Private ruling: Taxation treatment of land development, subdivision and sale
Date of advice: 16 September 2021
Published: November 2021
Ruling period: Year ended 30 June 20XX | Year ended 30 June 20XX | Year ended 30 June 20XX | Year ended 30 June 20XX | Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: A1: Based on the facts provided, it is the Commissioner's position that your activities constitute the carrying on the business of land development, subdivision and sale. | Q1: Will any part of the proceeds on sale of any of the lots from the Planned Subdivision be included in your assessable income as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A2: Yes, all proceeds from the sale of subdivided land from the Planned Subdivision will be included in your assessable income as ordinary income under section 6-5 of the ITAA 1997. | Q2: Will any part of the proceeds on sale of any of the lots from the Planned Subdivision be included in your assessable income as profit arising from the carrying on or carrying out of a profit-making undertaking or plan under section 15-15 of the ITAA 97? | A3: No | Q3: Will the sale of any subdivided lots from the Planned Subdivision by you represent the mere realisation of land that was acquired before 20 September 1985 (a pre-CGT asset)? | A4: No | Q4: If the answer to question 3 is that you have gone beyond the mere realisation of land, when will you have changed intention? | A5: You changed intention when you allowed the real estate agent to manage the initial planning and application for the subdivision. This resulted to the grant of conditional approvals for certain stages of subdivision. | Q5: Has any part of Lot X (the land) become trading stock or will become trading stock as part of the Planned Subdivision? | A6: Yes, Lot X except for the 'Infrastructure Land' become your trading stock as you are determined to have commenced carrying on the business of property development, subdivision and sale and you hold the land for the purposes of that business. The subdivision of that land into certain number of lots being available for sale also become your trading stock as part of the Planned Subdivision. | Q6: Does the Commissioner accept no part of the land can become trading stock unless and until the extent that subdivisional lots have been created and are available for sale as per the decision in Federal Commissioner of Taxation v. St. Hubert's Island Pty. Ltd. (In Liq.) (1978) 138 CLR 210 at 22 and at 23? | A7: No | Q7: If the answer to either part of question 5 is yes, when did or does the land become trading stock? | A8: Based on the facts, it is the Commissioner's position that the land become your trading stock in the 20XX income year. The subdivision of that land into certain number of lots being available for sale also become your trading stock as part of the Planned Subdivision in the 20XX income year. | Q8: If the answer to question 5 is yes, will the Commissioner under the power in section 70-30(2) of the ITAA 1997 allow you additional time to make the election under section 70-30(1) of the ITAA 1997 (to value items at cost or market value)? | A9: Yes | Q9: If the answer to question 5 is yes, does the Commissioner accept that the increase in the cost of items to market value is not to be included as income regardless of whether you elect to value at market value on the basis of FCT v Whitfords Beach Pty Ltd [1982] HCA 8; 150 CLR 355 and as confirmed by the Commissioner in Taxation Determination TD 97/1? | A10: No | Q10: If the answer to question 5 is no but the answer to either or both of questions 1 and 2 is yes, does the Commissioner accept that the increase in the cost of the subdivided lots to market value is not to be included as income on the basis of FCT v Whitfords Beach Pty Ltd [1982] HCA 8; 150 CLR 355 and as confirmed by the Commissioner in Taxation Determination TD 97/1? | A11: This question is redundant because the answer to question 5 is yes. For information on trading stock rules, refer to ATO Document QC 51614. | Q11: If the answer to question 5 is no but the answer to either or both of questions 1 and 2 is yes, does the Commissioner accept that should you both die before the sale of all of the lots, that the unsold lots (other than any post CGT capital improvements) are acquired by your heirs with a market value for both the income and the capital gains provisions of the ITAA 1997 - see McClelland v FC of T 70 ATC 4115 and N.F. Williams v. F C of T 72 ATC 4069; and item 4 in the table of subsection 128-15(4) of the ITAA 1997? | A12: This question is redundant because the answer to question 5 is yes. For information on cost base of inherited assets, refer to ATO Document QC 66053. | Q12: Will the capital gain on the disposal of each lot be disregarded save and to the extent that section 108-70 of the ITAA 1997 is applicable? Within this, does the Commissioner accept that section 108-70 needs to be applied separately to each subdivided lot which is sold? That is, capital improvement expenditure is to be apportioned over all of the subdivided lots to which it relates and measured against the improvement threshold for the relevant year and the five per cent of capital proceeds tests. | A13: Yes. The interaction of the CGT rules and the trading stock rules will apply because the subdivided lots are trading stock of your business. The capital improvements made to the pre-CGT land in connection with its subdivision and development are considered related to each other and so the total cost of the improvements is to be allocated over to all the subdivided lots. The capital improvements will only be treated as separate CGT assets if the threshold conditions in section 108-70 are satisfied.

