Private ruling: Property development – Subdivision – Am I carrying on a business?
Date of advice: 1 December 2017
Published: April 2018
Ruling period: Year ended 30 June 2017 | Year ended 30 June 2018 | Year ended 30 June 2019
Date scheme commenced: 1 July 2016.

Ruling: Q1: Will the proceeds received from the sale of the subdivided blocks be assessable under section 6-5 of the Income Tax Assessment Act 1997 ? | A1: No | Q2: Will the proceeds received from the sale of subdivided blocks be taxed under the capital gains tax provisions of Part 3-1 and Part 3-3 of the Income Tax Assessment Act 1997 ? | A2: Yes

Relevant facts and circumstances: In the early 1900’s the farm land was originally purchased with the intention of residing on and farming the land. Three successive generations of the family have lived there since. In 19XX the three children of the original owner, Sibling A, Sibling B and Sibling C, inherited the farm land from their parent as a working farm. The farm land was always used as a mixed farm, incorporating sheep and cattle grazing, and various vegetables and fruit trees. The vegetables and fruit trees relied on naturally occurring and stored rainwater as the farming land was not connected to town water supply. Due to a significant change in weather patterns there was eventually not enough rain or dam water to sustain the vegetables and fruit trees. In the early 2000’s the farm land was divided into three separate parcels of land, Sibling A receiving Parcel 1, Sibling B Parcel 2 and Sibling C Parcel 3, each with its own title. This was considered the best course of action to distribute the farm land as each of them had a severe medical condition and could not farm the land due to ill health. Approximately half a decade later Sibling A, the last of the three siblings to survive, passed away, with Parcel 1 being transferred to their spouse (Spouse A). After Spouse A inherited Parcel 1, portions were agisted out to assist with its upkeep and maintenance. Sibling B and Sibling C’s inherited parcels of land, Parcel B and Parcel C, were advertised to be subdivided not long after Sibling A passed away as each property was too small and dry to farm and subdivision of all adjoining land had commenced. Spouse A asked their two children, Child Z and Child Y, to investigate the subdivision of Parcel 1 as the valuation as a whole appeared quite low compared to the adjoining subdivided properties. Spouse A never placed Parcel 1 on the market and believed that subdivision was the best option for the family under these circumstances. Several years after Parcel 1 were transferred to Spouse A, Spouse A commenced engaging and overseeing the services of various professionals to apply for and complete the subdivision. Spouse A had discussions with the local city council (Council) and State Planning Authority to ensure the subdivision of Parcel 1 was possible before the subdivision activities were commenced. Several years after Spouse A commenced engaging professional services activities involved in gaining Council’s approval for the subdivision of Parcel 1 commenced. This was paid for by Spouse A from existing cash reserves and the sale of shares, whilst still living in the family home on Parcel 1. A couple of years later Stage 1 was approved by Council and development commenced. Less than ten months later Spouse A passed away (the Deceased) after being placed into a nursing home due to deteriorating health. After the Deceased passed away Child Z and Child Y, the executors of the estate, have controlled and coordinated the activities involved with the subdivision of Stage 1 and Stage 2. Approximately one year after the Deceased passed away the Council approved the subdivision of Stage 2. Neither the Deceased nor the executors have ever completed any subdivision projects before and the Deceased’s estate will be finalised at the completion of the subdivision in question. Stage 1 Around the time the Deceased passed away the land located at Stage 1 was valued at over $1,000,000 with current planning permit for subdivision already approved and substantial works completed. The same valuation shows a valuation completed half a decade earlier indicating Stage 1 was valued at over $500,000. The valuation indicated the Council has an interim planning scheme for the area: Relevant Planning Scheme 201X (replaced the 2007 planning scheme). The land is now zoned Rural Living with lot sizes a minimum of 2.0ha. The total costs for subdividing Stage 1 were over $1,000,000 with service providers being paid within their normal trading terms. Stage 1 was initially funded from existing investments held by the Deceased, and now the Deceased’s estate, with the balance being borrowed from the Deceased’s estates beneficiaries, the deceased children, Child X and Child B. These additional funds were required due to higher construction costs. Only fencing has been constructed on the subdivided lots. A Local real estate (Agent P) was appointed to sell all lots. All lots have been sold for over $2,800,000 