Private ruling: CGT implications on subdivision and sale of property
Date of advice: 18 November 2016
Published: April 2017
Ruling period: Year ended 30 June 201X | Year ended 30 June 201X | Year ending 30 June 201X | Year ending 30 June 201X | Year ending 30 June 201X

Ruling: Q1: Does the sale of the property (the Land) constitute a 'mere realisation' of the Land, assessable on capital account and dealt with exclusively under Part 3-1 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes. | Q2: Will the activities undertaken by the taxpayer constitute the carrying on of a business of subdivision and sale of land for the purpose of profit making by development and sale? | A2: No. | Q3: Is any income received from the sale of the Land assessable as ordinary income under section 6-5 of the ITAA 1997? | A3: No. | Q4: If any income received is assessable as ordinary income, will any profit made be calculated on the basis that the cost of the Land was the market value as at date of contract together with all amounts payable in respect of its development and sale? | A4: Not applicable as income received is on capital account.

Relevant facts and circumstances: Acquisition and use of the Land The taxpayer's parents were in the business of primary production. They acquired a parcel of land (the Land) to conduct their primary production business. In addition to the primary production business, there are also residential dwellings located on the Land. The portion of land occupied by these dwellings is less than 5 percent of the entire parcel. One of the residential dwellings was used by the taxpayer's family as their main residence. The other residential dwellings on the Land are much smaller in size and have been rented to third parties for nominal rent over the years. The taxpayer's parents conducted the primary production business on the Land until they became ill. At this time the taxpayer's parents leased the Land to third parties for various other primary production purposes. The taxpayer's parents passed away. The Land was inherited by the taxpayer. The taxpayer leased the Land to a large primary producer. The larger primary producer leased the Land for a nominal annual rent since this time. The other residential properties are currently let to unrelated parties for nominal rental. The taxpayer obtained an Australian Business Number as a sole trader and registered for GST because of this lease. GST registration was later cancelled on the basis that the taxpayer's turnover did not exceed the GST registration turnover threshold. Property Status - Urban Zone A Precinct Structure Plan (PSP) applied to the Land from the mid 20X0's. As a result, the Land is now within an 'Urban Zone' for land tax purposes. Prior to the rezoning of the Land, the taxpayer claimed and received a land tax exemption in relation to the majority of the Land on the basis that it was Primary Production Land (PPL) pursuant to section 66 of the Land Tax Act 2005 (Vic) (LTA). However, as the Land is now within an Urban Zone, section 67 of the LTA now applies and requires that the taxpayer personally is engaged in a substantially full-time capacity in the business of primary production carried out on the Land. As a result of these requirements, the taxpayer no longer qualifies for the PPL land tax exemption as the taxpayer is not personally involved in the primary production activity on the Land. According to the council rates notices, the site value attributed to the Land is substantial. On that basis, the taxpayer would be liable to large amounts of land tax. Council rates have also increased dramatically in line with the change in zoning. Disposal of the Land - Decision to sell The taxpayer only formed an intention to dispose of the Land when it became clear that the costs of holding the Land as a result of the rezoning would become a significant burden and cause financial distress. The taxpayer has been approached by a number of third parties over the years with offers to buy the Land as a whole. These offers were made prior to the change in zoning and were relatively small in value. At this time the taxpayer had no inclination to sell the Land. It held sentimental value and the taxpayer was not under any financial burden with respect to the holding costs of the Land. Within the last few years, the approaches to sell came in the forms of offers to develop the Land. The taxpayer has been approached by a number of property development companies. The taxpayer did not approach any development companies as part of this process. The taxpayer soon realised through discussions with the development companies that they would generate the highest sale price by subdividing the Land and disposing of individual lots as opposed to a sale of the property as a whole. Development of the Land One of the main property development companies had approached the taxpayer with an offer to develop the Land for sale on their behalf (the Developer). Having agreed to the terms offered by the Developer, the taxpayer entered into a Relevant Agreement (RA) with the Developer. The taxpayer's intention on entering the RA was to achieve the highest selling price on the disposal of the Land. The overall development is a significant project. A permit plan for the development currently makes provisions for lots, active open spaces and passive open spaces. The development of the lots is expected to occur over a number of stages. Project Management Agreement The RA provides that the taxpayer has appointed the Developer to manage all aspects of the Project to achieve the objective of maximising the Land's value. The RA provides that apart from providing access to the Land and executing various documents, the taxpayer is not involved in any aspect of the development activities taking place on the Land. The Developer is required to obtain all Project Funding, to ensure that all Works are paid for and that all Contractors and Consultants are paid, when due. The Developer is responsible for all Project Costs, including outgoings in relation to the Land. The Project Management Fee for the services provided by the Developer is included in the RA. Primary Production activities may continue on any part of the Land not immediately undergoing development works.

