. As stated above, it is not necessary that the sole or dominant intention or purpose for entering into the transaction is to make a profit, providing it is a significant purpose. A significant purpose of what you have undertaken was to sell the remaining lots at a profit. Therefore, the proceeds from the sale of the subdivided land will assessable under section 6-5 of the ITAA 1997 as ordinary income from an isolated profit making transaction.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | 2. Will the proceeds received from the subdivided lots be assessable pursuant to section 6-5 of the ITAA 1997 as an isolated profit making transaction? | 3. Will the gains made on the disposal of the subdivided lots be subject to the CGT provisions in Part 3-1 of the ITAA 1997? | Relevant facts: You and three others purchased vacant land in July 2011. | The land was purchased as tenants in common in the following shares: | Each of you contributed to the cost of the land based on your individual shares. | The land was subsequently subdivided into six lots and split between the owners as follows: | · Lot 1 - owned solely by owner 1 | · Lot 2 - owned solely by owner 2 | · Lots 3, 4, 5 & 6 - owned by all four parties in equal shares of 25% each. | · Lots 1 & 2 will be kept for private purposes. | The other four lots have been or will be sold to the general public. | A profit will be made on the subdivided land. | You have not been involved in any type of subdivision before. | You have no business plan or projected profit and loss statement. | There is no formal equipment or facilities used in the activity. | You have no formal bookkeeping and are basically keeping receipts and contracts and settlement statements. | You have no expertise or qualifications in the activity undertaken and have outsourced to consultants who have completed all necessary documents for the subdivision. | You are not members of any organisation or body relating to the activity. | The amount of time spent on the activity is approximately one hour per week.