Private ruling: Realisation of a capital asset
Date of advice: 27 June 2017
Published: October 2017
Ruling period: Year ending 30 June 2018
Date scheme commenced: July 1985

Ruling: Q1: Are the profits from the sale of the X lot of a subdivision ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No | Q2: Are the profits from the sale of the X lot of a subdivision included as assessable income under section 15-5 of the Income Tax Assessment Act 1997 (ITAA 1997) or section 25A of the Income Tax Assessment Act 1936 (ITAA 1936)? | A2: No

Relevant facts and circumstances: You and your ex-spouse purchased a property (the property). You and your ex-spouse lived in the property before you separated. After the separation, your ex-spouse continued to live in the property and it continued to be held jointly. Your ex-spouse did not pay any rent and it was agreed that they would maintain the property. Your ex-spouse accumulated animals and this collection of animals had an adverse effect on the condition of the property. A health notice was issued. As the cost of any rectification would be borne by yourself, it was decided that you would purchase your ex-spouse’s share of the property. You decided that the best option would be to demolish the uninhabitable house and to subdivide the block into Y lots. You received approval for the subdivision. You employed a project manager to oversee and manage the subdivision. You contracted with a real estate agent to sell the blocks. You have not been involved in any property developments in the past. You only completed the works required under the Development Approval. The subdivision was later completed in. The subdivision was funded from your savings. You intend to sell the X lot in the next income year.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5. | Income Tax Assessment Act 1997 Section 15-5. | Income Tax Assessment Act 1936 Section 25A

Reasons for decision: Summary: In this case, given the scale of the activity, the number of lots and the level of involvement, any proceeds from the sale of the subdivided land will represent a mere realisation of a capital asset. | Detailed Reasoning - Detailed reasoning: Under section 6-5 of the ITAA 1997, your assessable income includes the ordinary income you derived directly or indirectly from all sources, during the income year. Additionally, section 15-15 of the ITAA 1997 includes profit arising from the carrying on or carrying out of a profit-making undertaking or plan. However, this provision does not apply to a profit that is assessable as ordinary income under section 6-5 of the ITAA 1997, or which arises in respect of the sale of property acquired on or after 20 September 1985. 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: In this case, the property was originally purchased by you and your then spouse. You and your spouse lived on the property until you separated. Your ex-spouse continued to live on the property until it was issued with a health notice. It was decided that you would purchase your ex-spouse’s share of the property. You were granted permission to subdivide the land by the local council. You will have minimal involvement in the subdivision of the land. 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.