Private ruling: Subdivision and sale of residential property
Date of advice: 8 September 2017
Published: November 2017
Ruling period: 1 July 2009 to 30 June 2010 | 1 July 2010 to 30 June 2011 | 1 July 2011 to 30 June 2012 | 1 July 2012 to 30 June 2013 | 1 July 2013 to 30 June 2014 | 1 July 2014 to 30 June 2015
Date scheme commenced: 1 July 2009

Ruling: Q1: Is any gain or loss you made from the sale of the properties taxed under the capital gains provisions? | A1: Yes

Relevant facts and circumstances: The taxpayer purchased a number of properties over a period of years starting in 200X. The properties all had large yards that made them suitable for subdivision. The taxpayer purchased the properties with the intention of subdividing them, and did subdivide them. The taxpayer then rented the houses on the properties while they owned them. The taxpayer earned rental income from all the houses while they owned them. The taxpayer planned to build on the subdivided land. The taxpayer spent some time researching and pricing demountable houses, kit houses and relocated properties as a quick way to turn the vacant blocks of land into income producing rental properties. In 200X the taxpayer separated from their then spouse. The taxpayer continued to work in the spouse’s family business and you remained on speaking terms. The taxpayer expected to receive a cash payment from their then spouse when joint property was separated. The taxpayer purchased three properties on dates 200Y and 201W with the support of their then spouse and family. At a time in 201W the relationship with the taxpayers then spouse deteriorated. In 201X the taxpayer was fired from their then spouse’s family business, losing their main source of income. The taxpayer’s expectation of a quick property settlement with their then spouse also disappeared. At this point the taxpayer’s bank began to pressure the taxpayer to sell properties to reduce the size of their loans. In order to pay for their living expenses, meet the bank’s demands to reduce debts and maintain payments on the other properties while waiting for the settlement, on dates in 201W the taxpayer sold a house and then later the subdivided land. This was followed by the sale of another house and then the subdivided land on dates in 201X. The taxpayer sold further land on dates in 201Y. The taxpayer’s divorce was finalised in 201Z, and the taxpayer was required to pay their former spouse an amount for their share of the taxpayer’s main residence. The taxpayer sold another house to raise this money. The taxpayer has been involved in a dispute with their bank, suggesting that they misled the taxpayer and acted improperly in forcing them to sell properties to pay down the debt. The taxpayer took the bank to the Financial Ombudsman Service. As a result of the banks actions, the taxpayer sold most of their portfolio of property. The taxpayer has retained one house and land and is pursuing the building X units on the subdivided block. The taxpayer will keep these units as investments. The taxpayer is currently subdividing their main residence and offering for sale the house and land as a single package. The taxpayer expects to use money from this to finally carry out the building of units on the land they have retained.

Relevant legislative provisions: Income Tax Assessment Act 1997 Part 3-1

Reasons for decision: Summary: The taxpayer purchased the properties for the purpose of investment, and so held them on capital account. Any gain or loss on the sale of the properties will be taxable under the capital gains tax provisions. | Detailed Reasoning - Detailed reasoning: Real estate can be held on revenue account or capital account. If land has been purchased for the purpose of subdivision and resale at a profit, it will be on revenue account and any profits (or losses) made on the sale will be treated as ordinary income and taxed accordingly. If land has been purchased for the purpose of holding as long term income making investment, it will be on the capital account and subject to taxation under the concessional capital gains tax rates. The taxpayer must have the requisite purpose at the time of entering into the relevant transaction or operation. If a transaction or operation involves the sale of property, it is usually necessary that the taxpayer has the purpose of profit-making at the time of acquiring the property, although where the taxpayer subsequently changes their intention the status can change. The relevant intention or purpose of the taxpayer (of making a profit or gain) is not the subjective intention. Rather, it is the taxpayer's intention or purpose discerned from an objective consideration of the facts and circumstances of the case. It is not necessary that the intention or purpose of profit-making be the sole or dominant intention or purpose for entering into the transaction. It is sufficient if profit-making is a significant purpose. In your case, your stated intention in purchasing the properties was to subdivide them, build additional houses or units on the properties, and rent them to earn income. You investigated using portable, pre-fabricated and relocatable housing on the properties in order to provide a faster route to building and renting. When your relationship with your former spouse collapsed and you lost your job, you lost both your main source of income and the quick access to cash from a property settlement you had been relying on to advance the development of rental properties. At this point the bank began to force you to liquidate your investments. With the final divorce settlement in 201X, rather than receiving an expected cash payment you were obliged to sell a further property in order to pay out your former spouse’s share of your residence. The properties were bought for the purpose of holding, building and renting, not resale at a profit. The sales of the properties were forced by the changes in your circumstances and the banks insistence, and were carried out to prevent foreclosure and incurring of losses rather than to make a profit. You held the properties on capital account, and any gains or losses you made on the sales will not be ordinary income. They will be subject to the capital gains tax provisions, and you will be eligible to apply the CGT discount where you have held property for more than 12 months.