Private ruling: Income versus capital
Date of advice: 13 October 2017
Published: March 2018
Ruling period: 1 July 2023 to 30 June 2025
Date scheme commenced: 1 July 2016

Ruling: Q1: Will the sale of each of the subdivided lots be on capital account so that any net capital gains would be included in your statutory income under section 6-10 and section 102-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes.

Relevant facts and circumstances: You and your spouse are self-funded retirees who are aged 7X and 6X respectively. You and your spouse are the joint owners of the Land. Acquisition and use of the land You and your spouse acquired the Land in 1981. You and your spouse acquired the Land with the intention to build your main residence there. You did not have enough money to build a residence on the Land at the time of purchase. A residence was built progressively on the Land between 1985 and 198X and in 198X you and your spouse moved into the residence on the Land. At that time, you and your spouse sold your former residence. The Land has continuously been the principal place of residence of you and your spouse from 198X to today. When the Land was originally purchased by you and your spouse, it was vacant and had been used by earlier owners for X farming. Following the purchase of the Land, you and your spouse have permitted some intermittent farming activities by third parties to be carried out on the Land. Characteristics of the land The land is approximately 20 acres in size. The land was not near the urban growth boundary at the time you and your spouse acquired it. The Land is currently and has always been zoned as ‘Rural General Farming’. In recent years, the council has indicated that they wish to rezone the Land and surrounding area into a residential zoning. To date, neither you and your spouse nor the Developer (see below) have taken an active role in the rezoning process for the Land and surrounding land. Instead, Council have driven the rezone process themselves, over the entire precinct. Approach from developer You and your spouse have been contacted over the years with unsolicited offers which have all been rejected. In mid 201X you and your spouse received an unsolicited approach from a property developer, (‘Developer’). The Developer offered to purchase the Land outright but you declined this offer on the basis you wished to retain your residence. The Developer proposed the idea of entering into a project with you and your spouse to develop the Land by way of a development agreement. You and your spouse are contemplating entering into the proposed development agreement (‘Development Agreement’ or ‘DA’) with the Developer to develop the Land into a residential vacant lot development. The proposed development It is expected that the Land would be subdivided into about XX vacant residential lots which would be sold to third parties. It is expected that the only works undertaken on the Land will be those necessary to create the residential lots and those mandated by Council in accordance with the Concept Plan. Under the proposed Development Agreement, the Developer will undertake all the development required to subdivide the Land and incur all the development costs in return for a development fee. Decision to sell According to you and your spouse, your decision to sell is motivated by the increasing cost and effort of maintaining a 20 acre block. Council rates have also increased markedly in recent years as the value of the block has increased. You and your spouse: ● have never undertaken any property development activities in the past; ● have not contacted anyone else such as surveyors, agents and the like; the only step you are your spouse have taken is to seek this private ruling; ● intend to keep your existing residence and continue living in it after the development; and ● have not registered for GST and do not intend to do so.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Subsection 6-5(1) | Income Tax Assessment Act 1997 Section 6-10 | Income Tax Assessment Act 1997 Subsection 6-10(1) | Income Tax Assessment Act 1997 Subsection 6-10(2) | Income Tax Assessment Act 1997 Section 102-5

