Private ruling: Land subdivision
Published: June 2012
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: 1. Are the proceeds from the sale of the subdivided lots assessable under sections 6-5 or 15-15 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. | Q2: 2. Are the proceeds from the subdivision of your property subject to the CGT provisions in Part 3-1 of the ITAA 1997? | A2: Yes, however any capital gain or capital loss you make on the disposal of each subdivided block will be disregarded for CGT purposes. | Q3: 3. Is the sale of subdivided lots subject to GST? | A3: No.


Relevant legislative provisions: Income Tax Assessment Act 1997 - Section 6-5. | Income Tax Assessment Act 1997 - Section 15-15. | Income Tax Assessment Act 1997 - Section 104-10. | Income Tax Assessment Act 1997 - Subsection 104-10(5). | A New Tax System (Goods and Services Tax) Act 1999 - Section 9-5. | A New Tax System (Goods and Services Tax) Act 1999 - Section 9-20 | A New Tax System (Goods and Services Tax) Act 1999 - Section 9-40

Reasons for decision: Detailed Reasoning - Income tax provisions: Under section 6-5 of the ITAA 1997, your assessable income includes the ordinary income you derived directly or indirectly from all sources, during the income year. Additionally, section 15-15 of the ITAA 1997 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. Although the legislation does not define income according to ordinary concepts, a substantial body of case law has evolved to identify various factors that indicate the nature of ordinary income. 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. Additionally, if a taxpayer acquires an asset with the intention of using it for personal enjoyment but later decides to commit the asset, either: · as the capital of a business or · into a profit-making undertaking with the characteristics of a business operation or commercial transaction, this activity constitutes the carrying on of a business, or a business operation or commercial transaction. The profit from such activity is income even though the taxpayer did not have the purpose of profit-making at the time of acquiring the asset. Some of the factors to consider when looking at whether an isolated transaction amounts to a business operation or commercial transaction are listed at paragraph 13 of TR 92/3. They are: (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. Profits on the sale of subdivided land can therefore be income according to ordinary concepts within section 6-5 of the ITAA 1997, or as a profit making undertaking or plan within section 15-15 of the ITAA 1997, if the taxpayer's subdivisional activities have become a separate business operation or commercial transaction, or an isolated profit making venture. 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, the property was originally purchased for the sole purpose of carrying out primary production activities which were conducted on the land for an extensive period prior to the subdivision. You have never been in the business of land development and you will have minimal involvement in the subdivision of the land. Therefore, the proceeds from the sale of the subdivided land are not ordinary income and not assessable under sections 6-5 or 15-15 of the ITAA 1997. The proceeds represent a mere realisation of a capital asset which will fall for consideration under the CGT provisions in Part 3-1 of the ITAA 1997. | Detailed Reasoning - CGT provisions: CGT event A1 in section 104-10 of the ITAA 1997, relating to the disposal of a CGT asset, will happen when you dispose of each subdivided block. You will make a capital gain if the capital proceeds from the disposal of the block are more than the cost base of the block. You will make a capital loss of those capital proceeds are less than the reduced cost base of the block. Subsection 104-10(5) of the ITAA 1997, however, contains an exception, where any capital gain or capital loss made is disregarded if the asset was acquired before 20 September 1985. Where a block of land is subdivided, the date you acquired the subdivided blocks is the date you acquired the original parcel of land. In your case, you acquired the original parcel of land before 20 September 1985; therefore, the subdivided blocks will also have been acquired before 20 September 1985. Any capital gain or capital loss you make on the disposal of each subdivided block will therefore be disregarded for CGT purposes. | Detailed Reasoning - Goods and Services Tax: Section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that GST is payable on any taxable supply that you make. Section 9-5 of the GST Act states: You make a taxable supply if: (a)you make the supply for *consideration; and (b)the supply is made in the course or furtherance of an *enterprise that you *carry on; and (c)the supply is *connected with Australia; and (d)you are *registered, or *required to be registered. However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed. Note the terms with the asterisks are defined terms in the dictionary at section 195-1 of the GST Act. In your case the proposed sale of the subdivided land will be for consideration and the supply is connected with Australia as your property is located in Australia. As a result paragraphs 9-5(a) and (c) of the GST Act are satisfied. Therefore, it is necessary to determine whether the sale of the subdivided land will be made in the course or furtherance of an enterprise. If there is an enterprise, then it will be necessary to determine whether you are required to be registered for GST. The term 'enterprise' is defined in section 9-20 of the GST Act to include an activity, or series of