Relevant facts and circumstances: Background You are the Partners of XY & XZ Partnership (the Partnership). You are both retired farmers. In 20XX, you arranged with their child to take over the management of your affairs including your relationships with a real estate firm and your accountants. In this role, your child reviewed your affairs including the advice which had been given to you. Your child suggested changes in the way your affairs are dealt with, appointed a new accountant, and initiated this tax ruling. Lot X (Planned Subdivision) You reside at Lot X - Certificate of Title XXXX and Plan AXYZ. It is submitted that Lot X is a pre-CGT land. You obtained a private ruling from the ATO in 19XX (that ruling ceased to apply after the year ended 30/6/19XX), before embarking on the First Subdivision. The ATO position expressed in that ruling could be summarised as follows: • the sale of subdivided land would not be on revenue account; • the improvements on the land would be treated as separate CGT assets where the threshold tests in subsection 160P(6) of the Income Tax Assessment Act 1936 (ITAA 1936) are satisfied; • the sale of land acquired post CGT would be subject to CGT rules in Part IIIA of the ITAA 1936. As stated in that ruling, at that time your intention was to retain the balance of the land and not to be sold during your lifetime. Due to your age and inability to maintain the property, your child is in the process of planning the subdivision of Lot X (Planned Subdivision). The intention now is to reduce your landholding down to a small manageable portion of Lot X, which contains your house and shed. You want to tidy up your affairs for your heirs by selling the excess land. You expect that proceeds from the Planned Subdivision will be treated in the same way as the earlier (and larger) First Subdivision. That is, none of the proceeds will be assessable either as income or as capital gains - save for any amount brought to tax under section 108-70 of the Income Tax Assessment Act 1997 (ITAA 1997) referring to when a capital improvement to an asset is treated as a separate CGT asset. You wish to confirm this expectation by way of a private tax ruling. The property - Lot X - Portion of former Part Lot Y Lot X is portion of former Part Lot Y on Plan ABCD, as contained on Certificate of Title Volume XXXX Folio 32, that was held tenants in common by you. Lot X is a descendant allotment of land that has been held by you as tenants in common between 1976 and 2002 (as Part Lot Y) and as joint tenants from 2002 (as Lot X). In an email from your tax agent, it is submitted that originally the property was owned as tenants in common, where 50% of the property was owned by each of you. In 2002 this was changed to joint tenancy, where 50% of the property continues to be owned by each of you. The only difference between the type of holdings is that on death of one of you, the property is automatically transferred to the surviving owner. This automatic transfer to the surviving owner is classified as a change in beneficial ownership and is treated for tax purposes the same of a transfer of the same interest in a property held as tenants in common. Lot X is over XX hectares in area and is the balance of your farm, the larger part of which was sold by subdivision in the period 20XX through 20XX as the First Subdivision. The only buildings on Lot X are the farmhouse and shed which were constructed after 19 September 1985. These are both located on the reduced lot which you will retain as your continuing home. Lot Y on Plan ABCD Lot Y was originally purchased by your late parent for the purposes of farming. In 19XX this land was passed down as an inheritance to you and you continued to farm it for the entire time, between purchase of the land by your parent and the start of the First Subdivision in 20XX. First Subdivision from 20XX through 20XX As noted above, Lot X was originally part of a larger parcel of land and being Part Lot Y on Plan ABCD. You carried out a subdivision of part of that parcel and three other lots (First Subdivision). The subdivision entry is just few kilometres from the City's main street. The First Subdivision comprised of as follows: • Part Lot 2; • Part *Lot Y on Plan ABCD; • Lot 19; and • *Lot 20. *Lot Y on Plan ABCD was around XX hectares of which over XX hectares were retained by you and formed Lot X. *Lot 20 was purchased from your sibling post CGT, to allow completion of access roads to the First Subdivision. The First Subdivision occurred in certain Stages spanning over a number of years creating lots consisting of residential lots and a business lot for the general store and café. Initial steps In late 1990s, to provide a framework for a subdivision to be approved, you requested the local government to initiate a local planning scheme amendment to rezone the land. The City Town Planning rezoned the land from General Farming to Restrictive Use to support special residential lot sizes. The rezoning was to provide a statutory framework for the outcomes of the larger Airport Structure Plan for the area and would have occurred independently to your making the request. As mentioned earlier, you sought and obtained a private ruling from the ATO in 19XX before embarking on the subdivision. You have been unable to locate the request for that ruling. The ruling noted that approximately XX hectares would be retained for farming. For a variety of reasons including dealing with government bodies, only just over XX hectares were retained after the First Subdivision. The expected scope of the work for Stage 1 of the subdivision was to put in roads, electricity, phone lines, some drainage and water supply, but no sewerage and no clearing beside that required for the roads. Tree barriers were also required to be planted. The application for rezoning was undertaken through a consultant. The subdivision was undertaken by a development company with the marketing and selling undertaken by a local real estate agency. Government Rezoning Following years of consultation and assessment, the Airport Structure Plan was endorsed by the relevant Planning Commission. The rezoning then happened from General Farming to Restricted Use to what were Part Lot Y on Plan ABCD, Lot 19, Part Lot 2, and Lot 20. The most significant of these properties is Lot Y, for which the cancelled certificate title and relevant plan are provided. A copy of the Airport Structure Plan and Plan XXXX Drawing were provided as attachments to the ruling application. Since late 1990s, several