Stage 2 Around the time the Deceased passed away the land located at Stage 2 was valued at over $500,000 with current planning permit for subdivision already approved and substantial works completed. Estimated costings for the subdivision of Stage 2 equate to approximately $300,000. Each of the subdivided lots located at Stage 2 are expected to sell for below $350,000. You will not build any other buildings or structures on the land. You expect the subdivision of Stage 2 to be completed in 12-18 months. The main residence of the Deceased, which is located alongside Stage 2, will not be included in the subdivision of Stage. There are no other parcels of land that the Deceased owned prior to their passing that are not part of the subdivision, either in Stage 1 or Stage 2.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 section 15-15 | Income Tax Assessment Act 1997 Part 3-1 | Income Tax Assessment Act 1997 Part 3-3

Reasons for decision: Summary: There are three ways profits on the sale of subdivided land can be income: ● As ordinary concepts within section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997), if the taxpayers’ subdivisional activities have become a separate business operation or commercial transaction, or ● As ordinary concepts within section 6-5 of the ITAA 1997, if the taxpayers’ subdivisional activities result from an isolated business transaction entered into by a non-business taxpayer, or outside the ordinary course of business of a taxpayer carrying on a business, which is the commercial exploitation of an asset acquired for a profit making purpose; or ● As statutory income under the capital gains tax (CGT) legislation, sections 10-5 and 102-5, on the basis that a mere realisation of a capital asset has occurred. Several cases have considered the assessability of profits or proceeds from the sale of land including the following cases: In Statham & Anor v FC of T 89 ATC 4070 (Statham’s case) the Full Federal Court considered the subdivision of rural land which involved a large scale subdivision of 105 lots with a substantial outlay to obtain a large profit. It was considered that the mere magnitude of the realisation does not convert the activity into a business, undertaking or scheme. The Court considered the size of the subdivision, the amount of money involved, the involvement of the parties and the length of time the subdivision was to be developed over to determine whether the activities amounted to more than a mere realisation of assets. The Court determined that the owners were not in the business of selling land and that the activities amounted to a mere realisation of the asset by the most advantageous means. In FC of T v Williams 72 ATC 4188; (1972) 127 CLR 226 (Williams’s case) the High Court considered that development carried out on land to be subdivided, such as grading, levelling, road building and provision for water and power, was to enable the owner to secure the best price for the land and did not amount to carrying out a profit making scheme. The proceeds resulted from the mere realisation of a capital asset and were not income. Casimaty v FC of T 97 ATC 5135; (1997) 37 ATR 358 (Casimaty’s case) considered the sale of farming land. The proceeds were held to not be income according to ordinary concepts, but rather constituted the mere realisation of a capital asset, carried out in an enterprising way so as to secure the best price. Consequently, the profit derived from the subdivision and sale of the land by the taxpayer was not assessable income under section 6-5 of the ITAA 1997. In Stevenson v FC of T 91 ATC 4476; (1991) 22 ATR 56; (1991) 29 FCR 282 (Stevenson’s case) the court considered that the magnitude of the subdivision and the degree of involvement in the planning and managing of the subdivisional activities amount to the carrying on of a business. The facts in this case involved a 220 block subdivision and the taxpayer was actively involved in the planning, employment of contractors and marketing of the blocks. In FC of T v Whitfords Beach Pty Ltd 82 ATC 4031; (1982) 150 CLR 355; (1982) 12 ATR 692; (1982) 39 ALR 521; (1982) 56 ALJR 240 (the Whitfords Beach case) where the court found that the taxpayer’s activities in relation to the subdivision of the land amounted to more than realisation of a capital asset and constituted the carrying on of a business of land development. The taxpayer in this case was a company which was originally formed to acquire land to secure the shareholders continued access to their properties and at some stage subdivide the land and give each shareholder a separate title to a lot. | Detailed Reasoning - Am I carrying on a business: Business is defined in section 995-1 of the ITAA 1997 as including any profession, trade, employment, vocation or calling but does not include occupation as an employee. Taxation Ruling TR 97/11 ( Income Tax: am I carrying on a business of primary production?) provides a guide to the indicators that the courts have held to be relevant as to whether