Private ruling: Subdivision and sale of land - capital gain or ordinary income
Published: November 2011
Ruling period: Year ending 30 June 2012. | Year ending 30 June 2013.
Date scheme commenced: 1 July 2011.

Ruling: Q1: Will the proceeds from the sale of the subdivided lots be assessable pursuant to section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: 

Relevant facts and circumstances: You purchased the property as two lots. The first lot was purchased before 20 September 1985. The second lot was purchased after 20 September 1985. You used the property to live in and to carry on a business for a number of years before leaving the area. The property was then let for a number of years before part of the property was sold. Some years later there was work carried out in the area it was suggested that the property may be suitable for future subdivision. This was when you first thought of subdividing the land. More recently you submitted a development approval (DA) application to the council to subdivide the property into less than 20 lots. You will not build anything on the land or perform any works beyond the minimum amount necessary to satisfy the DA. You have no formal business plan. You have no business organisation for the subdivision and no office, employees or letterhead in relation to the subdivision. You intend to use consultants and contractors to perform the work and will take a passive role. You have engaged a third party to survey the land and prepare a draft of the proposed subdivision. You will not need to apply for a loan to finance the subdivision activities - all of the costs are funded from savings. The subdivision will be done in two stages. Due to the amount of work needed to meet council approval, you will incur substantial costs. You intend to market the land for sale through local real estate agents. You have not claimed expenses in relation to the current subdivision as deductions for income tax purposes. You have not claimed any input tax credits in relation to the subdivision for goods and services tax (GST) purposes. You have no intention of doing any future subdivisions. You have a portfolio of residential investment properties which are leased to tenants. You are not and never have been involved in the building and construction or development industry. You have no related entities involved in land development. You have no intention to subdivide any of the investment properties.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 104-10

Reasons for decision: Summary: While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision. The legislative references referred to herein are from the ITAA 1997 unless otherwise stated. It is considered that the proceeds of the subdivision do not constitute ordinary income in terms of section 6-5. Instead the proceeds represent the mere realisation of a capital asset to its best advantage and gains made from the sale of post-CGT lots are assessable as capital gains under subsection 104-10. | Detailed Reasoning - Detailed reasoning: Section 6-5 includes in a taxpayer's assessable income, where the taxpayer is an Australian resident, all ordinary income derived by the taxpayer both in and out of Australia during an income year. Ordinary income is defined as income according to ordinary concepts. However, a profit which is not assessable under section 6-5 may be assessed as a capital gain under section 104-10 if it relates to an asset which was acquired after 19 September 1985. Taxation Ruling TR 92/3 addresses the treatment of profits on isolated transactions, and the relevant factors to be considered when determining the treatment of these profits are contained within paragraph 13. The mere disposal of investment assets such as rental properties, business plant and machinery, the family home, family cars and other private assets does not amount to trade. However, assets can change their character but cannot have a dual character at the same time (paragraph 26 of Miscellaneous Taxation Ruling MT 2006/1). Paragraph 265 of MT 2006/1 lists factors which consider when land development activities amount to a business or a profit-making undertaking. If several of these factors are present it may be an indication that a business or an adventure in the nature of trade is being carried on. Factors relevant to your activity include: · there is a change of purpose for which the land is held · additional land was acquired to be added to the original parcel of land · there is a coherent plan for the subdivision of the land. Paragraph 266 of MT 2006/1 goes on to say: 266. In determining whether activities relating to isolated transactions are an enterprise or are the mere realisation of a capital asset, it is necessary to examine the facts and circumstances of each particular case. This may require a consideration of the factors outlined above, however there may also be other relevant factors that need to be weighed up as part of the process of reaching an overall conclusion. No single factor will be determinative rather it will be a combination of factors that will lead to a conclusion as to the character of the activities. A number of taxation cases have addressed the question of whether profits on sale of subdivided land are considered ordinary income or capital. Some of the leading cases which have deemed the profit capital include Casimaty v. FC of T (1997) 151 ALR 242, 97 ATC 5135, 37 ATR 358; 97 ATC 5135 (Casimaty), AAT Case 13,136; McCorkell v. FC of T Re 39 ATR 1112; 98 ATC 2199 (McCorkell) and Statham v. FC of T (1988) 16 ALD 723; 20 ATR 228; 89 ATC 4070 (Statham). FC of T v. Whitfords Beach P/L (1982) 39 ALR 521; 12 ATR 692; (1982) 150 CLR 355; (1982) 56 ALJR 240; 82 ATC 4031 (Whitfords Beach) concluded that profits were assessable as ordinary income. The direction provided within TR 92/3 and the above cases indicates that profits in this context are more likely to be considered ordinary income if they are made in the ordinary course of carrying on a business. Further, ordinary income may be derived from an isolated transaction which becomes commercial in nature, or as a result of profits on a transaction in which the initial intention was to make a profit on sale. In determining whether an isolated transaction is commercial in nature, paragraph 13 of TR 92/3 lists the following factors: 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 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. In applying these principles to your case, the following facts have been considered: · your past and present occupations are not related to building and construction. · you have not been involved in any property development activity in the past and this is your first subdivision project. · the approximate cost of the subdivision is substantial and the expected total proceeds from the subdivided lots is significant. · the scale of the development is relatively small. The land has been held for a long time and there was no intention of resale at the time of purchase. · the work to be done on the land will only extend to that required to secure approval from the relevant authorities for the subdivision application. · you will use consultants and contractors to perform the work as you have no formal skills that is; surveying and so on. You have no intention to do any future subdivision. Those facts indicate that you have not at any time prior to, or during this venture been involved in the carrying on of a business related to acquiring, subdividing and selling land. Further, this particular isolated transaction is not considered commercial in nature, and you have shown that your intention when acquiring the property was other than to make a profit on sale. Accordingly it is considered that the proceeds of the subdivision do not constitute ordinary income in terms of section 6-5. Instead the proceeds represent the mere realisation of a capital asset to its best advantage and gains made from the sale of post-CGT lots are assessable as capital gains under subsection 104-10 (refer to section 118-20). Note that the findings of this ruling do not apply to subsequent ventures of such a nature.

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. | Does Part IVA apply to this ruling?: Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable. | We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part. | If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply. | For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: 'Part IVA: the general anti-avoidance rule for income tax'.