Private ruling: Income tax, Capital gains tax
Published: September 2017
Ruling period: Year ended 30 June 2017 | Year ended 30 June 2018 | Year ended 30 June 2019 | Year ended 30 June 2020
Date scheme commenced: 1 July 2016

Ruling: Q1: Did the Property, or any part of the Property, become trading stock in 2014? | A1: Yes, the Residential Freehold area, the Residential Mixed Use areas and the Strata Precinct became trading stock in 2014. | Q2: When subdivision of the Property occurs, will the Non-Residential Freehold retain its pre-CGT status? | A2: Yes. | Q3: Did the area representing the Mixed Use Precinct become trading stock in 2014? | A3: The Residential Mixed Use areas of the Mixed Use Precincts became trading stock in 2014. The Commercial Mixed Use areas of the Mixed Use Precincts did not become trading stock in 2014. | Q4: When subdivision of the Property occurs, will the Commercial Mixed Use retain its pre-CGT status? | A4: Yes.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. You own land (the Property). You acquired the Property in 19XX. You acquired the Property with the intention of holding it over the long term as your family home and for use as a farm. Since 19XX you have conducted a farming business on the Property. For a significant period of time you used the dwelling on the Property as your family home. Rezoning of the Property At the time of purchase, you had no intention to subdivide, develop and sell the Property. When the Property was purchased, it was well outside the then metropolitan area. Most of the property was rezoned by the Government. The rezoning of the Property made it possible to develop the Property for the first time. Development of the Property You are currently developing the Property for the purposes of funding your retirement, and leaving investment legacies to your children, grandchildren and great grandchildren. Prior to 20XX various preliminary work was done to consider whether the property development would proceed (for example, feasibility studies). Following the preliminary work you formed the intention to proceed with the property development. In 20XX you commenced a property development business in respect of your Property, having become definitively committed to the undertaking the development, and increasing your development activities in relation to the Property. The Property is being developed to include: ● a residential area ( Residential Freehold ) ● a retirement village ( Retirement Village ) ● several mixed use areas ( Mixed Use Precinct ) The exact make-up of the Mixed Use precinct is yet to be determined, however it is likely to include residential area and commercial areas, and is anticipated to be strata titled. ● office space and other commercial areas ( Commercial Freehold ) ● a medical precinct ( Medical Precinct ) ● medium density areas ( Strata precinct ) Since 20XX the following activities have taken place: ● Construction of a road - This was a precondition for undertaking the development, required by Council. Half of the cost is funded by you. ● Preliminary works for the residential area are nearing completion. ● You are working with your advisors with the Council to finalise building permits for the residential areas. ● Marketing for sales of the residential lots commenced. ● To date the residential area has been sold via off the plan sales contracts. ● Preparations are currently being made to sell further parts of the residential area. You made a planning application to the Council in respect of the subdivision of the Property. The Council approved the planning permit. A plan of subdivision and engineering drawings in respect of part of the residential area has been lodged with the Council. On subdivision of the land, legal title to the new parcels of land will be in your name. As a result of the property development the Property will be subdivided into various areas, such as the residential lots, Strata Precinct and the Residential mixed Use. Thus, separate legal title to these areas does not currently exist and will only come into existence when subdivision occurs. No entities have been engaged to develop the other areas of land (other than the residential area). It is intended that arm's length third parties will be engaged for any work that is to be carried out on those areas in due course. However the development and sale of the residential areas represent the first stages of the development project. Development Agreement - Residential Area You entered a Development Agreement with a developer in 20YY, to complete the 'Project' on behalf of and as agent for you. Pursuant to the Development Agreement, the developer will carry out and manage the Project which is the development of the Residential Area (i.e. Residential Freehold) and the sale of the Residential Lots (i.e. the lots derived from the Residential Area and registered as a separate lot under a Plan of Subdivision and includes any residential dwelling or other capital improvements to it pursuant to the Project and meant to be sold as part of the Project). The developer will subdivide and sell the Residential Area on the market as residential lots ( Residential Lots ). The Development Agreement commences on the Commencement Date in 20XX. In consideration for the Development Services provided by the developer, it will be entitled to a Development Fee, which means a percentage of the Project Profit, and consists of the Lot Development Fee and the Final Adjustment. The developer is obliged to do all things necessary or required to complete the Project. The