or not a person is carrying on a business. It should be noted that the principles in this ruling apply equally to all businesses. The indicators are: ● Whether the activity has a significant commercial purpose or character; ● Whether the taxpayer has more than an intention to engage in business; ● Whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity; ● Whether there is repetition and regularity of the activity; ● Whether the activity is of the same kind that is carried on in a similar manner to that of the ordinary trade in that line of business; ● Whether the activity is planned, organised and carried out in a business-like manner; ● The size, scale and permanency of the activity; and ● Whether the activity is better described as a hobby, a form of recreation or a sporting activity. Whether or not a person is carrying on a business is a question of fact, not a question of law. The determination of whether or not a business is being carried on is generally a process of weighing up all of the relevant indicators within the context of a given situation. No one indicator determines whether or not a business is being carried on. | Detailed Reasoning - Application to your situation: In this case, the Deceased began the process of land subdivision before they passed away. Upon their passing Parcel 1 was transferred into the Deceased’s estate where the executors decided to continue the subdivision through to its end. The Deceased had never completed any subdivision projects before and the Deceased’s estate will be finalised at the completion of the subdivision in question. The transactions entered into by the Deceased and the Deceased’s estate is not on a continuous and repetitive basis given that they will not personally be engaged in repetitive property development activities. Instead the Deceased and the Deceased’s estate has engaged the services of professionals to subdivide and sell the subdivided lots and the subdivision activities will not go beyond what is necessary to present the individual lots for sale as vacant lots. Based on the information provided, there is nothing to suggest that the subdivision of Parcel 1 was the beginning of a property subdivision business. Therefore, it is the Commissioner’s view that the activities in relation to the subdivision are not those of an entity carrying on a business of buying, subdividing and selling subdivided land. However, the activity may be described as an isolated transaction. Whether the proceeds of that transaction constitute assessable income depends on the following. | Detailed Reasoning - Isolated business transactions: The principle has been established that 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 : Income tax: whether profits on isolated transactions are income (TR 92/3) discusses the application of the principles outlined in the Myer Emporium case and provides guidance in determining whether profits from isolated transactions are ordinary income and therefore assessable under section 6-5. According to Paragraph 1 of TR 92/3, the term isolated transactions refers to: ● those transactions outside the ordinary course of business of a taxpayer carrying on a business, and ● those transactions entered into by non-business taxpayers. Paragraph 8 TR 92/3 of the ruling explains that 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. Paragraph 16 of TR 92/3 provides that 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. Paragraph 13 of TR 92/3 outlines the following factors which may be relevant when considering whether an isolated transaction amounts to a business operation or commercial transaction: ● the nature of the entity undertaking the operation or transaction; ● the nature and scale of other activities undertaken by the taxpayer; ● the amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained; ● the nature, scale and complexity of the operation or transaction; ● the manner in which the operation or transaction was entered into or carried out; ● the nature of any connection between the relevant taxpayer and any other party to the operation or transaction; ● if the transaction involves the acquisition and disposal of property, the nature of the property, and ● the timing of the transaction or the various steps in the transaction. Miscellaneous Taxation Ruling MT 2006/1 also 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. 