Private ruling: Capital Gains Tax - Property Sub-division
Published: September 2017
Ruling period: Year ending 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Will the profit from the sale of subdivided blocks of land be treated as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No | Q2: Will the profit from the sale of the subdivided blocks of land be treated as ordinary income under section 6-5 of the ITAA 1997 as a result of a profit making undertaking? | A2: No | Q3: Will the profit from the sale of the subdivided blocks of land be treated as statutory income under the capital gains tax provisions in Parts 3-1 and 3-3 of the ITAA 1997? | A3: Yes

Relevant facts and circumstances: You acquired the Property as a joint tenant with your spouse prior to 20 September 1985. The land area of the Property is more than X hectares and includes a dwelling. Since its purchase the Property has been used as your main residence for you, your spouse and children to pursue your children's hobby and has not been used to produce assessable income. You and your spouse are both effectively retired and the Property is too large for you to continue to maintain. You and your spouse have decided to sell the excess land by way of subdivision in order to become self-funded retirees. 30 years after the Property was purchased the local Council gazetted its Environment Plan that introduced a minimum 10 hectare lot size for all land in the street where the property is located. 12 months later you engaged a local company to prepare and lodge a development application to divide the property into a number of specified lots. Approval for the subdivision was granted by the local Council a few months later. In accordance with the subdivision approval, you paid for electricity connections, fencing, and associated work in order to comply with the development application. You also made a contribution to the work carried out by the National Broadband Network. The total expenditure incurred to obtain and comply with the development application was no more than the minimum required. The services of a local real estate agent were engaged to sell the lots of land after Council approval. Over a period of ZZ months, contracts for the sale of the subdivided lots were entered into. You and your spouse made a boundary adjustment and sold a small parcel of land to your neighbour. You retained the lot that contained the main residence. The market value of the Property as a whole prior to the commencement of the subdivision was estimated to be over $X. The gross proceeds from the sub division of the property exceed $Y. You have not undertaken any land subdivision and sale activities in the past and do not intend any similar activities in the future.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 15-15 | Income Tax Assessment Act 1997 Section 102-20 | Income Tax Assessment Act 1997 Section 104-10 | Income Tax Assessment Act 1997 Subsection 104-10(3) | Income Tax Assessment Act 1997 Section 112-25 | Income Tax Assessment Act 1997 Part 3-1 | Income Tax Assessment Act 1997 Part 3-3 | Income Tax Assessment Act 1997 Section 25A

Reasons for decision: Summary: The proceeds from the sale of the subdivided blocks are not ordinary income and not assessable under sections 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997). The proceeds represent a realisation of a capital asset which will fall for consideration under the capital gains tax (CGT) provisions in Parts 3-1 and 3-3 of the ITAA 1997. You and your spouse acquired the Property before 20 September 1985 therefore the subdivided blocks of land will also be viewed as having been acquired before 20 September 1985, being pre-CGT. As the subdivided blocks of land are pre-CGT assets, any capital gain made on their disposal can be disregarded. | Detailed Reasoning - Income or capital: As a general principle, profits from property sales will either be assessable as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) or statutory income under the CGT provisions of the ITAA 1997. Taxation Ruling TR 97/11 (TR 97/11) outlines the indicators used to determine whether a taxpayer is carrying on a business. Taxation Ruling TR 92/3 (TR 92/3) provides guidance in determining whether profits from isolated transactions are assessable under section 6-5 of the ITAA 1997 as ordinary income. Where the profit has been made as a result of a taxpayer carrying on a business of property development or as a result of a taxpayer entering into an isolated business transaction, the profit will be assessable as ordinary income. However, where the profit is a realisation of a capital asset, the profit will be assessable under the CGT provisions of the ITAA 1997. | Detailed Reasoning - Application to your situation: In this case, the Property was purchased before 20 September 1985 and has been used as your main residence. The Property has never been used to earn assessable income since its purchase. Due to you and your spouse's semi-retirement and the size of the Property, you made the decision to subdivide the Property. You engaged the services of a local company to manage the subdivision of the Property. Only the minimum activities required under the development application were undertaken in relation to the subdivision. You and your spouse retained the block with the existing family home. You and your spouse have never been in the business of land development and you had minimal involvement in the subdivision of the land. Therefore, the proceeds you and your spouse receive from the development of the subdivided blocks of land are not ordinary income and will not be assessable under sections 6-5 of the ITAA 1997. We further view that the subdivision of the Property and sale of the subdivided blocks of land will not be considered a profit making undertaking. The proceeds represent a realisation of a capital asset being a long-held privately owned property which will fall for consideration under the CGT provisions in Part 3-1 and 3-3 of the ITAA 1997. | Detailed Reasoning - CGT provisions: The CGT provisions are contained in Part 3-1 and 3-3 of the ITAA 1997. Broadly, 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 of a CGT asset. A CGT asset is any kind of property or a legal or equitable right that is not property. However, any capital gain or capital loss made on the disposal of a CGT asset will be disregarded if the asset was acquired before 20 September 1985. When a CGT asset (the original asset) is split into 2 or more assets (the new assets), such as when land is subdivided, the subdivision of the land into subdivided blocks is not a CGT event, according to subsection 112-25(2). Where the original land was acquired before 20 September 1985, each new block retains its pre-CGT status. | Detailed Reasoning - Application to your situation: In this case you acquired the Property before 20 September 1985 being pre-CGT and the subdivided blocks of land will also be viewed as having been acquired before 20 September 1985. Any capital gain made on their disposal can be disregarded.