Development Services to be provided by the developer are specified in the Development Agreement. You will either incur the Project Costs or reimburse the developer for permitted Project Costs. Strata Precinct In respect of the Strata precinct, you intend to sell that land as vacant land to a developer/builder. Retirement Village, Commercial Freehold and Medical Precinct You intend to retain the Retirement Village, Commercial Freehold and Medical Precinct (together, the Non-Residential Freehold ) as long term investment assets, to be passed down to your children, grandchildren and great grandchildren. Once all the Residential Lots and other areas have been subdivided and settled, the Non-Residential Freehold will be separately and distinctly titled with its own Certificate of Title. Mixed Use Precinct In respect of the Mixed Use Precinct, you intend to: ● sell the Mixed Use Precinct, to the extent it is used for residential purposes ( Residential Mixed Use - strata lots that will be zoned residential) ● retain, and continue to own, for long-term investment purposes the Mixed Use Precinct, to the extent that it is used for retail and commercial purposes ( Commercial Mixed Use - strata lots that will be zoned for commercial use) Certain areas of the Property will form part of the Mixed Use Precinct. The exact make-up of the Mixed Use Precinct is yet to be determined, however, it is likely that these areas will be at least medium density (e.g. offices and apartments). These areas are likely to be strata titled (as medium density developments) rather than freehold.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 6(1) | Income Tax Assessment Act 1997 s ection 70-10 | Income Tax Assessment Act 1997 paragraph 70-10(1)(a) | Income Tax Assessment Act 1997 section 108-5 | Income Tax Assessment Act 1997 section 112-25 | Income Tax Assessment Act 1997 subsection 112-25(2)

Reasons for decision: Summary: Those parts of the Property comprising the Residential Freehold area, the Residential Mixed Use areas and the Strata Precinct became trading stock in 2014. | Detailed Reasoning - Detailed reasoning: Section 70-10 of the Income Tax Assessment Act 1997 (ITAA 1997) defines trading stock to include anything produced, manufactured or acquired that is held for the purposes of manufacture, sale or exchange in the ordinary course of a business. Land can be trading stock, and it will be trading stock where a business of property development is carried on in respect of that property. That is, the development of one specific property can constitute a property development business, in which case the sale of the property is within the ordinary course of that business and the property is trading stock ( R and D Holdings Pty Ltd v DCT [2006] FCA 981 ( R and D Holdings ) and FCT v St Hubert's Island Pty Ltd (In Liq) [19781 HCA 10; (1978) 138 CLR 210 ( St Hubert's Island) ) . Land that is not initially acquired for subdivision, development and sale, but is later 'held' for that purpose will be trading stock. Land intended to be sold after subdivision is still trading stock before it is subdivided Land can be trading stock before it has been turned into the condition in which it is intended to be ultimately sold - that is, land intended to be sold after subdivision is still trading stock before it is subdivided ( R and D Holdings ; St Hubert's Island). It is only when the land is subdivided, so that different parts of the land become an identifiable and segregated parcel of land subject to separate title or titles, separate from the other parts of the land that each plot of land becomes an individual article of trading stock ( Barina Corporation Ltd v FC of T 85 ATC 4186). The Commissioner's view in respect of whether land ventured into a business of subdivision, development and sale can be trading stock if it has not yet been subdivided is stated in ATO Interpretative Decision ATO ID 2004/532 Income Tax: business of subdivision - time when land becomes trading stock (ATO ID 2004/532): The decision in Federal Commissioner of Taxation v. St Hubert's Island Pty Ltd (1978) 138 CLR 210; 78 ATC 4104; (1978) 8 ATR 452 confirms that broadacres land (that is, not yet subdivided) is trading stock of a property developer. As the taxpayer is regarded as being in the business of subdivision, development and sale of land, the proceeds from the sale of the subdivided land will be assessable under section 6-5 of the ITAA 1997. The taxpayer's land will be treated as trading stock when the land is ventured into the business of development, subdivision and sale. When an asset is ventured into the business of development, subdivision and sale is a matter of fact. However, TD 92/124 provides guidance that a business activity is taken to have commenced when a taxpayer embarks on a definite and continuous cycle of operations designed to lead to the sale of the land. Taxation Determination TD 92/124 Income Tax: business of subdivision - time when land becomes trading stock (TD 92/124) states: 1. Land is treated as trading stock for income tax purposes if: • it is held for the purpose of resale; and • a business activity which involves dealing in land has commenced. 