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

Ruling: Q1: Will the sale of the subdivided lots ( Lots ) constitute the mere realisation of capital assets and be dealt with on capital account pursuant to the capital gains tax ( CGT ) rules in Part 3-1 of the Income Tax Assessment Act 1997 ( ITAA 1997 )? | A1: Yes. | Q2: If the answer to question 1 is yes, will the sale of the 'Pre-CGT Lots' (as defined in fact 12) be exempt from income tax under the ITAA1997? | A2: Yes. | Q3: If the answer to question 1 is yes, will the sale of the 'Combination Lots' (as defined in fact 12) be exempt from income tax, to the extent they are comprised of pre-CGT Land, under the ITAA 1997? | A4: Yes. | Q4: Is the cost base of the post-CGT portion of the Combination Lots calculated under Division 110 of the ITAA 1997, and does the cost base include a reasonable allocation of expenses incurred in respect of the post-CGT portion of the Combination Lots? | A6: Yes. | Q5: If the answer to questions 1, 2 or 3 is no, will the sale of the Lots be treated as the disposal of trading stock of a business pursuant to Division 70 of the ITAA 1997? | A7: No. The sale of the Lots will not be treated as the disposal of trading stock | Q6: If the answer to questions 1, 2 or 3 is no, will the proceeds received from the sale of the Lots be treated as ordinary income pursuant to section 6 - 5 or any other provision of the ITAA 1997? | A8: No. The proceeds received from the sale of the Lots will not be treated as ordinary income of the Owner.

Relevant facts and circumstances: · The Council will transfer SRR land to the Owner. · The Property was to be divided into three parcels of land: ˗ Lots A and B ware to be transferred to the Council. ˗ Lot 1 was to be retained by the Owner for future subdivision into residential lots. · The SRR land owned by the Council was to be transferred to the Owner consideration of $xx. · The Owner would use its best endeavours, with the assistance of Council, to obtain a planning permit to subdivide Lot 1 into residential lots. · 'Combination Lots' are the lots which include both Lot 1 and SRR land. · 'Pre-CGT Lots' are the remaining lots which are comprised of Lot 1 land only. · Extending the sewer from the neighbouring property to connect it to the subdivision · Connecting the subdivision to town water · Relocating a light pole · Removing redundant telecommunication infrastructure · Civil engineers who called for tenders to carry out the project and performed construction management services. · Civil contractors for the project who completed the subdivision and associated works. · Real estate agents to market and sell the Lots. · Town Planning Consultants who co-ordinated all planning documentation, sourced and briefed all sub consultants and experts, liaised with referral parties and the Council planning officer to complete all permit application documents for submission to Council. · A plumber who assisted with the plumbing and sewerage works for the lots.

Relevant legislative provisions: Income Tax Assessment Act 1997 Part 3-1 | Income Tax Assessment Act 1997 Part 3-3 | Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 Division 70 | Income Tax Assessment Act 1997 section 70-10 | Income Tax Assessment Act 1997 subsection 104-10(5) | Income Tax Assessment Act 1997 section 108-65 | Income Tax Assessment Act 1997 Division 110 | Income Tax Assessment Act 1997 section 110-5 | Income Tax Assessment Act 1997 section 110-25 | Income Tax Assessment Act 1997 Division 112 | Income Tax Assessment Act 1997 section 112-5 | Income Tax Assessment Act 1997 section 112-25

Reasons for decision: Summary: The disposal of the Lots represents a realisation of a capital asset. The proceeds from the disposal of the Lots will be assessable under Parts 3-1 and 3-3 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: The proceeds from the sale of land can be treated as: · a realisation, often referred to as a 'mere realisation', of a capital asset, assessable under Parts 3-1 and 3-3 of the ITAA 1997; · assessable ordinary income under section 6-5 of the ITAA 1997 as income from carrying on a business of property development; or · assessable ordinary income under section 6-5 of the ITAA 1997 as income from an isolated commercial transaction with a view to a profit. The doctrine of 'mere realisation' was developed in the High Court case of Scottish Australian Mining Co Ltd v. Federal Commissioner of Taxation (1950) 81 CLR 188 ( Scottish Australian Mining) , and is used to distinguish a mere realisation from a business operation or a commercial transaction carrying out a profit-making scheme. Based on the facts in Scottish Australian Mining the subdivision of land was considered no more than a mere realisation of a capital asset and merely an enterprising way to realise an asset to its best advantage. However in Federal Commissioner of Taxation v Whitfords Beach Pty Ltd (1982) 150 CLR 355; 82 ATC 4031 Mason J and Wilson J seemed to doubt the correctness of the court's earlier decision in Scottish Australian Mining due to the scale of the development activities undertaken in that case. Mason J said: 38. ... I have difficulty with the decision of Williams J. in Scottish