Private ruling: Subdivision of land
Date of advice: 12 June 2019
Published: July 2019
Ruling period: Year ending 30 June 2019 | Year ending 30 June 2020 | Year ending 30 June 2021 | Year ending 30 June 2022
Date scheme commenced: 1 July 2018

Ruling: Q1: Will the proceeds from sale of the subdivided blocks be assessable under section 6-5 or section 15-15 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. | Q2: Will the capital gain from disposal of the subdivided blocks be disregarded under subsection > 104-10(5) of the ITAA 1997 on the basis the land was acquired prior to 20 September 1985? | A2: Yes. The proceeds from the sale of the subdivided blocks are not ordinary or statutory income and are not assessable under sections 6-5 or 15-15 of the ITAA 1997. The proceeds represent a mere realisation of a capital asset which falls for consideration under the capital gains tax provisions in Part 3-1 of the ITAA 1997.

Relevant facts and circumstances: The two individuals (the rulees) acquired a house and land prior to 20 September 1985. At the time of acquisition, the land was zoned semi-rural residential and no roads were gazetted on the land. The rulees did not have an intention to resell the land at a profit at the time of acquisition. The house has been the rulees' principal place of residence since the time they acquired it and will continue to be so, that is, it is not being sold. The rulees have never carried on a business on the property. At a social gathering some informal discussions took place between the neighbours about the idea of undertaking a land subdivision. The rulees and some adjoining land owners subsequently agreed to enter into a joint development of their respective properties for a residential land subdivision. It was only after the social function that the rulees believed that this would be the best possible way to realise the value in their land. This was because they had no professional expertise in land development or subdivision, and joining with their neighbours would make it more cost-effective. A key reason the rulees joined with their neighbours was the expected cost-savings. At this time, the rulees did not have a history of developing properties and had never previously carried on a business of land subdivision or property development. Although the land was zoned semi-rural residential, the area fell within the Council master plan and was going to be rezoned as residential by the Council as it was adjoining an existing residential suburb. There were no legal challenges or planning rejections in relation to the subdivision. The rulees borrowed funds from a commercial lender to fund the subdivision. The loan was secured by the rulees' property and was drawn down in stages on an 'as needs' basis. For ease of administration of the development, it was agreed to establish a Company (the Company) to manage the project. One of the rulees was appointed as a director of the Company along with some of the other land owners. The Company had no employees. Rather, the relevant activities it was required to undertake were outsourced to professional engineers / town planners / accountants / consultants etc. Project costs were dealt with centrally by the Company, and the various land owners contributed funds to meet any cash calls that were required to meet those costs. The Company was a vehicle which provided a simple method to collect money from the participants and pay consultants for performing services. The Company was not established with any profit-making intention and has not made any profit from its activities. It has operated solely on a break-even basis with cash contributions by the participants equalling outgoings and will be deregistered. The Company, and also the rulees, registered for GST in respect of the subdivision on the advice of the joint venture accountant. The rulees subsequently received professional advice that they need not have registered for GST on the basis that an enterprise was not being carried on. The arrangement between the rulees, the Company and the other land owners is governed by a joint venture agreement. Under the joint venture agreement: · The Company engaged suitably qualified professionals to undertake the development activities (e.g. town planners, engineers, accountants, solicitors); · A firm of consulting engineers was engaged as the project manager; and · The professionals advised participants when cash calls were required for their share of the expenses required and ensured all the relevant development applications and approvals were obtained. The rulees did not have a business plan or timeline for undertaking the development. However, a cash flow projection was prepared by an accountant so that the various parties would know the estimated times that cash contributions would need to be made to the Company. Notwithstanding one of the rulees being a director of the Company, the rulees played no active part in the day-to-day activities of the development as the Company engaged professionals to undertake the various tasks required. Ownership of the land was not transferred to the Company and each of the participants continued to own their respective land holdings. The subdivision was a basic subdivision with no buildings or structures being erected. All participants are now selling their respective lots and the Company will be wound up. No sales office was erected on the land. All sales are dealt with by a third party real estate agency, with each party free to choose how they marketed and sold their lots, if in fact they did. The rulees did not register a business name for the subdivision and did not undertake market research as such prior to commencement of the subdivision. Their investigations were limited to asking a local real estate agent what the potential sale price would be for the blocks. The rulees have no plans to further subdivide or undertake similar property development activities.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 15-15 | Income Tax Assessment Act 1997 subsection 104-10(5)