Private ruling: CGT - subdivision of land
Published: January 2013
Ruling period: Year ending 30 June 2013 | Year ending 30 June 2014
Date scheme commenced: 1 July 2012

Ruling: Q1: Will the proceeds from the sale of the subdivided land be assessable income under section 6-5 or section 15-15 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No | Q2: Will the proceeds from the sale of the subdivided land be accounted for under the capital gains tax (CGT) provisions? | A2: Yes | Q3: If the answer to Question 2 is yes, should the costs of the subdivisional works be apportioned over each of the new blocks of land for the purposes of determining if the subdivisional works will be treated as capital improvements that are a separate CGT asset to the land? | A3: Yes | Q4: If the answer to Question 3 is yes, where the amount of the subdivisional works apportioned over each of the new blocks of land is less than the improvement threshold for the relevant income year, will the subdivisional works will be treated as capital improvements that are a separate CGT asset to the land? | A4: No | Q5: If the answer to Question 3 is yes, where the amount of the subdivisional works apportioned over each of the new blocks of land is less than the improvement threshold for the relevant income year, will the entire capital gain made from the disposal of the subdivided blocks be exempt from CGT in accordance with subsection 104-10(5)(a)? | A5: Yes

Relevant facts and circumstances: The company is the trustee for the trust. Z & Y are equal shareholders and directors of the company. Z & Y are also the principal discretionary beneficiaries of the trust, and have been since it was established. The property was acquired prior to 20 September 1985. Shortly after acquiring the property, a home was constructed. The Certificate of Occupancy for the completion of the home was issued prior to 20 September 1985. Post 20 September 1985, the mortgagee of the property lost the title certificate for the property. Subsequently a new title certificate was issued; however, the legal and beneficial ownership has always remained with the company as trustee for the trust since the acquisition date prior to 20 September 1985. The property, and home constructed on the property has, at all time since the acquisition, been used as the principal place of residence of Z & Y, along with their children. At no time since the acquisition date has the property been used for a commercial purpose or to derive assessable income. Z is retired. Y is a homemaker. Z, Y or the company have never been involved in property development in the past. As the home on the property is now over thirty years old, and due to the costs and effort required to maintain such a large property, Z & Y now wish to modernise the home and sell the excess part of the property. To achieve this, the property will be subdivided by undertaking the following: · Obtaining planning permits · Demolishing the existing home · Subdividing the property into separate lots · Connecting essential services such as electricity, water, gas, sewerage and road access to each of these lots · One lot will be retained and be used to construct a new home for Z & Y · The remaining lots will be sold as vacant lots to third party purchasers. It is intended that the proceeds from the sale of these lots will help to fund the construction of the new home and Z & Y's retirement. The financial details of the development are: · The cost base of the property us $X (being the purchase price of $X and the construction cost of the house of $X) · The current market value of the property is $Xmillion · The expected cost to subdivide the property is $Xmillion plus GST · The expected total proceeds from the sale of the lots is $Xmillion · The expected cost for the construction of a new home is $X including GST The subdivision will consist of 'premium' lots that sit at the top of a hill with views and 'standard' lots at the base of the hill with little or no views. The lot to be retained for the construction of the new home will be a 'premium' lot. A project manager will be appointed to manage the development and other contractors will be engaged as required to carry out the works. A real estate agent will also be appointed to handle the sale of the lots. The certificate of Plan of Subdivision has been obtained. The legal title to the property cannot be subdivided until the works have been carried out and further certification obtained. It is anticipated that the subdivision works will take 6 to 12 months to complete. You have provided a break down of the costs involved allocated to each new lot on an area basis. The cost allocated to each lot is below the current improvement threshold.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 15-15 | Income Tax Assessment Act 1997 Subsection 104-10(5) | Income Tax Assessment Act 1997 Subsection 108-70(3) | Income Tax Assessment Act 1997 Section 108-80

Reasons for decision: Detailed Reasoning - Question 1 and 2: 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. Section 15-15 of the ITAA 1997 provides that your assessable income also includes profit arising from the carrying on, or carrying out, of a profit-making undertaking or plan. 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 initial property primarily for the domestic use of your beneficiaries and have held the property for that use for an extended period of time. You intend to retain one of the premium subdivided blocks to construct a new residence in which the beneficiaries will reside. You will undertake only as much capital works as is required to develop and sell the lots and will engage professionals to carry out the works. Accordingly, the proceeds from the sale of the subdivided blocks will not be included in your ordinary income. Rather, the sale will be considered a capital transaction subject to the capital gains tax provisions in Part 3-1 of the ITAA 1997. | Detailed Reasoning - Question 3, 4 and 5: As the land was acquired before 20 September 1985, it is a pre-CGT asset. Disposal of a pre-CGT asset does not give rise to a taxable capital gain in accordance with paragraph 104-10(5)(a) of the ITAA 1997. Furthermore, subdivision of the land does not alter its pre-CGT status. Taxation Determination TD 7 states: Where pre-CGT land is subdivided after 19 September 1985 the land will maintain its pre-CGT acquisition date because no CGT event has happened. The subdividing of the land is not itself a CGT event: section 112-25 of the ITAA 97. However, under subsection 108-70(3) of the ITAA 1997, capital improvements to a pre-CGT asset that are related to each other may be treated as a separate CGT asset if the total of their cost bases when a CGT event happens (for example a disposal) in relation to the asset is: · more than the improvement threshold for the relevant income year, and · more than 5% of the capital proceeds from the event. In your case, the total subdivision and land development costs are considered related to each other in accordance with section 108-80 of the ITAA 1997. The total cost of these capital improvements is to be allocated over all of the subdivided blocks when determining if the capital improvements will be treated as a separate CGT asset. You have indicated that the expected expenditure applicable to each subdivided block will be significantly less than the improvement threshold for the relevant year. Accordingly, where this is the case, the capital improvement expenditure for the purposes of any subsequent disposal of any of these blocks of land will not be taken to be a separate CGT asset. Subsequently, where the capital improvements are not treated as a separate CGT asset, the entire capital gain made on the disposal of the subdivided blocks will be disregarded under subsection 104-10(5) of the ITAA 1997.

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.