Australian Mining Co. Ltd. v. Federal Commissioner of Taxation (1950) 81 CLR 188. The taxpayer there, after giving up its mining business in 1924, devoted itself to the subdivision of its land. This entailed the construction of roads, the building of a railway station, the granting of land to public institutions such as schools and churches and the setting aside of land for parks. I should have been inclined to the view that the taxpayer had ceased to carry out its mining business and that it had commenced to carry on the business of land development. The courts have since endeavoured to reconcile these decisions and a number of factors have been established to determine whether the sale of subdivided land is income from the mere realisation of a capital asset. The distinction between a mere realisation of a capital asset and a transaction that is an act done in carrying on a business or carrying out a business operation or commercial transaction will be determined by weighing all the facts and circumstances taken as a whole. Paragraph 18 of Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? provides a summary of the main indicators for consideration to determine if a business is being carried on. These include: · significant commercial activity; · purpose and intention of the taxpayer in engaging in the activity; · intention to make a profit from the activity; · activity is or will be profitable; · repetition and regularity of activity; · activity is carried on in a similar manner to that of the ordinary trade; · activity is organised and carried on in a businesslike manner and systematically - records are kept; · size and scale of the activity; · a business plan exists; · commercial sales of product; and · taxpayer's knowledge or skill. Whilst one factor relevant to determining if a business is being carried on is repetition and regularity of activity, in relation to a business of property development and resale, repetitive buying and selling of property is not necessary to establish that a business is being carried on. A single acquisition by a business commenced for the purpose of development, subdivision and sale will be sufficient to constitute a business activity (Taxation Determination 92/124: Income tax: property development: in what circumstances is land treated as 'trading stock'? ). In addition to transactions that occur in the ordinary course of a taxpayers business, transactions may occur which are outside of the ordinary course of a taxpayer's business. These transactions are referred to as an 'isolated transaction'. As explained in Taxation Ruling TR 92/3: income tax: whether profits on isolated transactions are income (TR 92/3), under certain circumstances, profits from an 'isolated transaction' can be ordinary income. Paragraph 35 of TR 92/3 states that profits on isolated transactions may be ordinary income if: · the intention or purpose of a taxpayer in entering into the transaction was to make a profit or gain; and · the transaction was entered into, and the profit was made, in the course of carrying on a business or in carrying on a business operation or commercial transaction. Paragraphs 56 and 57 of TR 92/3 set out what objective intentions the ATO considers will give rise to a profit made from an isolated transaction being assessable as income according to ordinary concepts. The requisite intentions are: · where a taxpayer acquires property with a purpose of making a profit by which ever means prove most suitable and a profit is later obtained by any means which implements the initial profit-making purposes; · where a taxpayer acquires property contemplating a number of different methods of making a profit and uses one of those methods in making a profit; and · where a taxpayer enters into a transaction or operation with a purpose of making a profit by one particular means but actually obtains the profit by a different means. 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 that gives rise to the profit. It is sufficient if profit-making is a significant purpose. If the transaction 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 (paragraph 9 of TR 92/3). However, that is not always the case. As explained in the example at paragraph 41 of TR 92/3: 41. ... if a taxpayer acquires an asset with an intention of using it for personal enjoyment but later decides to venture or commit the asset either as the capital of a business or into a profit-making undertaking or scheme with the characteristics of a business operation or commercial transaction, the profit is income even though the taxpayer did not have the purpose of profit-making at the time of acquisition. The decisions in Casimaty v. Federal Commissioner of Taxation (1997) 97 ATC 5135; 37 ATR 358 ( Casimaty ) and McCorkell v Federal Commissioner of Taxation 98 ATC 2199; (1998) 39 ATR 1112 ( McCorkell ) demonstrate that if a taxpayer does not intend to make a profit when he or she acquires land then the likelihood that any profit made on the eventual sale of land being considered ordinary income is greatly diminished. However, as demonstrated in the High Court decision in Whitfords Beach , that is not always the case because the purpose can change. In addition to a