Private ruling: Capital gains tax and property subdivision
Date of advice: 30 April 2019
Published: June 2019
Ruling period: Year ended 30 June 2020 | Year ended 30 June 2019
Date scheme commenced: 1 July 2018.

Ruling: Q1: Will the proceeds from the sale of the subdivided lots be assessable as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. The proceeds from the sale of the subdivided lots will not be ordinary income and not assessable under section 6-5 of the ITAA 1997. | Q2: Will the proceeds from the sale of the subdivided lots, be treated as statutory income under the capital gains tax provisions in Parts 3-1 and 3-3 of the ITAA 1997? | A2: Yes. The proceeds from the sale of the subdivided lots will represent a mere realisation of a capital asset and will fall under the capital gains tax provisions in Part 3-1 and 3-3 of the ITAA 1997.

Relevant facts and circumstances: You entered into an agreement to purchase a property after 20 September 1985 (the property). You planned to build a new home on the property and renovate the current run down dwelling (the original dwelling). You planned to rent out the original dwelling after it was renovated. You were a stay at home parent at the time the property was purchased. Only your name was placed on the title and you claimed all rent received. The original dwelling on the property straddled the diagonal boundary of the two titles. You decided the subdivision process was too complex and instead renovated the original dwelling and resided in it happily as your main residence. At the time the property was purchased it was zoned general residential but was unsewered. From the time the property was purchased until the property was subdivided it was not placed on the market and no offers were made on the property. You have begun to transition into retirement and have decided to subdivide the property to give you a parcel of land that better suits your needs. A number of years after you purchased the property you contacted a property developer. A few months later the property developer made a visit to the property. A couple of weeks later the property developer provided you with a quote for service and terms of agreement and soon after subdivision activities commenced. A few months later the property developer submitted a development application (planning permit) for the property to the Council. A few months later the development application was approved. The property will be subdivided into a number of lots with lot B holding the original dwelling. After the subdivision of the property you will keep lot B as your main residence. All other lots will be sold. Sometime later sewerage was connected to the property The property was valued prior to subdivision at $XXX,XXX. Infrastructure has been completed on the property in accordance with the planning permit. Your only involvement in the subdivision process is paying the bills as directed to you by the property developers. The subdivision has been fully funded by you with no finance being obtained. The sub-divided lots will be sold separately and will be put in the hands of a local real estate agent. You will not do any advertising or be directly involved in the sale process. You are not registered for GST. Sometime after the subdivision process had begun you remembered you were the sole owner of the property as indicated on the titles. A few years after the subdivision process started you added the co-owner and spouse onto both titles. Both you and your spouse will be the registered owners following the sub-division of all lots. You are aware that a capital gains tax event occurred for you when your spouse was included on the title. The transfer of the property to your spouse happened before the subdivision process was complete. A few months later the final stages of the sewage update will commence. You expect titles to be finalised and issued shortly after the completion of these works. You will to sell the subdivided lots. You have not previously been involved in activities involving the acquisition, subdivision and sale of subdivided land and have no intention of undertaking any similar project in the future.

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