Private ruling: Capital gains tax
Published: June 2014
Ruling period: Year ending 30 June 2014 | Year ending 30 June 2015
Date scheme commenced: 1 July 2013

Ruling: Q1: Are the proceeds from the sale of the subdivided land considered a mere realisation of a capital asset for income tax purposes? | A1: Yes.

Relevant facts and circumstances: You acquired a property, with your late spouse prior to 20 September 1985. The family home was constructed on the property immediately after purchase. It has been and continues to be used as your main residence. Your late spouse passed away in the 200X financial year. You became the sole owner of the property. There have been no commercial activities carried out on the property since its acquisition. You are not registered for GST and you do not carry on a business. The decision to subdivide the land into X lots has arisen from debts associated with the unforeseen circumstances relating to medical costs of your late spouse. You have not previously been involved in any land subdivision or property development activities. You do not plan to carry out these types of activities in the future. Following the subdivision you intend to retain a portion of the property including the lot which contains your existing main residence. You have not acquired or added to the original parcel of land. You will be reliant upon professional planners and contractors to carry out the works associated with the subdivision. You will use both personal funds and borrowing to fund the subdivision. Works will only be carried out to the necessary levels to achieve council approvals for the subdivision. No buildings will be erected on the subdivided lots. The lots will be sold as vacant land.

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

Reasons for decision: Summary: Acquiring an asset from a deceased estate When a person dies, the assets that make up their estate can pass directly to beneficiaries or pass to the legal personal representative. If you acquire an asset owned by a deceased person as their legal personal representative or a beneficiary, you are taken to have acquired the asset on the day the person died. In your case, the property was originally purchased prior to 20 September 1985 with your spouse. You spouse passed away in the 200X financial year and you became the sole owner of the property. You are taken to have acquired your late spouse's interest in the property at its market value at the date of their death. Therefore, you hold your original interest as a pre CGT asset and the inherited interest as a post CGT asset. Subdivision of land 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 Income Tax Assessment Act 1997 (ITAA 1997) as ordinary income. 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. 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. TR 92/3 lists the following factors to be considered: 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. In contrast, paragraph 36 of TR 92/3 notes that 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. However, if a transaction satisfies the elements set out above it is generally not a mere realisation of an investment. Miscellaneous Taxation Ruling MT 2006/1 provides a list of specific factors relevant to isolated transactions and sales of real property. If several of the factors are present, it may be an indication that a business or an adventure or concern in the nature of trade is being carried on. These factors are as follows: • 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. No single factor is 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: Having regards to your circumstances and the factors outlined above, we consider that any proceeds from the sale of the subdivided land will represent a mere realisation of a capital asset which will fall for consideration under the capital gains tax provisions of the ITAA 1997. As you held both pre and post CGT interests in the property, a portion of the capital proceeds received from the sale of the subdivided lots will be assessable income.