2. Both the required purpose and the business activity must be present before land is treated as trading stock. The business activity is taken to have commenced when a taxpayer embarks on a definite and continuous cycle of operations designed to lead to the sale of the land. Where broadacres are to be subdivided as part of a property development the entire broadacres may not be trading stock. In Federal Commissioner of Taxation v. Kurts Development Ltd (1998) 86 FCR 337; (1998) 39 ATR 493; 98 ATC 4877 certain parts of the broadacres were 'Infrastructure Land' to be dedicated to the Crown or a public authority for the purpose of roads, parks, sewerage, etc. That dedication was effected upon the registration of a plan of subdivision. It was only at that moment that the Infrastructure Land became an identifiable and segregated parcel of land subject to separate title, separate from the other part of the original broadacres. The Tribunal considered that whilst the broadacres as originally acquired was an article of trading stock, the Infrastructure Land could never be part of the taxpayer's trading stock. The Infrastructure Land was never intended for sale and the dedication of the land did not constitute a sale. In your case, you acquired the Property in 19XX with the intention of holding it for the long term as your family home and for use as a farm. Since 19XX you conducted a farming business on the Property, and for a significant period of time used the dwelling on the Property as your family home. At the time of purchase, you had no intention to subdivide, develop and sell the Property. In 20YY you commenced a property development business in respect of the Property, having become definitively committed to undertaking the development of parts of the Property and increasing your development activities in relation to the Property. The Property has not yet been subdivided however distinct areas will be created by the subdivision of the Property, described as Residential Freehold, Retirement Village, Mixed Use Precincts, Commercial Freehold, Medical Precinct, and Strata Precinct. You intend to develop and retain the Retirement Village, Commercial Freehold and Medical Precinct (together, the Non-Residential Freehold) and the Commercial Mixed Use areas of the Mixed Use Precincts. These areas of land and the developments constructed on those areas will be retained as long term investment assets to be passed to future generations. You intend to develop and sell the Residential Freehold area and the Residential Mixed Use areas of the Mixed Use Precincts. The Strata Precinct will not be developed but will be sold to a builder/developer as vacant land. You commenced a property development business in 20XX. Your different activities indicate that not every transaction undertaken in the course of subdividing, developing or otherwise dealing with your Property will be a transaction undertaken in the ordinary course of your business activities, which involves in dealing in land, and thus characterise the land as trading stock. The Residential Freehold area and the Residential Mixed Use areas will be developed and sold. These areas of the Property are trading stock as defined in section 70-10 of the ITAA 1997 in 20XX because at that point of time a business of dealing in land has commenced, and those particular areas of the Property are held for the purpose of sale in that business of dealing in land. You do not intend to develop the Strata Precinct and will instead sell that area of the Property as vacant land to a developer/builder. While you have indicated you intend to sell the Strata Precinct, a determination needs to be made whether the sale of the Strata Precinct will be made in the ordinary course of a business (refer to paragraph 70-10(1)(a) of the ITAA 1997). To determine whether the receipt is produced by or is an ordinary incident of the business of dealing in the land the relationship between that business and the receipt from the dealing in the land needs to be considered. In applying the principles of Californian Copper Syndicate v Harris (1904) 5 TC 159, Lockhart J stated in CMI Services Pty Ltd v FC of T 90 ATC 4428 at 4437, that it is necessary to have consideration of: ...the nature of the company, the character of the assets realised, the nature of the business carried on by the company and the particular realisation which produced the profit... In FC of T v Merv Brown Pty Ltd 85 ATC 4080 at 4086 Lockhart J also observed: In determining whether moneys received by a taxpayer are of an income or capital nature one looks to the nature of the taxpayer's business and activities, the character of the assets realised and the relationship between the two. It is necessary “to make both a wide survey and an exact scrutiny of the taxpayer's activities”: Western Gold Mines NL v C of T (WA) (1938) 59 CLR 729 per Dixon and Evatt JJ at p 740. If, having regard to these matters, the conclusion is reached that the particular realisation was a normal incident in the carrying on the profit earning operations of the taxpayer's business, [then the proceeds will be assessable income]. The activities to occur in relation to the Strata Precinct, being the sale of a large parcel of land, cannot really be distinguished from the business of dealing in land. It is a significantly larger parcel of land being sold, than the lots being sold in the Residential Freehold area and the Residential Mixed Use areas, but it is just another sale of a lot, albeit a very large lot. Even if it is considered to not be strictly part of dealing in the sale of lots (because of the lack of development of that portion of land), it must still nevertheless be concluded that the sale was a normal incident of such a business, because the act of selling excess land, being the portion of the land which you did not intend to develop further (due to it not meeting your requirements), would be an ordinary