profit making intention the transaction must have a business or commercial character. Paragraph 47 of TR 92/3 states: For a transaction to be characterised as a business operation or commercial transaction, it is sufficient if the transaction is business or commercial in character ... Whether a particular transaction has a business or commercial character depends very much on the circumstances of the case. No single factor or circumstance is determinative to characterise a transaction. Each must be weighed against all other factors. Paragraph 49 of TR 92/3 provides a number of factors which may be relevant in 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 that property; and · the timing of the transaction or the various steps in the transaction. Specifically in relation to the sale of subdivided land, the following factors have been considered by the courts to determine whether proceeds from the sale of subdivided land was income from carrying on a business or carrying out an isolated commercial transaction, or was from the mere realisation of a capital asset: · whether the landowner held the land for a considerable period of time prior to any subdivision and sale; · the purposes for acquiring the property, and whether it was used for any other purposes prior to sale; · whether the landowner conducted farming or other activities on the land prior to beginning the process of developing and selling the land; · whether the landowner originally acquired the property as an investment, such as long term capital appreciation or to derive income; · whether the land was originally acquired near the urban fringe of a major city or town; · if the property has been rezoned, whether the landowners actively sought that rezoning; · whether a potential buyer made any offers to the landowners before they commenced discussion to enter into a proposed or final development agreement; · whether the landowners had tried to sell the land without subdivision; · whether the landowner had any history of buying and profitably selling developed land or land for development; · the extent to which the development goes further than that required to obtain council approval; · whether the operations will be planned, organised and carried on in a business-like manner; · whether the landowners have changed their business activity relating to the land from one business to another (for example, from farming to property development); · the scope, scale, duration and degree of complexity of the proposed development; · the reasons for selling the land; · who initiated the proposal to develop the land for resale; · the complexity of the development; · the level of involvement that the taxpayer had in the development, marketing and sale of the property; · the level of legal and financial control maintained by the landowners in the proposed or final development agreement; · whether any finance must be obtained in order to fund the development activities; and · the level of financial risk borne by the landowner in acquiring, holding and/or developing the land. | Detailed Reasoning - Will the subdivision and sale of the subdivided lots represent a mere realisation of a capital asset?: The following relevant factors, on balance, lead to a conclusion that the subdivision and disposal of the subdivided lots are the realisation of a capital asset: · The Owner has owned the Property (which includes Lot 1) for a considerable period of time. · The Owner did not acquire the Property for profit-making by its development, subdivision or resale. It acquired the Property for use in its business. · The Owner's use of the Property is consistent with its reason for acquiring the Property. The Property was used for business activities since its acquisition, for a period of approximately 30 years. · The Owner is undertaking the subdivision and sale of subdivided lots to meet its legal obligations in the second Agreement. The second Agreement imposed various obligations on the Owner and the Council, including that the Owner subdivides Lot 1 and the adjacent SRR land into residential lots. · The Owner has not tried to sell Lot 1 and the adjacent SRR land because it is contractually obligated by the second Agreement to undertake the subdivision. · The Owner will not seek rezoning for the subdivision. · The Owner does not have an extensive history of property development and sales to indicate this subdivision is more than a mere realisation of an asset. Approximately 30 years ago the Owner purchased land for the purpose of resale. The profit was returned as assessable income. With the exception of this activity, the Owner and any associated entities have not carried out any other similar activities. · The subdivision by the Owner is not significant or complex. Dwellings will not be erected on the subdivided lots which will be sold as vacant land. The works to be undertaken for the subdivision are those required by Council for the planning permit, with some other additional works for town water and the sewer. · The scale of the development is not significant. Lot 1 together with the adjoining SRR land will be subdivided into 41 Lots. · The Owner does not have expertise in or knowledge of the subdivision process