Private ruling: CGT - subdivision of pre-CGT land and assessable income
Published: March 2013
Ruling period: 1 July 2012 to 30 June 2013 | 1 July 2013 to 30 June 2014 | 1 July 2014 to 30 June 2015 | 1 July 2015 to 30 June 2016
Date scheme commenced: 1 July 2008

Ruling: Q1: Are the proceeds from the sale of the subdivided land acquired prior to 20 September 1985 assessable income? | A1: No | Q2: Is any gain or loss made on the disposal of the subdivided land that you acquired prior to 20 September 1985 disregarded under subsection 104-10(5) of the Income Tax Assessment Act 1997 (ITAA 1997)? | A2: Yes

Relevant facts and circumstances: You purchased over two hectares of land prior to 20 September 1985. The land was mostly bush and your intention at the time of purchase was to build your principal residence on the land and develop a small business. You were unmarried at the time of purchase, your family owned a similar small business, and it was your intention to continue in the family business. You later married and started a family. You purchased a business in partnership with your spouse as well as a principal residence. To date you operate the business with your spouse. Whilst it was always your intention to build a home on the property, this has never eventuated. In year ended 30 June 200X the land adjacent to the property was purchased and redeveloped as residential lots. The developers needed a portion of your land to construct an access road for their development, so they invited you to share in the costs and subdivide part of your property. The local council accepted your redevelopment proposal relating to a specified number of lots of land. The council resumed part of your property for road widening and realignment in XX year. You retained the balance of the property with the intention to subdivide the remaining land into blocks for your children and to construct a home for yourself. To date, you have sold XX blocks of the subdivided land, and constructed a rental property on another block. Your intention is to construct an additional rental property on the last block and retain both rental properties to fund your retirement. You now intend to subdivide the remaining land rather than gift this land to your children. Due to the economic conditions, you wish to use the sale of this land to fund the construction of your second rental property and to assist in funding your retirement. Minimal work is required for this proposed subdivision as all power and amenities were delivered to the land in the last subdivision. You will only be required to engage a quantity surveyor to peg the land and submit plans to the council to effect this further subdivision. There was never any plan for the development of your land. It came about merely because the surrounding land was purchased and developed. There was no business created, site office or building erected. There was no business organisation, no manager, secretary or letterhead and you did not take time off from your normal occupation to work on the development. You intend to retain the last remaining portion of your property to build your principal residence on in the future.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Subsection 108-5(1) | Income Tax Assessment Act 1997 Section 104-10 | Income Tax Assessment Act 1997 Subsection 104-10(5)

Reasons for decision: Summary: As a general principle, if the sale of land constitutes a business, or part of a business, then the proceeds will be assessable as ordinary income, under section 6-5 of the ITAA 1997. On the other hand, if the sale is a mere realisation of the asset, the proceeds will be on capital account. The Full High Court made the following observation in Federal Commissioner of Taxation v. The Myer Emporium (1987) 163 CLR 199 about the nature of profits from isolated transactions: It is one thing if the decision to sell an asset is taken after its acquisition, there having been no intention or purpose at the time of the acquisition of acquiring for the purpose of profit making by sale. Then, if the asset is not a revenue asset on other grounds, the profit made is capital because it proceeds from a mere realisation. But it is quite another thing if the decision to sell is taken by way of implementation of an intention or purpose, existing at the time of the acquisition, of profit-making by sale, at least in the context of carrying on a business or carrying out a business operation or commercial transaction. The courts have also said that the profit on the mere realisation of an investment is not income, even if the taxpayer goes about the realisation in an enterprising way. Gibbs CJ in Federal Commissioner of Taxation v. Whitfords Beach Pty. Ltd . (1982) 150 CLR 355 considered the disposal of surplus land at 367: If the taxpayer does no more than realise an asset, the profits are not taxable. It does not matter that the taxpayer goes about the realisation in an enterprising way, so as to secure the best price. As I have said in FCT v Williams (1972) 127 CLR 226 at 249: 'The situation is not altered by the fact that the landowner seeks and acts upon the advice of an expert as to the best method of subdivision and sale or by the fact that he caries out work such as grading, levelling, road building and the provision of reticulation for water and power to enable the land to be sold to its best advantage' In accordance with the cases on point and Taxation Ruling TR 92/3 - Income tax: whether profits on isolated transactions are income (TR 92/3) the following are important considerations in determining whether proceeds from the sale of the subdivided land acquired prior to 20 September 1985 are considered to be assessable income: · the intention of the parties at the time of the acquisition of the land (although this appears to be of a lesser importance where the subdivision is on a large scale as would occur with a staged subdivision) · the intention of the parties at the time of the undertaking to strata/subdivide the land; for example, where attempts have failed to sell the land as one lot, it is less likely the entering into the venture was a business undertaking · the nature and scale of the activities undertaken; for example, where minimal work is required in the way of road works, earthworks, sewerage, water, etc it is more likely a subdivision and sale would be a mere realisation · where there is a repetition of transactions and a systematic course of conduct it is more likely the profit will be assessable; for example, the profit on a staged subdivision of land with timed releases to the market will be more likely to be assessable · the manner in which the subdivision was progressed. Where the owner is heavily involved with the project, it is more likely to be considered a business undertaking and the profit assessable, and · the nature of the other activities undertaken by the taxpayer. In Stratham v. FCT (1988) 20 ATR 228, the Full Federal Court held that the subdivision in this case was a mere realisation and not a profit-making undertaking or scheme. Some of the factors considered were: · the subdivision and development occurred over a long period of time; · the work proceeded methodically over this extended period; and · the size of the subdivision. The court concluded, on the basis of these factors, that there were insufficient indicators to conclude that the subdivision was a business venture or profit-making scheme. In your case, the proposed subdivision of an additional number of lots and their subsequent sale will constitute a mere realisation of a capital asset because · the subdivisions have occurred over a long period of time; · your original intention was to retain the property to gift to your children; · the nature and scale of the activities to be undertaken will be minimal and you will not be involved in the project. Therefore, the profit on the sale of the subdivided land is not considered to be ordinary income, and will not be assessable under section 6-5 of the ITAA 1997. A capital gain or loss may be made if a capital gains tax (CGT) event happens to a CGT asset. Subsection 108-5(1) of the ITAA 1997 describes a CGT asset as any kind of property or a legal or equitable right that is not property. Land is considered to be a CGT asset and its disposal will constitute CGT event A1. Section 104-10 of the ITAA 1997 states that CGT event A1 occurs if you dispose of a CGT asset. However, subsection 104-10(5) of the ITAA 1997 states that a capital gain or capital loss that is made is disregarded if the CGT asset is acquired prior to 20 September 1985. Subdivision does not constitute the disposal of land under section 104-10 of the ITAA 1997. Taxation Determination 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) states that the effect of registering new titles under the subdivision is, for the purposes of the CGT provisions, to divide the original land parcel into two or more assets. Additionally, subdivided blocks are taken to have been acquired by the owner of the original land parcel when the original property was acquired. In your circumstances, you acquired the property prior to 20 September 1985. Therefore, any capital gain or loss made on the disposal of the subdivided land that you acquired prior to the 20 September 1985, is disregarded under subsection 104-10(5) of the ITAA 1997.