Private ruling: INCOME TAX: SUBDIVISION AND SALE OF LAND AS RESIDENTIAL LOTS
Published: June 2013
Ruling period: Year ending: 30 June 2013 | Year ending: 30 June 2014

Ruling: Q1: Are the proceeds of the land subdivision into residential lots constitute assessable income under section 6-5 or section 15-15 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No.

Relevant facts and circumstances: The Property Owners have decided to sub-divide and sell inherited farmland as residential blocks. In the absence of any interest to purchase the land for an acceptable price, the Property Owners have decided to arrange for the land to be prepared for sale by lots. The land has been re-zoned and has been approved for sub-division. The lots will be sold in two stages by a real estate agent. There will be no separate marketing for this development, nor will the Property Owners be involved in the marketing of the land. Minimal infrastructure (roads and drainage) is being put in place and is to be arranged by a third party. The Property Owners do not have the time or skills required for the development. Consequently contractors will carry out the required work. The Property Owners own other commercial property for which they are registered for GST.

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

Reasons for decision: Summary: Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 97) provides that assessable income includes income according to ordinary concepts. This is called ordinary income. An amount which is not assessable as ordinary income under section 6-5 of the ITAA 1997 may be included in assessable income under section 15-15 of the ITAA 1997 if the profit arises from the carrying on or carrying out of a profit making undertaking or plan. The Commissioner accepts that where the activities are no more than the realisation of a capital asset as per the 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 ) cases, any realised gain on the transaction would fall for consideration under the CGT provisions of the ITAA 1997. However, profits made on the sale of subdivided land can still be ordinary income, or a profit making undertaking or plan, if the activities become a separate business operation or commercial transaction. For example, in Case W59 89 ATC 538; 20 ATR 3728 it was considered that the appellant was carrying on a business of subdividing, developing and selling land. Similarly, the decision in Federal Commissioner of Taxation v Whitfords Beach Pty Ltd 82 ATC 4031; (1982) 150 CLR 355, considered that when the shares in the taxpayer was purchased by three development companies, it transformed the company which held land for the domestic purposes of its shareholders to a company whose purpose was to engage in a commercial venture with a view to profit. Consequently the taxpayer's activities involved more than a mere realisation of an asset. The Commissioner considers that the following matters (listed at paragraph 13 of Taxation Ruling TR 92/3 - Income tax: whether profits on isolated transactions are income ) may be relevant in determining whether an isolated transaction amounts to a business operation or commercial transaction: (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 this case: · the property owners decided to sub-divide inherited farmland to realise the best value for the asset; · minimal infrastructure (roads and drainage) is being put in place and a third party will plan the development and negotiate with the State Authorities and Council. · the land is to be sold into residential lots in two stages due to the costs involved. · the property owners do not have the time or the skills required for the property development; · all works involved in the development is to be undertaken by contractors; · the sale of the lots would be undertaken by a real estate agent and the property owners will not be involved in the marketing of the land. The facts in this case are materially similar to the facts in Casimaty where the profit was not derived from the conduct of a business of subdividing and selling land or from the carrying out of a profit-making undertaking or scheme. The proceeds were held not to 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. Accordingly it is considered that the proceeds of the subdivision will not constitute ordinary income in terms of section 6-5 of the ITAA 1997, nor would they be assessable under section 15-15 of the ITAA 1997 as they are not considered to be a profit or gain arising from the carrying on or carrying out of a profit making undertaking or plan. They represent a mere realisation of capital assets which will fall for consideration under the CGT provisions in Part 3-1 of the ITAA 1997.