Private ruling: Subdivision of land
Published: December 2014
Ruling period: Year ending 30 June 2015 | Year ending 30 June 2016 | Year ending 30 June 2017 | Year ending 30 June 2018
Date scheme commenced: 1 July 2014

Ruling: Q1: Will the subdivision of the property cause the developed lots to be considered to have been acquired after 20 September 1985? | A1: No. | Q2: Will the proceeds from the sale of the developed lots be included in your assessable income under section 6-5 of section 15-15 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A2: No. | Q3: Will the proceeds from the sale of the developed lots considered the mere realisation of a capital asset? | A3: Yes. | Q4: Can any capital gain made on the sale of the developed lots be disregarded under Part 3-1 of the ITAA 1997? | A4: Yes.

Relevant facts and circumstances: You and your spouse acquired a property prior to 20 September 1985. At the time of the acquisition of the property, there was a residential dwelling on the land. The property was acquired by you and your spouse to rent the dwelling and to hold equipment relating to a business conducted by a related entity. You and your spouse received correspondence from the local council advising of a neighbourhood complaint and of the requirement to desist using the land (zoned as residential) for commercial purposes. A show cause notice was issued by the council during the relevant financial year. You and your spouse have ceased using the property to store equipment for the business. You and your spouse have obtained alternate storage arrangements. You and your spouse now propose to retain the dwelling on the property and subdivide the land into several lots. You and your spouse will remain the registered owners of the property both prior to and at the time of the subdivision. The works required for the subdivision of the property are engagement and dealing with town planners, surveyors, engineers, all land subdivision works including soil movements, channelling and kerbing, provisions of water, sewer, constructions of a cul de sac, provisions of electrical and telecommunication, and any head works required as part of the subdivision approval. Following the subdivision of the property, the developed lots will comprise vacant lots of land (other than the lot containing the existing dwelling). You and your spouse propose to sell the individual vacant lots of land and retain the dwelling as a rental property.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 15-15 | Income Tax Assessment Act 1997 paragraph 104-10(5)(a) | Income Tax Assessment Act 1997 section 120-20

Reasons for decision: Summary: Under section 120-20 of the Income Tax Assessment Act 1997 (ITAA 1997), an entity will make a capital gain or a capital loss if a CGT event happens to a CGT asset. A capital gain on the disposal of an asset can be disregarded under paragraph 104-10(5)(a) of the ITAA 1997 if it was acquired prior to 20 September 1985. If you subdivide a block of land, each block that results is registered with a separate title. For CGT purposes, the original land parcel is divided into two or more separate assets. Subdividing land does not result in a CGT event if you retain ownership of the subdivided blocks. In this case, you and your spouse acquired a property prior to 20 September 1985. The subdivision of this property will not result in a CGT event. Therefore, the individual lots are considered pre CGT assets. | Detailed Reasoning - Question 2 & 3: We need to determine whether the proceeds from the sale of the asset: • are assessable ordinary income under section 6-5 of the ITAA 1997 as you were carrying on a business of property development • are assessable ordinary income under section 6-5 or 15-15 of the ITAA 1997 as you conducted an isolated commercial transaction with a view to a profit, or • are a realisation of a capital asset and assessable under the CGT provisions of the ITAA 1997. | Detailed Reasoning - Carrying on a business of property development: Based on the information provided, we do not considered that any proceeds received from the sale of the subdivided land would not be derived in the course of carrying on a business. | Detailed Reasoning - 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). 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. 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. There was a change of purpose for which the land was held. The 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 officer and letterhead. If several of the factors are present, it may be an indication that a business or an adventure of concern in the nature of trade is being carried on. | Detailed Reasoning - Application to your circumstances: Having regards to your circumstances and the factors outlined in TR 92/3, we do not consider that the proceeds from the sale of the asset will be assessable under section 6-5 or 15-15 of the ITAA 1997. We consider that the disposal of the property will be a mere realisation of a capital asset. | Detailed Reasoning - Question 4: As discussed above, a capital gain on the disposal of an asset can be disregarded under paragraph 104-10(5)(a) of the ITAA 1997 if it was acquired prior to 20 September 1985. As the property was acquired prior to 20 September 1985, you and your spouse are entitled to disregard any capital gain made from the sale of the individual lots.