Private ruling: CGT - subdivision
Published: February 2014
Ruling period: Year ending 30 June 2014 | Year ending 30 June 2015 | Year ending 30 June 2016 | Year ending 30 June 2017
Date scheme commenced: 1 July 2013

Ruling: Q1: Will the proceeds from the sale of the subdivided land be assessable income under section 6- 5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No | Q2: Will the proceeds from the sale of the subdivided land be accounted for under the capital gains tax provisions? | A2: Yes | Q3: If the answer to question 2 is yes, will you be able to apply the 50% general discount to any capital gain that arises as a result of the sale of the subdivided land? | A3: Yes

Relevant facts and circumstances: You acquired a property. The dwelling on the property has always been your main residence. When you purchased the property a covenant restricted the subdivision of the land. You are aware that owners of neighbouring properties have begun the process to subdivide their land; they have had the covenant lifted by the relevant authority. You intend to subdivide the property. You will continue to live in the dwelling on one lot and sell the remaining lots. The remaining lots will be sold as vacant land; however as a part of the subdivision process essential services will be connected. Additionally you will install a driveway prior to the sale as this is a council requirement. You will engage professionals to undertake the subdivision work, including the council approval process. You will fund the subdivision work yourselves. You anticipate that you will sell the vacant blocks at some point in the future to help fund your retirement. However, you would like to commence the subdivision process as you feel it would be a more opportune time and to avoid any delays when you are ready to sell. You have not been involved in any other similar land development projects in the past.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Part 3-1 | Income Tax Assessment Act 1997 Section 104-10

Reasons for decision: Summary: 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. 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. 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 initial property primarily for domestic use and have held the property for that use for an extended period of time. You intend to sell the subdivided land to aid in funding your retirement. You intend to retain your residential property on one of the subdivided lots and will engage professionals to carry out the council application process and construction works. Accordingly, the proceeds from the sale of the subdivided blocks will not be included in your ordinary income. Rather, the sale will be considered a capital transaction subject to the capital gains tax provisions in Part 3-1 of the ITAA 1997. | Detailed Reasoning - General discount: Under section 115-10 of the ITAA 1997, to qualify for the 50% general discount a capital gain must be made by an individual, a complying superannuation entity, a trust or a life insurance company. The capital gain must result from a CGT event happening after 11:45am on 21 September 1999 and must not have an indexed cost base. Also, the gain must result from a CGT event happening to an asset that was acquired at least 12 months before the CGT event. In this case, you have owned the property for more than 12 months. Accordingly, you will be eligible to apply the 50% general discount to any capital gain you make on the sale of the subdivided blocks.