and expected incident of a property development business. (Refer to Californian Copper Syndicate v Harris (1904) 5 TC 159 and FC of T v GKN Kwikform Services Pty Ltd 91 ATC 4336) The Strata Precinct therefore satisfies the trading stock definition in section 70-10 of the ITAA 1997 and became trading stock in 20XX. The areas of the Property comprising the Non-Residential Freehold and the Commercial Mixed Use areas of the Mixed Use Precincts did not become trading stock in 2014. Section 70-10 of the ITAA 1997 includes the requirement that for land to be trading stock it must be held for the purpose of sale in the ordinary course of business. You stated that these areas of land are not held for the purpose of sale. In summary, those parts of the Property comprising the Residential Freehold area, the Residential Mixed Use areas and the Strata Precinct satisfy the requirements of section 70-10 of the ITAA 1997 and became trading stock in 20XX. | Summary: The land comprising the Non-Residential Freehold will retain its pre-CGT status. | Detailed Reasoning - Detailed reasoning: Section 112-25 of the ITAA 1997 states what happens if a CGT asset is split into two or more assets and you are the beneficial owner of the original asset and each new asset. As provided by subsection 112-25(2) of the ITAA 1997 the split is not a CGT event. 'CGT asset' is defined in section 108-5 of the ITAA 1997 and includes any kind of property. Section 112-25 of the ITAA 1997 provides an example of the subdivision of a block of land into three separate blocks as an example of a situation to which the provisions apply so that each block is a new asset. CGT Determination Number 7 Capital Gains: What are the CGT consequences of sub-dividing pre-CGT land? states: 1. Where pre-CGT land is sub-divided after 19 September 1985 the land will maintain its pre-CGT acquisition date because no CGT event has happened. The subdividing of the land is not itself a CGT event: section 112-25 of the ITAA97. Taxation Determination TD 97/3 Income tax: capital gains: if a parcel of land acquired after 19 September 1985 is subdivided into lots ('blocks'), do Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 treat a disposal of a block of the subdivided land as the disposal of part of an asset (the original land parcel) or the disposal of an asset in its own right (the subdivided block)? states: 2. … the effect of registering separate new titles under the subdivision is, for the purposes of Parts 3-1 and 3-3, to divide the original land parcel into two or more assets (viz., the subdivided blocks). The subdivided blocks are then treated as separate assets under the capital gains provisions. They are taken to have been acquired by the owner of the original land parcel when that original parcel was acquired. You will subdivide the Property you purchased in 19XX. You are the beneficial owner of the Property prior to its subdivision, and you will be the beneficial owner of the new parcels of land created by the subdivision. Section 112-25 of the ITAA 1997 applies with the effect that the subdivision does not cause a CGT even to happen. The Property is a pre-CGT asset because it was acquired prior to 20 September 1985. When the Property is subdivided the areas of land comprising the Non-Residential Freehold will be taken to have been acquired by you when the original Property was acquired. The land comprising the Non-Residential Freehold will retain its pre-CGT status. | Summary: The Residential Mixed Use areas of the Mixed Use Precincts became trading stock in 20XX. The Commercial Mixed Use areas of the Mixed Use Precincts did not become trading stock in 20XX. | Detailed Reasoning - Detailed reasoning: As discussed in Question 1, land will be trading stock as defined in section 70-10 of the ITAA 1997 if it is held for the purpose of resale and a business of development, subdivision and sale in relation to the land has commenced. You commenced a property development business in respect of the Property in 20XX. Upon subdivision certain areas of the Property will be Mixed Use Precincts. The Mixed Use Precincts will comprise both Residential Mixed Use areas which will be used for residential purposes and Commercial Mixed Use areas to be used for retail and commercial purposes. You intend to retain the Commercial Mixed Use areas as long term investment assets to be passed to future generations. You intend to sell the Residential Mixed Use areas. Section 70-10 of the ITAA 1997 requires, in part, that for land to be trading stock it must be held for the purpose of sale. This is stated in TD 92/124 and ATO ID 2004/532. You only intend to sell the Residential Mixed Use areas of the Mixed Use Precincts. As a result, the Residential Mixed Use areas of the Mixed Use Precincts satisfy the requirements of section 70-10 of the ITAA 1997 and became trading stock in 20XX. The Commercial Mixed Use areas of the Mixed Use Precincts are not trading stock. | Summary: The land comprising the Commercial Mixed Use will retain its pre-CGT status. | Detailed Reasoning - Detailed reasoning: As discussed at Question 2, pre-CGT land sub-divided after 19 September 1985 will maintain its pre-CGT acquisition date because no CGT event has happened. Your Property is a pre-CGT asset because it was acquired prior to 20 September 1985. When the Property is subdivided the areas of land comprising the Commercial Mixed Use will be taken to have been acquired by you when the original Property was acquired. The land comprising the Commercial Mixed Use will retain its pre-CGT status.