and will liaise with the independent project managers and consultants engaged to carry out the subdivision process, and will make joint decisions if and when required. Similarly, the marketing and sales of the subdivided Lots will be undertaken by a realtor. > The following factors indicate that the subdivision and disposal of the subdivided lots are less likely the realisation of a capital asset: · The Owner is assuming the risk of the proposed development including the profits, losses and its general success. Generally the greater the level of financial risk assumed by a landowner in respect of the development of their land, the more likely that the landowner is carrying on a business or is engaged in a profit making undertaking. · The Owner has engaged independent project managers and consultants to carry out the subdivision process however it is ultimately the Owner who make decisions in respect of the subdivision and sales. The engagement of professionals and consultants by a landowner is recognised as a normal part of the planning and approval process of a development and is in part a consequence of the development and approval process having become more complex. Such engagement does not however mean the landowner's role in the process is limited or passive as ultimately it is the landowner that makes the decisions and gives authority for the development. · In addition to the works required by Council for the planning permit, the Owner will perform some additional works for town water and the sewer. The facts and circumstances outlined above, considered in light of the relevant factors considered by the courts, with no one factor determinative in isolation, leads to a conclusion that the Owner is merely realising its asset in an enterprising way. Whilst the subdivision and sale arrangement has some characteristics indicative of an isolated business or commercial transaction, for example the Owner assuming the financial risk of the cost of the development, it is considered that these factors are outweighed by the other factors that indicate the Owner is instead undertaking the subdivision to dispose of a capital asset in the most enterprising manner. This is indicated by factors which include the reason for acquiring the Property, the absence of a profit making intention at the time of acquisition, the use of the Property since its acquisition and for a period of approximately 30 years, the considerable length of time the Property has been owned, the unimproved nature of the property, and the limited scope and size of the subdivision. In addition, the Owner is undertaking the subdivision to meet its legal contractual obligations in the second Agreement. Further, whilst the terms of the first Agreement would have resulted in the Owner incurring considerable expense in respect of the Property, the second Agreement allows the Owner to instead realise the Property to its best advantage. The fact that the Owner, has through the second Agreement, entered an agreement calculated to maximise their receipts for their disposal of the Property does not necessarily make the proceeds either profits from an undertaking or scheme, or income from a business. The fact that the Owner continued to use the Property for business activities for a further 10 years after the second Agreement was made indicates that the Owner's intention in respect of the Property was unchanged. In conclusion, the proceeds from the disposal of the subdivided Lots will not be income from carrying on a business or from an isolated business or commercial transaction undertaken for the purpose of profit. It is considered that the Owner is instead undertaking the subdivision and sale of subdivided Lots to dispose of a capital asset in the most enterprising way available so as to maximise the proceeds of sale. The proceeds from the sale of the subdivided Lots will not be assessable ordinary income under section 6-5 of the ITAA 1997, but will be assessable under Parts 3-1 and 3-3 of the ITAA 1997. > | Summary: Any capital gain or capital loss made by the Owner from the disposal of the 'Pre-CGT Lots' will be disregarded and will be exempt from income tax. | Detailed Reasoning - Detailed reasoning: Section 112-25 of the ITAA 1997 explains what happens if an asset is split into 2 or more assets or changes to an asset of a different nature. Subsection 112-25(2) states that the split or change is not a CGT event. CGT Determination Number 7 TD 7 Capital Gains: What are the CGT consequences of sub-dividing pre-CGT land? confirms that the subdivision of land is not a CGT event and pre-CGT land maintains its pre-CGT status when it is subdivided. The Property was acquired by the Owner prior to 20 September 1985 and, in accordance with the second Agreement, was subsequently subdivided into Lot A, Lot B and Lot 1. Ownership of Lot 1 was retained by the Owner. Lot 1 maintains pre-CGT status in accordance with section 112-25 of the ITAA 1997. The further subdivision of Lot 1 results in several Lots (out of 41 Lots) remaining solely on Lot 1 pre-CGT land. These 'Pre-CGT Lots' also retain pre-CGT status pursuant to section 112-25 of the ITAA 1997. CGT event A1 will occur when the Pre-CGT Lots are disposed