Private ruling: Subdivision and sale of land
Published: October 2012
Ruling period: Year ending 30 June 2013 | Year ending 30 June 2014 | Year ending 30 June 2015 | Year ending 30 June 2016
Date scheme commenced: 1 July 2012

Ruling: Questions and answers | Will the funds that you receive be capital receipts? | Yes. | Will a capital gains tax (CGT) event A1 occur when each individual lot is sold? | Yes. | Will the loans that you receive from the developer be considered to be additional capital proceeds for the disposal of the land? | No.

Relevant facts and circumstances: You own a parcel of land (herein referred to as the land). You have held the land for over two decades, during which time it has been vacant (aside from minor outbuildings) and has been used for recreational purposes. The property has predominantly been used as a hobby farm. It has never been rented or used for primary production. You have consistently maintained a vegetable garden and a brood of hens on the land. From time to time the land has also carried a couple of horses and some head of cattle and/or sheep and/or goats. You would often have family barbeques at the property. A developer has displayed an interest in developing the land and selling it off in vacant residential and commercial lots. The developer approached an associate of yours (Owner's Representative) and proposed the following: Development will occur as a staged subdivision and is expected to create a number of vacant residential and commercial lots. The developer undertakes all 'Project Services' in relation to the project. These include: · procuring the planning permit; · obtaining all Approvals; · undertaking all required work required by the planning permit or under the Approvals; · subdividing and attending to registration of any proposed plan of subdivision for the land for the purposes of sale; and · selling the lots under the plan of subdivision. You will not actively participate in the above process. The developer will provide his own finance for the project/development costs and will not be permitted to use the land as security for any borrowings by it or related entities. The developer will pay all shire council rates and state government land tax obligations in respect of the land from the time of the signing of the agreement through to the completion of the development. All correspondence between you and the developer occurs through an Owner's Representative. The Owner's Representative is able to convene a progress meeting with the developer no more often than monthly. The developer makes all decisions in relation to marketing of the individual lots. You have the right to obtain a loan from the developer subject to a loan agreement and repayable from the proceeds of the lots sales in Stage 1 of the development. All other funds due to you are payable upon the sale of each individual lot. You will receive an agreed amount from the proceeds which represents your capital value of the lot sold. The balance of the settlement funds is to be paid to the developer. The developer is required to maintain appropriate public liability insurance in connection with the land. You will remain the registered proprietor of the land during the development. The agreement states that no partnership or joint venture is formed by the parties by way of the agreement. You are the beneficial owner of the land and will not be involved with the provision of the 'Project Services' and have entered into this agreement to realise the value of the land. You are not in the business of land acquisition and resale/development. The developer is in the business of providing the 'Project Services' to develop the land. The developer has no beneficial interest in the land. You have provided a draft copy of the development agreement between yourself and the developer. This agreement is to be included in the facts for this private ruling. Neither you, nor any of your associates, have previously been involved in the subdivision and sale of land.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5, | Income Tax Assessment Act 1997 Section 6-10, | Income Tax Assessment Act 1997 Section 102-20, | Income Tax Assessment Act 1997 Section 104-10 and | Income Tax Assessment Act 1997 Subsection 104-10(3).

Reasons for decision: Detailed Reasoning - Income or capital: As a general principle, profits from property sales will either be assessable as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) or statutory income under the CGT provisions of the ITAA 1997. Where the profit has been made as a result of a taxpayer carrying on a business of property development or as a result of a taxpayer entering into an isolated business transaction, the profit will be assessable as ordinary income. However, where the profit is a mere realisation of a capital asset, the profit will be assessable under the CGT provision of the ITAA 1997. There have been several cases in which the courts have addressed the question of whether the proceeds received for the sale of an asset are revenue or capital in nature. The decision in each case depended on its own facts, and very often will be a matter of degree. The extent of the personal involvement of the taxpayer in much of the planning, organisation and management of the activities has been held to be significant factors in the determination of whether or not a business was being carried out. For example: · In Stevenson v FC of T (1991) 91 ATC 4476; (1991) 22 ATR 56; (1991) 29 FCR 282 (Stevenson) the degree of the taxpayer's involvement was seen as an indicator of a business being conducted; and · The lack of personal taxpayer involvement was seen as a relevant to the finding that a business was not being conducted in the cases of Stratham V FCT 89 ATC 4070, McCorkell v FCT 98 ATC 2199 (McCorkell) and Casimaty v FCT 97 ATC 5 (Casimaty). Taxation Ruling TR 92/3 considers whether profits made as a result of an isolated business transaction are income. A profit from an isolated transaction is generally assessable income when both of the following elements are present: · the intention or purpose of the taxpayer in entering into the transaction was to make a profit or gain · 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 determining whether an isolated transaction amounts to a business operation or commercial transaction the following factors are relevant: · 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. | Detailed Reasoning - Application to your circumstances: You are not in the business of property development and have never previously been involved in the subdivision and sale of land. You have held the land for over two decades and have used the land for recreational purposes. The amounts of money involved in the transaction are significant and the magnitude of profit will also be very substantial, however the developer will provide his own funding. The 'Project Services' will all be undertaken by the developer and overall it would appear that you will have minimal personal involvement in the process. Based on these factors we have concluded that the project is the mere realisation of a capital asset and any profits made will be assessable under the CGT provisions. | Detailed Reasoning - CGT event on disposal: Section 102-20 of the ITAA 1997 provides that you make a capital gain or capital loss if, and only if, a CGT event happens to a CGT asset that you own. In accordance with section 104-10 of the ITAA 1997, CGT event A1 happens when you dispose of an asset to someone else. Subsection 104-10(3) of the ITAA 1997 considers the timing of the event. The time of the event is either when you enter into a contract for the disposal, of if there is no contract, when the change of ownership occurs. In your situation, CGT event A1 will occur when the Owners Representative executes the sale contract on each developed lot in accordance with clause 18.3 of the agreement. | Detailed Reasoning - Loans: The loans that you will receive from the developer are merely an advance of capital proceeds that you are otherwise entitled to receive under the agreement. Accordingly the loan amounts are not considered to be additional capital proceeds for the disposal of the land. Where you receive loans from the developer and the development does not proceed and you are not required to repay the amount loaned, a CGT event does not occur. As stated previously, section 102-20 of the ITAA 1997 provides that you make a capital gain or capital loss if, and only if, a CGT event happens to a CGT asset that you own. The loans that you will receive are not CGT assets and therefore no CGT events will occur in relation to them.

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.