Private ruling: Subdivision
Published: July 2012
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Will the gain made on the subdivision be assessable as income under either section 6-5 or section 15-15 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. | Q2: Are the proceeds from the subdivision of your land subject to the capital gains tax (CGT) provisions | A2: No.

Relevant facts and circumstances: You purchased a property before 1985. The total area is more than 1000 acres. The sole purpose of the purchase was to use the land for farming. The property was not originally purchased with the intention of being resold at a profit. Approximately 20 years ago a portion of your land was rezoned to rural residential. No submission was made by you to have the land rezoned - it was part of a larger rezoning initiated by the State and Local governments. Approximately five years ago you employed professionals in the field of subdivisions to commence a 'Statement of Environmental Effects' (SEE). You are subdividing and selling approximately a quarter of the property while continuing to use the rest of the property for farming. Your subdivision will create approximately X lots Your subdivision is comprised of seven stages - this allows for the gradual realisation of the land. Your intention is to gradually realise the asset when required. All works for the subdivision are in accordance with and are the minimal works required by the council. You have engaged project managers and contractors to carry out all the works required for the subdivision. Real estate agents were used for the sales of the lots. The average cost per lot to complete the works was approximately $XX. This figure includes all tangible and intangible works and the average per lot cost to complete the SEE. You expect that the whole of the development will not be completed within 15 years.

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

Reasons for decision: Summary: The proceeds from the sale of your subdivided land are not assessable as income as it is not profit from an isolated transaction and you are not carrying on a business of land development. Additionally, as the property was purchased prior to 1985 the proceeds are exempt from capital gains tax. | 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. 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. Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income, discusses profits on isolated transactions and when they are regarded as income. Paragraph 15 of TR 92/3 provides that 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 taxpayer's 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. If a taxpayer acquires an asset with the intention of using it for personal enjoyment but later decides to commit the asset, either: · as the capital of a business; or · into a profit-making undertaking with the characteristics of a business operation or commercial transaction, · this activity constitutes the carrying on of a business, or a business operation or commercial transaction. The profit from such activity is income even though the taxpayer did not have the purpose of profit-making at the time of acquiring the asset. Some of the factors to consider when looking at whether an isolated transaction amounts to a business operation or commercial transaction are listed at paragraph 13 of TR 92/3. They are: · the nature of the entity undertaking the operation or transaction · the nature and scale of other activities undertaken by the taxpayer · the amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained · the nature, scale and complexity of the operation or transaction · the manner in which the operation or transaction was entered into or carried out · the nature of any connection between the relevant taxpayer and any other party to the operation or transaction · if the transaction involves the acquisition and disposal of property, the nature of that property, and · the timing of the transaction or the various steps in the transaction. Profits on the sale of subdivided land can be income according to ordinary concepts within section 6-5 of the ITAA 1997, if the taxpayer's subdivisional activities have become a separate business operation or commercial transaction, or an isolated profit making venture. Casimaty v. FC of T 97 ATC 5135; (1997) 37 ATR 358 ( Casimaty ) considered the sale of farming land. In this case the taxpayer acquired a farming property from his father. The next year he purchased more land on which he erected a homestead. For many years, the taxpayer conducted a farming business but because of growing debt and ill health, the taxpayer subdivided and sold off a large part of the property. In all there were eight separate subdivisions. Most of the subdivisions required the taxpayer to construct roads, provide water and sewerage facilities and to fence the boundaries. Although the subdivisions were numerous, took place over a period of 20 years and ultimately were a large part of the original property, the court held that the sales from the subdivisions occurred as part of the mere realisation of a capital asset of the taxpayer. The court was primarily influenced by the fact that the taxpayer continued to use the property as a farm and a residence. The court said that it did not detect any change in the purpose for which the property was acquired. The taxpayer did not undertake any works or developments on the land beyond that which was necessary to secure approval for each subdivision. The land was sold as vacant lots; the taxpayer did not construct houses, provide internal fencing or make additional improvements such as parks. | Detailed Reasoning - Application to your circumstances: The facts in your case are materially similar to the facts in Casimaty where the proceeds were held to not be income from carrying on a business or a profit-making undertaking or plan, but rather constituted the mere realisation of a capital asset. Accordingly it is considered that the proceeds of the subdivision would 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 of a business 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 capital gains tax provisions of the ITAA 1997. However, as you acquired the land prior to 20 September 1985 the capital gains tax provisions will not apply to the sale of the subdivided land.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.