activities, done in the form of a business, or in the form of an adventure or concern in the nature of trade. It is considered that a business includes a trade that is engaged in on a regular or continuous basis, while an adventure or concern in the nature of trade may be an occasional or one-off transaction that does not amount to a business. Miscellaneous Taxation Ruling: The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number (MT 2006/1) provides guidance on the Commissioner's view regarding carrying on an enterprise. Paragraph 1 of Goods and Services Tax Determination Goods and service tax: does MT 2006/1 have equal application to the meaning of 'entity' and 'enterprise' for the purposes of the A New Tax System (Goods and Services Tax) Act 1999 (GSTD 2006/6) provides that the guidelines in MT 2006/1 are to apply to the meaning of the terms entity and enterprise as used in the GST Act and can be relied upon for GST purposes. Paragraph 159 of MT 2006/1 states: 159. Whether or not an activity, or series of activities, amounts to an enterprise is a question of fact and degree having regard to all of the circumstances of the case. We agree that you are not carrying on a property development activity in the form of a business. However, an adventure or concern in the nature of trade may be an isolated or one-off transaction that does not amount to a business, but which has the characteristics of a business deal. MT 2006/1 states the following in relation to the isolated transactions and sales of real property. | Detailed Reasoning - Isolated transactions and sales of real property: 262. The question of whether an entity is carrying on an enterprise often arises where there are 'one-offs' or isolated real property transactions. 263. The issue to be decided is whether the activities are an enterprise in that they are of a revenue nature as they are considered to be activities of carrying on a business or an adventure or concern in the nature of trade (profit making undertaking or scheme) as opposed to the mere realisation of a capital asset. (In an income tax context a number of public rulings have issued outlining relevant factors and principles from judicial decisions. See, for example, TR 92/3, TD 92/124, TD 92/125, TD 92/126, TD 92/127 and TD 92/128.) 264. The cases of Statham & Anor v. Federal Commissioner of Taxation ( Statham ) and Casimaty v. FC of T ( Casimaty ) provide some guidance on when activities to subdivide land amount to a business or a profit-making undertaking or scheme. In these cases, farm land was subdivided and sold. Minimal development work was undertaken to meet council requirements and to improve the presentation of certain allotments. On the particular facts of these cases the courts held that the sales were a mere realisation of a capital asset. 265. From the Statham and Casimaty cases a list of factors can be ascertained that provide assistance in determining whether activities are a business or an adventure or concern in the nature of trade (a profit-making undertaking or scheme being the Australian equivalent, see paragraphs 233 to 242 of this Ruling). If several of these factors are present it may be an indication that a business or an adventure or concern in the nature of trade is being carried on. These factors are as follows. · there is a change of purpose for which the land is 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. 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. In your case, you have advised that the land was originally used for farming and this farming activity was conducted up until 2007 when this activity ceased due to viability issues. The land has then set dormant until the proposed subdivision and sale of the subdivided lots. You have advised that your involvement in the subdivision is minimal and that you are only undertaking works to meet the minimum requirements of your local council for gaining approval for the subdivision. You have advised that you continue to live in the main residence. Therefore, we are of the view that the subdivision of your property was not undertaken in the course of furtherance of an enterprise that you carry on. As such, the sale of land does not meet paragraph 9-5(c) of the GST Act and therefore is not a taxable supply. Consequently, GST is not payable on the sale of the subdivided lots.

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. | Relevant facts: You have farming land which you intend to subdivide in three stages on three separate titles. | Stage 1: will separate the main residence; | Stage 2: will subdivide five lots which will be offered for sale; and | Stage 3: will subdivide 16 lots which will be offered for sale. | You intend to continue living in the main residence. | The land was originally acquired before 20 September 1985 (zoned rural) and had been farmed up prior to 2008 when drought and other factors made it unviable. The land was cleared and has sat dormant since. | You are at retirement age and intend to use the money received from the subdivision to fund your retirement. | Your involvement in the subdivision is minimal; you merely arrange the relevant professionals and contractors to undertake the works involved to meet minimum local council requirements for approval. This includes basic utilities such as telecommunications, electricity and roads. | The estimated cost of the subdivision will represent less than 10% of the expected realisation of all lots sold. | The subdivided lots will be marketed and sold by a professional real estate agent. | You have never undertaken any land subdivisions in the past. | You are not currently registered of GST nor have you been in the past.