Private ruling: Capital gains tax - subdivision
Published: April 2013
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 | Are you required to pay capital gains tax on the sale of sub-divided blocks? | Yes. | Are you entitled to the main residence exemption on the block which contains your main residence? | Yes.

Relevant facts and circumstances: You and your spouse acquired the house and land a number of years ago. The land at all times since you acquired it has been used for private purposes and has never been used to derive income. The land is now being rezoned from rural to residential. You intend to sub-divide the land into a number of blocks. You have not sub-divided and sold land in the past. You intend to appoint others to project manage the total project.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 6-5. | Income Tax Assessment Act 1997 Subsection 6-10. | Income Tax Assessment Act 1997 Subsection 15-15. | Income Tax Assessment Act 1997 Subsection 102-5. | Income Tax Assessment Act 1997 Subsection 102-20. | Income Tax Assessment Act 1997 Subsection 104-10. | Income Tax Assessment Act 1997 Subsection 104-10(5). | Income Tax Assessment Act 1997 Subsection 108-5. Reasons for decision | Subsection 6-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that your assessable income includes the ordinary income derived by you. Section 6-10 of the ITAA 1997 points out that some amounts (called statutory income) that are not ordinary income are included in your assessable income by provisions of the ITAA 1997. | The term ordinary income is defined in subsection 6-5(1) of the ITAA 1997 to mean income according to ordinary concepts. Ordinary income includes income that arises in the normal course of a persons business and some that arises from isolated transactions. | Since you and your spouse are not in the business of subdividing land any profits you make from the sale of your subdivided blocks will not be income made in the ordinary course of a business. | Assessable income arising from an isolated transaction | The decisions from various court cases demonstrated that the involvement of the taxpayer was a significant factor in determining whether the transaction was a business or commercial nature. | Decisions in cases such as Casimaty v FC of T 97 ATC 5135; (1997) 37 ATR 358 and McCorkell v. FC of T 98 ATC 2199; (1998) 39 ATR 1112 ( McCorkell's Case ) demonstrate that in circumstances where there is an absence of profit making intention when farming land is acquired, the likelihood of any profit made on the eventual sale of land being income according to ordinary concepts is greatly diminished. | Profits on the sale of land can still 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 activities have become a separate business operation or commercial transaction. | Taxation Ruling TR 92/3 provides guidance in determining whether profits from isolated transactions are ordinary income and therefore assessable under section 6-5 of the ITAA 1997. Paragraph 1 of TR 92/3 defines the term isolated transactions as 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 13 outlines a number of factors which must be considered in determining whether an isolated transaction amounts to a business operation or commercial transaction including: | (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 involved 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. | We have considered the above factors and the following: | · You and your spouse are not in the business of property development. | · You and your spouse's intention at the time of acquisition was not to subdivide. | · Both of your involvement in the planned subdivision will be minimal if at all. | · You intend to appoint surveyors to project manage the total project/development. | Having regard to the above we have concluded that the proceeds from the subdivision of land will not be income according to ordinary concepts, as they represent the mere realisation of a capital asset, carried out in an enterprising way so as to secure the best price. | Section 15-15 of the ITAA 1997 does not apply as the property was acquired after 20 September 1985. | Capital Gains Tax | Effect of the subdivision | Land, or an interest in land, is a CGT asset (section 108-5 of the ITAA 1997). The sale of a CGT asset will be a disposal which will give rise to CGT event A1 under section 104-10 of the ITAA 1997. | Section 112-25 of the ITAA 1997 states that the subdivision of land into a number of lots is not, in itself, a CGT event (Capital Gains Tax Determination TD 7). The original block of land will be deemed to have been split into a number of new assets as a result of the subdivision (Tax Determination TD 97/3). The acquisition date of each of the new subdivided blocks will be the same as the original block. | When any of the subdivided blocks are sold, CGT event A1 applies by virtue of section 104-10 of the ITAA 1997. Subsection 104-10(4) of the ITAA 1997 provides that a capital gain will arise if the capital proceeds from the disposal are more than the asset's cost base and a capital loss will arise if the capital proceeds are less than the asset's reduced cost base. | Taxation Determination TD 10 requires that where the market value of an asset needs to be determined, the taxpayer can choose to either obtain a detailed valuation from a qualified valuer or compute their own valuation based on reasonably objective and supportable data. | The legislation dealing with main residence exemptions is contained in subdivision 118-B of the ITAA 1997. Section 118-110 of the ITAA 1997 provides that a capital gain or capital loss you make from a CGT event that happens in relation to a dwelling or your ownership interest in it is disregarded if you are an individual; and the dwelling was your main residence throughout your ownership period. | Section 118-120 of the ITAA 1997 extends the exemption to land adjacent to the dwelling (if the same CGT event happens to the land) but specifies that the total of the land subject to exemption (including the land on which the dwelling is situated) must not exceed 2 hectares. | Section 118-165 of the ITAA 1997 provides that the exemption for land adjacent to the dwelling does not apply if that event does not also happen in relation to the dwelling. | You have lived in the residence since acquiring the property and have used it for domestic purposes. Therefore, you are entitled to the CGT exemption on the sale of the main residence and its associated block, in the subdivision. However, this exemption does not extend to any other land sold as a result of the subdivision.