Reasons for decision: Summary: All legislative references are to the ITAA 1997 unless otherwise stated. Subsection 6-5(1) of the ITAA 1997 provides that your assessable income includes amounts that are income according to ordinary concepts, which is called ‘ordinary income’. | Detailed Reasoning - No land development business: It is well established that transactions which are in the ordinary course of a business are treated as ordinary income - FC of T v. The Myer Emporium Ltd ( 1987) 163 CLR 199; [1987] HCA 18; 87 ATC 4363; 18 ATR 693 ( Myer ). You and your spouse are self-funded retirees. The Commissioner does not consider that you and your spouse will have commenced a business of land development by entering and proceeding with the proposed Development Agreement. Whether a business of land development has commenced is determined as a result of a process of weighing all the relevant indicators. Miscellaneous Taxation Ruling MT 2006/1: The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number , discusses at paragraph 265 certain factors that may indicate whether activities constitute a business in the context of property transactions. These factors are as follows: ● There is a change of purpose for which the land held; ● Additional land is acquired to be added to the original parcel of land; ● The parcel of land is brought into account as a business asset; ● There is a coherent plan for the subdivision of the land; ● There is a business organisation – for example a manager, office and letterhead; ● Borrowed funds financed the acquisition or subdivision; ● Interest on money borrowed to defray subdivisional costs was claimed as a business expense; ● There is a level of development of the land beyond that necessary to secure council approval for the subdivision; and ● Buildings have been erected on the land. Based on a consideration of these factors, your circumstances and the Development Agreement, the Commissioner concludes that you and your spouse will not have commenced a business of land development with respect to the contemplated development, but rather merely realising a capital asset. As a consequence, the Land is not considered to be your trading stock. | Detailed Reasoning - Potential characterisation: The contemplated disposal and any resultant profit from the disposal is therefore either: (a) a ‘mere realisation’ of a capital asset under which capital gains may be included as statutory income (which is part of assessable income) under subsection 6-10(1), 6-10(2) and subsection 102-5(1); or (b) profits from an ‘isolated transaction’ which is ordinary income and included in your assessable income under section 6-5. | Detailed Reasoning - Mere realisation: You and your spouse contend that the proposed subdivision and sale of the Land is a mere realisation of a capital asset. | Detailed Reasoning - Profits from isolated transactions – ordinary income – section 6-5: As explained in Taxation Ruling TR 92/3: income tax: whether profits on isolated transactions are income , under certain circumstances, profits from an ‘isolated transaction’ can be ordinary income. An ‘isolated transaction’ is referred to in paragraph 1 of the ruling as those transactions outside the ordinary course of business of a taxpayer carrying on a business as well as those transactions entered into by non-business taxpayers. As mentioned earlier, the Commissioner does not consider you and your spouse to carry on a business of land development. Paragraph 16 and 35 of TR 92/3 states that for a taxpayer that is not carrying on a business, a profit is ordinary income if: (a) the intention of the taxpayer in entering into the profit-making transaction or operation was to make a profit or gain; and (b) the transaction or operation was entered into, and the profit was made, in carrying out a business operation or commercial transaction. | Detailed Reasoning - Profit-making intention: As stated in paragraph 9 of TR 92/3, if the transaction 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. However, as the High Court decision in FC of T v. Whitfords Beach Pty Ltd (1982) 150 CLR 355; [1982] HCA 8; 82 ATC 4031; 12 ATR 692 (Whitfords Beach) demonstrate, that is not always the case. For example, if a taxpayer acquires an asset with an intention of using it for personal enjoyment but later decides to venture or commit the asset either as the capital of a business or into a profit-making undertaking or scheme with the characteristics of a business operation or commercial transaction, the profit is income even though the taxpayer did not have the purpose of profit-making at the time of acquisition. Based on the facts, you and your spouse had no intention to profit from the sale of the Land at the time of its acquisition nor afterwards. Even if a profit-making intention is found to exist, the Commissioner must be satisfied that a profit was made in carrying out a business operation or commercial transaction. | Detailed Reasoning - Business operation or commercial transaction: As stated in paragraph 49 of TR 92/3, the following factors may be relevant in considering whether an isolated transaction amounts to a business operation or commercial transaction: (a) the nature of the entity undertaking the operation or transaction; (b) the nature and scale of other activities undertaken by the taxpayer; (c) the amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained; (d) the nature, scale and complexity of the operation or transaction; (e) the manner in which the operation or transaction was entered into or carried out, including use of professional agents or advisers; (f) the nature of any connection between the relevant taxpayer and any other party to the operation or transaction; (g) if the transaction involves the acquisition and disposal of property, the nature of that property; and (h) the timing of the transaction or the various steps in the transaction. It is important to note that no single indicator is determinative and must be weighed against all the other indicators. For example, the size and scale of the development itself is a relevant factor that assists with determining the intention to dispose for profit and whether a business or business operation has commenced but it alone is not determinative of the issue. This private ruling has considered the following relevant cases in the process of determining whether the planned development is a mere realisation or an isolated transaction that amounts to a business operation or commercial transaction: ● Casimaty v. Federal Commissioner of Taxation (1997) 97 ATC 5135; 37 ATR 358. ● Statham & Anor v. Federal Commissioner of Taxation [1988] FCA 463; 89 ATC 4070; 20 ATR 228; ● McCorkell v FC of T (1998) 98 ATC 2199; 39 ATR 1112 ● Stevenson v FC of T (1991) ATC 4476; 22 ATR 56 ● Federal Commissioner of Taxation v. Whitfords Beach Pty Ltd [1982] HCA 8; 150 CLR 355; 82 ATC 4031; 12 ATR 692 | Detailed Reasoning - Conclusion: Based on a consideration of the Development Agreement and the relevant factors discussed in paragraph 49 of TR 92/3, the Commissioner finds that any profits made from the proposed development would not be from carrying out a business operation or commercial transaction. The Commissioner finds that any profits from the proposed subdivision and sale of the Land would not be profits from an isolated transaction of the type discussed in TR 92/3 that would be ordinary income. There is an absence of both a profit making intention as well as a business operation or commercial transaction. The sale of each of the subdivided lots will be on capital account so that any net capital gains would be included in your statutory income under section 6-10 and section 102-5 of the ITAA 1997.