Private ruling: Subdivision of land
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 | Year ending 30 June 2017
Date scheme commenced: 1 July 2012

Ruling: Q1: Are the proceeds from the sale of the subdivided land assessable as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes. | Q2: Are the proceeds from the sale of the subdivided land assessable as a capital gain? | A2: No.

Relevant facts and circumstances: The self managed super fund (the fund) has two members, both of whom are the fund's trustees. The fund acquired a property. Some time after this, the fund acquired an adjacent parcel of land. At the time of acquisition, the fund planned to use these parcels of land to build a property. In the event that the fund was not able to follow through with the development, the fund may have sold the site to an unrelated developer once necessary approvals had been obtained. Council approvals to rezone the property were obtained. The fund's plans were put on hold as there was very little interest in the project from potential investors. This along with the high holding costs associated with the site meant that it was no longer feasible to follow through with the project. The trustees successfully applied for the site to be rezoned back to residential zoning. The trustees have investigated the possibility of disposing of the entire property in a single sale. They have found that this would only be possible by way of sale to a large property developer at prices that would represent a return far below reasonable levels. Given the fund is in pension phase and its members are only able to provide minimal contribution support, the holding costs associated with owning the land are becoming a burden. The trustees are seeking to divest of the property to realise a reasonable return on investment for the benefit of the fund members. The trustees are proposing to engage a project manager to undertake and manage a development on the site such that X residential and rural residential lots will be created. This averages out to approximately X square metres per lots. This size is substantially larger than average house blocks. The fund will not undertake any of the development work. The project manager will be responsible for all costs of developments and will be compensated for its efforts out of sale proceeds received. No houses will be built by the fund on any of the sites. The work undertaken will be the minimum to enable the lots to be sold. By undertaking the proposed development, the fund seeks to meet the minimum council requirements.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5, and | Income Tax Assessment Act 1997 section 118-20.

Reasons for decision: Summary: The fund intends to subdivide land, comprising 28.4 hectares into 117 residential and rural residential lots. The fund intends to sell the lots once the subdivision is complete. Therefore, we will need to determine whether the proceeds to be received on the sale of the subdivided lots: · is assessable ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (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 provisions of the ITAA 1997. Assessable as ordinary income Carrying on a business of property development It has been stated that the fund and it's trustees are not, nor have they ever been, in the business of property development and have no expertise relevant to property subdivision activities. Therefore, it is accepted that any proceeds received from the sale of the subdivided land would not be derived in the course of carrying on a business. Isolated commercial transaction with a view to profit Profits arising from an isolated business or commercial transaction 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). Taxation Ruling TR 92/3 considers the principles outlined in the Myer Emporium case and provides guidance in determining whether profits from isolated transactions are assessable under section 6-5 of the ITAA 1997 as ordinary income. TR 92/3 defines the term 'isolated transactions' as: · transactions outside the ordinary course of business of a taxpayer carrying on a business, and · transactions entered into by non business taxpayers. It is not necessary that the intention or purpose of profit-making be the sole or dominant intention or purpose for entering into the transaction. It is sufficient if profit-making is a significant purpose. If a taxpayer makes a profit from a transaction or operation, that profit is income if the transaction or operation is not in the course of the taxpayers business but: · the intention or purpose of the taxpayer in entering into the profit-making transaction or operation was to make a profit or gain, and · the transaction or operation was entered into, and the profit was made, in carrying out a business operation or commercial transaction. Whether an isolated transaction is business or commercial in character will depend on the circumstances of each case. Where a taxpayer's activities have become a separate business operation or commercial transaction, the profits on the sale of subdivided land can be assessed as ordinary income within section 6-5 of the ITAA 1997. TR 92/3 lists the following factors to be considered: 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. i) In addition to the above general factors, Miscellaneous Taxation Ruling MT 2006/1 provides a list of specific factors relevant to isolated transactions and sales of real property. If several of the 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. No single factor is determinative; rather it will be a combination of factors that will lead to a conclusion as to the character of the activities. | Detailed Reasoning - Application to your circumstances: In this case, the fund purchased land in and some time later acquired an adjacent parcel of land. At the time of acquisition, the fund had planned to use both parcels of land to build a retirement village. The fund acquired Council approvals to rezone the property. The fund was unable to raise sufficient funds to complete the intended project. The project was no longer financially viable, and the trustees applied for the site to be rezoned back to residential zoning. The fund contemplated selling the block to a property developer, but the return to the fund was deemed far below reasonable levels. A decision was made to engage a project manager to undertake a development on the site. The land will be subdivided into X residential lots to be sold. Based on the information provided; · there has been a change of purpose for which the land is held (that is, there is no longer an intention to use the land for the original project). · the subdivision is being developed in a businesslike manner as; o the land has been rezoned o you have engaged a project manager to manage the development o you will compensate the project manager for the services they provide in relation to the development o contractors will be engaged to undertake the activities necessary to develop the site On balance, it would appear that the subdivision project the fund has undertaken has the characteristics of a commercial transaction. This is because the steps undertaken in the general development process are consistent with what would be expected from a person involved in a commercial enterprise of subdivision and property development. This indicates that the project is in the form of an adventure or concert in the nature of trade and not the mere realisation of a capital asset. Therefore, as the activity was entered into, and any profits made, in the course of carrying out an isolated commercial transaction with a view to a profit, the proceeds will be considered ordinary assessable income under section 6-5 of the ITAA 1997. | Detailed Reasoning - Assessable under the capital gains tax provisions: Section 118-20 of the ITAA 1997 primarily exists to ensure that amounts which are assessable income outside of the CGT provisions are not also taxed as capital gains. In the absence of such a provision, it is conceivable that a receipt properly characterised as ordinary income and which has also been derived as a result of a CGT event could result in the receipt being taxed twice. Therefore, whilst CGT event A1 will happen when the fund sell the blocks of land, any capital gain will be disregarded to the extent of any amount already included as ordinary assessable income under section 6-5 of the ITAA 1997.