Private ruling: CGT - subdivision - mere realisation
Date of advice: 25 June 2015
Published: June 2015
Ruling period: Year ending 30 June 2015 | Year ending 30 June 2016 | Year ending 30 June 2017 | Year ending 30 June 2018
Date scheme commenced: 1 July 2014

Ruling: Q1: Will the proceeds received from the sale of the subdivided blocks be assessable pursuant to sections 6-5 or 15-15 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. | Q2: Will the proceeds received from the sale of subdivided blocks be taxed under the capital gains tax provisions of the ITAA 1997? | A2: Yes.

Relevant facts and circumstances: You purchased the property in December 20XX. The property is zoned rural residential and comprises XX hectares. The property was purchased with a conditional approval for a subdivision of 6 blocks between X to X acres each. The approval was subject to a number of conditions. Your intention at the time of purchasing the property was to live there upon your return from living overseas. You leased the property to unrelated parties from 20XX to 20XX, while you were living overseas. You returned to Australia in September 2011 and made the property your main residence. In August 20XX, you began working on satisfying the conditions contained in the conditional approval for the subdivision. In 20XX, you had met all the conditions and you obtained the approval to begin work on the subdivision. You completed some of the land clearing activity, however you engaged contractors to complete specialist clearing of the land. You also engaged contractors to carry out: • Road works and culvert installations • Concrete works • Electrical reticulation • Surveys • Geotechnical works • Telephone installation • Engineering works, and • Asphalting. You have not carried out any previous property subdivision and or development activity. You have not borrowed funds to finance the subdivision. Apart from rudimentary fencing, you are only completing the work required to satisfy the approval conditions. You are relying on the technical expertise of others to complete the subdivision and the marketing and sale of the blocks. You will not be erecting any buildings on the land. You expect that it may take several years to sell all the blocks.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 S ection 15-15 | Income Tax Assessment Act 1997 Part 3-1

Reasons for decision: Summary: Under section 6-5 of the ITAA 1997, the assessable income of an Australian resident includes ordinary income derived both in and out of Australia during an income year. Ordinary income is defined as income according to ordinary concepts. Additionally, section 15-15 of the ITAA 1997 specifies that your assessable income 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. In FC of T v The Myer Emporium (1987) 163 CLR 199; 87 ATC 4363; (1987) 18 ATR 693 ( Myer Emporium ), the Full High Court expressed the view that profits made by a taxpayer who enters into an isolated transaction with a profit making purpose can be assessable income. Taxation Ruling TR 92/3 considers the assessability of profits on isolated transactions in light of the principles outlined in Myer Emporium . According to Paragraph 1 of TR 92/3, the term isolated transactions refers to: • those transactions outside the ordinary course of business of a taxpayer carrying on a business, and • those transactions entered into by non-business taxpayers. Paragraph 6 of TR 92/3 provides that a profit from an isolated transaction will generally be income when both the following elements are present: • your intention or purpose in entering into the transaction was to make a profit or gain, and • the transaction was entered into, and the profit was made, in the course of carrying on a business or in carrying out a business operation or commercial 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. In your case, you do not carry on a business of buying, selling or developing land. You purchased the property with the intention of living there upon your return from overseas. You leased the property during the period you lived overseas and upon your return you moved in to the property and made it your main residence. You have had minimal involvement in the subdivision of the land and you will be reliant upon professional planners and contractors to carry out the works associated with the subdivision. You are only completing the work required to satisfy the approval conditions. Accordingly, the proceeds from the sale of the subdivided blocks will not be included in your ordinary income. Rather, the subdivision is considered to be a mere realisation of a capital asset and the proceeds will be subject to the capital gains tax provisions in Part 3-1 of the ITAA 1997.