Private ruling: Capital gains tax - land subdivision
Date of advice: 21 August 2017
Published: December 2017
Ruling period: Year ended 30 June 201Y | Year ended 30 June 201Z
Date scheme commenced: 1 July 201X

Ruling: Q1: Will the proceeds from the sale of the subdivided blocks be assessable under section 6-5 of the Income Tax Assessment Act 1997 ? | A1: No. | Q2: Will the proceeds received from the sale of subdivided blocks be taxed under the capital gains tax provisions of Part 3-1 and Part 3-3 of the Income Tax Assessment Act 1997 ? | A2: Yes.

Relevant facts and circumstances: After 19 September 1985 you purchased the dwelling (the Property). The Property is situated on more than 5 acres of land and has been your main residence until the present time. You have not rented the property out or used the property for any farming activities. You plan to subdivide the Property into three smaller blocks: ● Two blocks will be X each which will be sold and ● One block will be Y acres, on which the dwelling is located. You will keep the three acre subdivided block and continue to reside in it as your main residence. You did not put the Property on the market for sale. You were approached by the Council to subdivide your Property. Some of the adjoining landowners have recently been approached by the Council and have subdivided their properties. You will engage the services of an engineering surveyor to create the plans for the subdivision. You will complete the necessary activities to meet Council specifications for approval of the subdivision and no more. No activities have been commenced at this point and no plans have been lodged to the Council. As a result you do not have any estimates of the proposed subdivision. It is proposed that only the minimum capital will be outlaid as such you will extend your mortgage by to fund the subdivision. The approximate value of the Property, including the dwelling is over $500,000. You are expecting to sell the two new subdivided blocks and your expect to make a profit on their sale. You do not have a history in property development, or have any plans for future developments. The subdivision is only being considered as a result of being approached by your local reginal council. You are not registered for Goods and Services Tax (GST) and have no intention of registering for GST for the purpose of this sale. You expect to commence the subdivision activities in the 201Y financial year.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Part 3-1 | Income Tax Assessment Act 1997 Part 3-3

Reasons for decision: Summary: The proceeds from the sale of the subdivided lots will be subject to the capital gains tax provisions in Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 (ITAA1997). | Detailed Reasoning - Detailed reasoning: We need to determine whether the proceeds from the future sale of the two subdivided lots: ● is assessable ordinary income under section 6-5 of the ITAA 1997 as you were carrying on a business of property development ● is assessable ordinary income under section 6-5 of the ITAA 1997 as you conducted an isolated commercial transaction with a view to a profit, or ● is a realisation of a capital asset and assessable under the capital gains tax (CGT) provisions of the ITAA 1997. Carrying on a business of property development Based on the information provided, we do not consider that the proceeds received from the sale of the two subdivided blocks would be derived in the course of carrying on a business. Profits from an isolated transaction Profits arising from an isolated business or commercial transactions will be ordinary income if the taxpayer's purpose or intention in entering into the transaction is to make a profit, even though the transaction may not be part of the ordinary activities of the taxpayer's business ( FC of T v. Myer Emporium Ltd 1987 163 CLR 199; 87 ATC 4363; 18 ATR 693) (Myer Emporium). Under section 6-5 of the ITAA 1997, the assessable income of an Australian resident includes ordinary income derived both in and out of Australia during an income year. Ordinary income is defined as income according to ordinary concepts. 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. 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, you do not carry on a business of buying, selling or developing land. You purchased the property as your main residence and have not used the property to produce any assessable income either through lease or farming. You have made the decision to subdivide the property as a result of being approached by the Council. You will have minimal involvement in the subdivision of the Property and will only change the Property to the extent that you are required for council purposes. Based on the facts of your situation it is viewed that this is not a profit making undertaking, accordingly the proceeds from the sale of the two subdivided blocks will not be assessable under section 6-5 of the ITAA 1997. The subdivision is considered to be a realisation of your asset and the proceeds from the sale of the two subdivided blocks will be assessed under CGT provisions in Part 3-1 and 3-3 of the ITAA 1997.