Relevant legislative provisions: Income Tax Assessment Act 1997 Part 3-1 | Income Tax Assessment Act 1997 section 6-5 ATO view documents | Taxation Ruling: TR 92/3: Income Tax: whether profits on isolated transactions are income. | Case law | FC of T v The Myer Emporium Ltd (1987) 163 CLR 213 | Williams v FCT (1972) HCA 31 | Statham and Anor v FCT (1988) 89 ATC 4070 | Westfield v FCT (1991) 28 FCR 333 | McCorkell v FCT 99 ATC 2199 | Casimaty v FCT ( 1997)

Reasons for decision: Summary: Taxation Ruling TR 92/3 sets out the Commissioner's view on the tax treatment of profits on isolated transactions. It provides (at paragraph 6) that a profit from an isolated transaction is generally income when both of the following elements are present: (a) the intention or purpose of the taxpayer in entering into the transaction was to make a profit or gain; and (b) 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. On the point of isolated transactions, the Full High Court in FC of T v The Myer Emporium Ltd (1987) 163 CLR 213 explained: “It is one thing if the decision to sell an asset is taken after its acquisition, there having been no intention or purpose at the time of acquisition of acquiring for the purpose of profit-making by sale. Then, if the asset be not a revenue asset on other grounds, the profit made is capital because it proceeds from a mere realisation. But it is quite another thing if the decision to sell is taken by way of implementation of an intention or purpose, existing at the time of acquisition, of profit-making by sale, at least in the context of carrying on a business or carrying out a business operation or commercial transaction” Furthermore, 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. The expression “mere realisation” is used to contradistinguish a business operation or commercial transaction carrying out a profit-making scheme (TR 92/3, paragraph 36). The following cases have been considered in the process of determining the questions relating to your case: ● Williams v FCT (1972) HCA 31 where the landowner used an intermediary in dealing with the developer and did not carry out any works herself; ● Statham and Anor v FCT (1988) 89 ATC 4070 ('the Statham case') where the landowner did not participate in the development activities and marketing of the lots, and the development of subdivided lots was part of a very simple process to realise the value of the asset; ● Westfield v FCT (1991) 28 FCR 333 where the landowner entered into a transaction that fell outside the ordinary course of business. Accordingly, the basis of any revenue argument could only be determined by considering the means by which the profit was made; ● McCorkell v FCT 99 ATC 2199 where the taxpayer inherited land from his father and only considered selling the land upon reaching the age of retirement. The AAT held that the taxpayer was not carrying on a business, similar to the finding in the Statham case; and ● Casimaty v FCT ( 1997) where the taxpayer acquired land for use as his residence and for farming. Due to ill health, uneconomical farming and a depressed rural market, the taxpayer discontinued farming activities and tried unsuccessfully to sell the land to the State Housing Department. More financial problems led to further subdivision of 10 lots for which council required roads, water, fencing, and draining a creek. Properties were sold by a local real estate agent. It was held that the disposal transaction was of a capital nature. Weighing all of the evidence together, on balance it is more likely than not that the sale of the Land constitutes a mere realisation of a CGT asset (even though that realisation occurred in an enterprising way), and any profit made is assessable on capital account. Consequently, the profit made is capital in nature and subject to Part 3-1 of the ITAA 1997. It is not considered ordinary income assessable under section 6-5 of the ITAA 1997.