of, however any capital gain or capital loss made by the Owner on the disposal of these lots is disregarded pursuant to subsection 104-10(5) of the ITAA 1997 which states any capital gain or capital loss you make is disregarded if you acquired the asset prior to 20 September 1985. | Summary: Any capital gain or loss made in respect of the disposal of Combination Lots will be disregarded to the extent that the Combination Lots comprise pre-CGT land. | Detailed Reasoning - Detailed reasoning: Section 108-65 of the ITAA 1997 states: 108-65 Land adjacent to land acquired before 20 September 1985 Land that you *acquire on or after 20 September 1985 that is adjacent to land (the original land ) you acquired before that day is taken to be a separate *CGT asset from the original land if it and the original land are amalgamated into one title. | Detailed Reasoning - Example:: On 1 April 1984 you bought a block of land. On 1 June 1999 you bought another block of land adjacent to the first block. You amalgamate the titles to the 2 blocks into 1 title. The second block is treated as a separate CGT asset. You can make a capital gain or loss from it if you sell the whole area of land. CGT Determination Number 8 TD 8 Capital Gains: How does CGT apply to the amalgamation of two adjoining titles? states: 1. Where a person owns the title to two adjoining properties, the amalgamation of the two titles does not involve any change in ownership of the land. 2. There is no disposal of the land for CGT purposes. Example: (i) If both properties were acquired pre-CGT, an amalgamation of titles after 19 September 1985 has no CGT consequences at that time. (ii) If one property was acquired pre-CGT and the other after 19 September 1985, there are no CGT consequences on the amalgamation but the land acquired after 19 September 1985 remains subject to the CGT provisions and the pre-CGT land remains exempt. The SRR land was acquired by the Owner after 20 September 1985. It was adjacent to Lot 1, which was acquired by the Owner prior to 20 September 1985. The realignment of the boundary separating Lot 1 and the SRR land, together with the subdivision of those two parcels of land into 41 lots, resulted in several of the lots comprising land which is both pre-CGT and post-CGT. Pursuant to section 108-65 of the ITAA 1997, the amalgamation of the adjacent SRR land with Lot 1 land has no CGT consequences. However, as a result of the original land (i.e. Lot 1) having been acquired pre-CGT and the adjacent land (i.e. SRR land) acquired post-CGT, the portion of land in each of the Lots that was previously SRR land will be treated as a separate post-CGT asset. CGT event A1 will occur when Combination Lots are disposed of. Any capital gain or capital loss made by the Owner in respect of the pre-CGT portion of the Combination Lots is disregarded pursuant to subsection 104-10(5) of the ITAA 1997. The portion of each Combination Lot that is a separate post-CGT asset will be subject to the CGT provisions in Parts 3-1 and 3-3 of the ITAA 1997. | Summary: The capital proceeds from the disposal of the Combination Lots will be exempt from income tax to the extent that the proceeds are consideration for the proportion of the Combination Lots which is the pre - CGT land. | Detailed Reasoning - Detailed reasoning: Taxation Determination TD 9 Capital Gains: How do you apportion consideration received on the disposal of a composite asset? (TD 9) acknowledges that there is no statutory formula for apportioning the consideration received on the disposal of an asset over the parts that are deemed to be separate assets. TD 9 states that it is not mandatory that taxpayers obtain an independent valuation for the purposes of apportioning the consideration received on disposal; however taxpayers who choose to do their own apportionments need to be in a position to justify the estimates they make. The Commissioner will accept any reasonable method of apportioning the capital proceeds received, such as on an area basis or relative market value basis (Taxation Determination TD 97/3 Income tax: capital gains: if a parcel of land acquired after 19 September 1985 is subdivided into lots ('blocks'), do Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 treat a disposal of a block of the subdivided land as the disposal of part of an asset (the original land parcel) or the disposal of an asset in its own right (the subdivided block)? (TD 97/3)). The consideration received by the Owner in respect of the disposal of a Combination Lot should be apportioned between the pre-CGT and post-CGT portions of the Combination Lot disposed of. The apportionment should be made on a fair and reasonable basis, such as on an area basis or relative market value basis. | Summary: The cost base of the post-CGT portion of the Combination Lots is calculated under Division 110 of the ITAA 1997. The cost base of the post-CGT portion of each Combination Lot will include a reasonable apportionment of expenses incurred by the Owner in respect of the post-CGT portion of the Combination Lots; however costs that relate solely to a particular lot will be attributable solely to the lot to which those costs relate. | Detailed Reasoning - Detailed reasoning: Division 110 of the ITAA 1997 sets out how to work out the cost base (and reduced cost base) of a CGT asset. Subsection 110-25(1) of the ITAA 1997 states that the cost base of a CGT asset consists of 5 elements. Subsections 110-25(2) - (6) of the ITAA 1997 specify those elements. In addition to the general rules in Division 110 of the ITAA 1997, section 110-5 of the ITAA 1997 states: | Detailed Reasoning - 110-5 Modifications to general rules: After you have read the general rules, you need to know if there are any modifications to them. Division 112 lists each situation that may result in a modification and tells you where you can find the detailed provisions for each situation. Section 112-5 of the ITAA 1997 states that modifications can occur to the cost base of a CGT asset from the time the asset was acquired to the time when a CGT event happens in relation to the asset; and that most modifications replace the first element of the cost base of the asset. Most relevantly, section 112-25 of the ITAA 1997 provides for the cost base of a CGT asset where the asset is split into 2 or more assets. The cost base of each new asset is calculated by working out each element of the cost base of the original asset at the time of the split or change and apportioning them in a reasonable way. As stated in sub-section 112-25(3): | Detailed Reasoning - 112-25(3): You work out the *cost base and *reduced cost base of each new asset as follows: | Detailed Reasoning - Step 1.: Work out each element of the *cost base and *reduced cost base of the original asset at the time of the event referred to in subsection (1). | Detailed Reasoning - Step 2.: Apportion in a reasonable way each element to each new asset. The result is each corresponding element of the new asset's *cost base and *reduced cost base. In relation to subdivided land, TD 97/3 provides that the Commissioner will accept any reasonable method of apportioning the original cost base of the land between the new lots created by the subdivision, such as on an area basis or relative market value basis. Costs such as survey costs, legal fees and application fees should be apportioned in accordance with the methodology used to apportion the cost base of the land. However, costs which relate solely to a particular lot are attributable solely to the lot to which those costs relate. In relation to the Combination Lots, the cost base of the post-CGT portion of the Combination Lots is calculated under Division 110 of the ITAA 1997. The cost base of the post-CGT portion of each Combination Lot will include a reasonable apportionment of expenses incurred by the Owner in respect of the post-CGT portion of the Combination Lots; however costs that relate solely to a particular Combination Lot will be attributable solely to the lot to which those costs relate. | Summary: The first element of the cost base of the post-CGT portion of the Combination Lots includes the cash amount paid to the Council by the Owner for the SRR land. | Detailed Reasoning - Detailed reasoning: The cost base of a CGT asset consists of 5 elements. In relation to the first element of the cost base sub-section 110-25(2) of the ITAA 1997 states: | Detailed Reasoning - 110-25(2): The first element is the total of: (a ) the money you paid, or are required to pay, in respect of *acquiring it; and (b) the *market value of any other property you gave, or are required to give, in respect of acquiring it (worked out as at the time of the acquisition). The second Agreement clearly states that monetary consideration of $xx is to be paid by the Owner to the Council for the SRR land. The consideration of $xx will be included in the first element of the cost base of the post-CGT portion of the Combination Lots. | Summary: The sale of Lots by the Owner will not be a disposal of trading stock. | Detailed Reasoning - Detailed reasoning: Division 70 of the ITAA 1997 deals with the tax treatment of trading stock. Section 70-10 of the ITAA 1997 defines 'trading stock' widely and includes 'anything produced, manufactured or acquired that is held for purposes of manufacture, sale or exchange in the ordinary course of a business'. This definition can include land. Taxation Determination TD 92/124 Income tax: property development: in what circumstances is land treated as 'trading stock'? states land is treated as trading stock for income tax purposes if it is held for the purpose of resale and a business activity which involves dealing in land has commenced. As explained above in response to Question 1, the Owner has not commenced a business of property development, subdivision and sale of land in respect of the Property. Accordingly, the sale of the subdivided Lots by the Owner will not be treated as the disposal of trading stock pursuant to Division 70 of the ITAA 1997. > | Summary: The proceeds received from the sale of the Lots will not be treated as ordinary income of the Owner. | Detailed Reasoning - Detailed reasoning: As explained above in response to Question 1, the sale of the Lots by the Owner will represent a realisation of a capital asset. The proceeds from the sale of the Lots will not be treated as ordinary income of the Owner pursuant to the ITAA 1997.