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. In determining whether activities relating to isolated transactions are an enterprise or the mere realisation of a capital asset, it is necessary to examine the facts and circumstances of each case. No single factor will be determinative. Rather it will be the combination of factors that will lead to a conclusion as to the character of the activities. | Detailed Reasoning - Application to your situation: With the above factors in mind the farm land was originally purchased for farming activities and a main residence. The farm land was held for a considerable amount of time within the family structure and the purpose for which the farm land was purchased had remained unchanged for over a century. This can be compared to both Casimaty’s case and McCorkell v FC of T 98 ATC 2199; (1998) 39 ATR 1112 ( McCorkell's case ). In Casimaty’s case , the taxpayer acquired and continued to hold his property as a residence and for the use of primary production for more than twenty years. In McCorkell’s case , the property had been in the family and used for primary production purposes at least as far back as the taxpayer’s birth in 1917. After the Deceased inherited Parcel 1 of the farm land, the Deceased was unable to continue any farming activity due to their age and the size of the land but remained living in the dwelling located on Parcel 1. As the Deceased was unable to maintain Parcel 1 they decided to use some of the land for Agistment. Rezoning of the local area was initiated by other property owners in the area, in conjunction with state government and local Council rather than any action on the Deceased’s part. After a number of years the decision was made by the Deceased to investigate the viability of subdivision as the Deceased was aware that the market valuation of Parcel 1 was comparatively low compared to the adjoining subdivided properties. The Deceased lodged the development applications (DA’s) to subdivide Parcel 1 over two stages, not including the main residence of the Deceased. The subdivision of Parcel 1 into two stages will consist of land only. No buildings or structures will be constructed on the land. There are a significant number of cases where developments of a larger scale have been held not to constitute a commercial or profit making undertaking. These cases include Statham’s case were the rural land was subdivided into 105 lots, Casimaty’s case , were the land was subdivided into a total of 80 lots which were developed in eight separate stages and Williams’s case , were the land was subdivided into 35 lots and sold by auction. The subdivision of stage one had already commenced when the Deceased passed away prior to Parcel 1 being transferred into the Deceased’s estate. It was the decision of the executors of the Deceased’s estate to continue with the subdivision of Stage 1 and Stage 2 of the subdivision as: ● the DA for stage 1 had been lodged with Council and approved; ● the DA for stage 2 had been lodged with Council and was waiting for approval; ● numerous professionals had been employed and paid; ● substantial works had commenced on Stage 1; and ● substantial expenses had been occurred. The DA’s approved by council require substantial earthworks, fencing and development in order to get Stage 1 to a position where Council would allow the sale of the subdivided lots. The cost of the subdivision activities required by Council was quite substantial, with the Deceased providing a substantial amount in order to meet the costs, exhausting all reserves in the Deceased’s estate the executors needed to borrow an additional amount from beneficiaries. Neither the Deceased nor the trustees have ever completed any subdivision projects before and the Deceased’s estate will be finalised at the completion of the subdivision in question. Based on the information and documents supplied we consider that while some factors listed in paragraph 265 of MT 2006/1 and paragraph 13 of TR 92/3 are present, on balance the subdivision does not amount to you carrying on, or carrying out a profit making undertaking or plan. | Detailed Reasoning - Capital Gains: The capital gains tax (CGT) provisions are contained in Part 3-1 and Part 3-3 of the ITAA 1997. The provisions include in your assessable income any assessable gain or loss made when a CGT event happens to a CGT asset that you own. CGT event A1 happens if you dispose a CGT asset. A CGT asset is any kind of property or a legal or equitable right that is not property. When a CGT asset (the original asset) is split into two or more assets (the new assets), such as when land is subdivided, the subdivision of the land into subdivided lots is not a CGT event, according to subsection 112-25(2). Each new subdivided lot will be viewed as having been acquired on the same date that the original asset was acquired. | Detailed Reasoning - Conclusion: The activities involved in the subdivision and sale of the subdivided lots will not amount to carrying on a business. The transactions will not have the character of business operations or commercial transactions. There is no indication that your subdivision activities will become a separate business operation or commercial transaction, or that the Deceased or the Deceased’s estate will be carrying on, or carrying out a profit-making undertaking or plan. As it is viewed that the Deceased’s estate is not carrying on a business, or that the subdivision activities will not be an isolated transaction, any profit arising from the sale of the subdivided lots will be a mere realisation of an asset and accounted for under the capital gains tax provisions in Part 3-1 and Part 3-3 of the ITAA 1997.