Private ruling: CGT - land subdivision
Published: July 2014
Ruling period: Year ending 30 June 2015 | Year ending 30 June 2016 | Year ending 30 June 2017 | Year ending 30 June 2018
Date scheme commenced: 1 July 2014

Ruling: Q1: 1. Will the profit derived from the subdivision and sale of the land be considered as a mere realisation of capital assets and hence assessable under Part 3-1 of the Income tax Assessment Act 1997 (ITAA 1997)? | A2: 

Relevant facts and circumstances: You acquired the land after 20 September 1985. The land was a farmland on which a farming activity was operated. The zoning of the land was non-urban. Since the acquisition, you continued the operation of the farming activity on the land. You considered sale of the land and the business due to unprofitability of the business. However, it considered that the disposal of the land as farm would not result in a reasonable return on the investment. In order to realise the farm at its highest and best use, you have undertaken to subdivide the land, develop it and sell it as separate lots. It is intended that the subdivided lots will be sold as vacant blocks. No houses, fences or other improvements will be constructed on these blocks. You have not previously engaged in property development. The subdivided lots have not sold as quickly as was originally anticipated. There are still a number of blocks for sale.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5, | Income Tax Assessment Act 1997 Subsection 104-10(5), | Income Tax Assessment Act 1997 Subsection 108-70(3) and | Income Tax Assessment Act 1997 Section 108-80.

Reasons for decision: Summary: Under section 6-5 of the ITAA 1997, the assessable income of an Australian resident includes ordinary income derived both in and out of Australia during an income year. Ordinary income is defined as income according to ordinary concepts. In FC of T v The Myer Emporium (1987) 163 CLR 199; 87 ATC 4363; (1987) 18 ATR 693 ( Myer Emporium ), the Full High Court expressed the view that profits made by a taxpayer who enters into an isolated transaction with a profit making purpose can be assessable income. Taxation Ruling TR 92/3 considers the assessability of profits on isolated transactions in light of the principles outlined in Myer Emporium . 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 6 of TR 92/3 provides that a profit from an isolated transaction will generally be income when both the following elements are present: • your intention or purpose 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 out a business operation or commercial 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. In your case, it is considered that the subdivision and sale of the land is a mere realisation of capital asset. There was no intention or purpose on your part to carry on a business of subdivision and sale of the land. The business was continued until it was no longer profitable. The systematic and extensive activities involved in the subdivision and sale of the land show nothing but the most enterprising way that the trustee could realise the best outcome from the land which could no longer sustain the business. Accordingly, the proceeds from the sale of the remaining subdivided blocks will not be included in your ordinary income. Rather, as the subdivision is considered to be a mere realisation of a capital asset, the proceeds will be subject to the capital gains tax provisions in Part 3-1 of the ITAA 1997.

2. Will any profit derived from the subdivision and sale of the land be assessable as ordinary income under section 6-5 of the ITAA 1997?