Question 3A: Are the capital proceeds from the disposal of the Combination Lots exempt from income tax, to the extent that the proceeds are consideration for the proportion of the pre - CGT land? | Yes, however any costs that relate solely to a particular lot will be attributable solely to the lot to which those costs relate. | Question 4A: Does the first element of the cost base of the post-CGT portion of the Combination Lots include the cash amount paid? | Relevant facts and circumstances: The Property was acquired approximately 40 years ago. The land area of the Property was approximately 12 hectares. | The Property was purchased for the main purpose of carrying on business activities on the Property. | The business activities were conducted on the Property for approximately 30 years. | An Agreement (the first Agreement) was entered between the Owner of the Property, prior to 20 September 1985, and the Council in respect of the Property. | A second Agreement was entered, after 20 September 1985, between the Owner of the Property and the Council to resolve a dispute in respect of their first Agreement. Under this second Agreement various land transactions would occur including: | At the time of entering the second Agreement, the Owner intended to, and did, continue the business activities on the Property. | In accordance with the second Agreement, the Property was subdivided. | To help fulfil its obligations under the second Agreement in relation to Lot 1 and the SRR land, the Owner has appointed independent professionals to carry out the subdivision project because the Owner does not have expertise or knowledge of the subdivision process. | The Owner has limited involvement in the subdivision and development. The Owner liaises with the independent project managers and consultants that it engaged to carry out the subdivision process and make joint decisions if and when required by the project managers and consultants. | A planning permit was issued by Council. The Council approved a 41 lot subdivision. | The Council also approved the realignment of the boundary separating Lot 1 and SRR land. As a consequence, some of the 41 Lots that the Owner intends to sell include both Lot 1 and SRR land. This means that some of the lots consist of both pre-CGT and post-CGT areas. | For the purposes of the Application for private ruling: | The planning permit issued by Council requires the Owner to provide and construct roadworks, drainage and associated works as detailed in the plans and specifications approved by Council including: Stormwater Drainage Outfall, Water Quality treatment works, Kerb and channel, footpaths, vehicle crossings to each lot, street signs, street tree planting, road pavement, street lighting and provision of telecommunication services to each lot (connected or ability to be connected). | The Owner also intends to complete minimal additional works for the subdivision, including: | No houses or buildings will be constructed on the Lots before sale. | The Owner has not entered a development agreement with a property developer in respect of the subdivision. | The Owner has not established any separate entity to carry out or complete the subdivision of Lot 1 and SRR land. All works will be carried out by independent parties/contractors acting at arm's length. | In addition to the appointment of the project manager and development manager, the following professionals were/are engaged by the Owner to carry out the subdivision and sale process: | The Construction Manager from the Civil engineers manages the day to day operations of the project and organises and carries out these activities. | The Development Manager meets with the Civil engineers approximately once per week to check in with them, and monitor project timelines and any issues which may arise. | The Owner does not need to rezone the land for the subdivision. | All costs incurred to date relating to the subdivision have been paid by the Owner from its own funds. There is no mortgage or other security interest over the Property. | The Owner intends to obtain loan funding for the subdivision costs. | The Owner did not attempt to sell Lot 1 in its un-subdivided state. | The Owner previously participated in an activity to sell land approximately 30 years ago. The Owner's share of the profit was returned as assessable income during the applicable income years. | With the exception of the activity approximately 30 years ago, the Owner and any associated entities have not carried out any other activities in respect of selling land. | The Owner is currently carrying out activities to realise its ownership of the Property by subdivision.