changes were made to the structure plan and zoning of the area. Due to the scope of the Planning and Development legislation, these changes were made without direct consultation or engagement with you. The Planned Subdivision of Lot X You were approached by a real estate agent who proposed a plan to sell Lot X as an englobo piece of land at a price which would be increased if you carried out the initial groundwork to allow subdivision of the property. You had not actively looked to sell. The assumption was that one day a developer would come to you with the right price and you would sell the portion of land that did not contain your house or shed. The key requirement for any plan was to make sure you could continue living on the portion of the land that contained your house and shed, as you were not willing to move from the location that had been your home for so long. You were not interested in taking on the burden of a subdivision and were encouraged that the real estate agent's plan would add value with minimal cost to and involvement by yourselves. After regular contact from the real estate agent, and driven by the understanding that, due to your age, the property was becoming too difficult to maintain, a decision was made later to allow the real estate agent to facilitate this plan. The agreement was that the real estate agent would instigate and manage all groundwork for the initial planning of the subdivision (including the application) and you would pay the costs, so long as they are reasonable. That is, you would bear the costs of the planning which while not insignificant, were nevertheless immaterial in comparison to the assumed value of the land. Your tax agent in their email, said they were not able to find any formal agreements between you and the real estate agent. Instead your tax agent provided a copy of two emails from a project consultant which contained the service proposal for stage 1 of the subdivision detailing the scope and breakdown of specific work as follows: • Subdivision application for certain number of lots • Fees for services in preparing the application • Environmental surveys to support the application (e.g. cockatoo and possum surveys) • Flora survey • Bushfire management plan • Federal referral in conjunction with the subdivision application. The results of what had been agreed with the real estate agent (informal agreement) to facilitate the planned subdivision were as follows: January 20XX: The real estate agent retained a project manager on your behalf, to submit the subdivision application for Lot X. July 20XX: The subdivision approval was granted to create the first stage of subdivision from Lot X. This approval is valid until 20XX due to changes to planning legislation in response to COVID-19. September 20XX: Approval was granted for the second and third stages of subdivision from Lot X, given its remnant vegetation cover and habitat for threatened species. October 20XX: Subdivision approval was granted to create the second and third stages from Lot X comprising certain number of residential lots. This approval is valid until 20XX due to changes to planning legislation in response to COVID-19. Other items completed by the project manager during the 4-year period included: • Most feature surveys • Bushfire management plan • Environment investigation • EPBC Act approval. November 20XX: You confirmed that you received the development costings which enabled you and your child to estimate the value of the property and the profit that the developers could make. This is the time when you decided to sell the portion of the land (you could not make this decision until you had the costings). This decision was still primarily driven by your inability to maintain the property but was also driven by a desire to see your children enjoy the benefit of their inheritance. At this time you were still not willing to subdivide yourselves, as you had completed a subdivision in the past and you're aware of the challenges and you did not believe you had the capabilities to do it again. January 20XX: A valuation was received for the englobo land. This valuation came in much lower than you expected. You informally appointed your child as project manager of the subdivision; and you instructed your child to attend to the completion of the subdivision on your behalf. In an email to the ATO, your tax agent advised that your child does not have any experience in property subdivision. Your child has her own family business with the spouse and that your child hasn't given up the job to manage the planning of the subdivision. It's submitted your child devoted an average of X hours per week to managing the subdivision; and was not involved in the previous development of the First Subdivision. Your child appointed a project manager to complete the subdivision on your behalf. In an email to the ATO, your tax agent provided a copy of the initial service proposal prepared by the project manager addressed to you on the costings to apply and secure a freehold subdivision approval. Your tax agent confirmed that the service proposal was verbally accepted by you in a meeting back in 20XX. A further fee estimate was also verbally accepted by you in 20XX. Your tax agent confirmed no additional agreements have been found. February 20XX: The real estate agent had a meeting with you to discuss a possible joint venture development of the land with him and his colleagues. However, you did not pursue the joint venture. March 20XX: A civil engineer has been appointed. In the period of 8 months, all feature survey and hydrological data were gathered, enabling completion of the urban water management plan and submission to the City Council. May 20XX: The Partnership was registered for GST by your previous accountant with effect from 1 January 20XX (see GST registration facts below for more information about how the Partnership was registered for GST). August 20XX: The real estate agent who started the process was given the selling rights of the blocks. January 20XX: Final engineering design submissions to be provided to the City Council and State Servicing authorities. January - February 20XX: Tenders for the civil construction will be sought to determine final per block construction costs. January 20XX: Sale of Stage 1 Lots to commence. July to September 20XX: Stage 1 Lots are planned to be titled and transferred to purchasers. July to September 20XX: Stage 2 Lots are planned to be titled and transferred to purchasers. The total expenditure on the preliminary subdivision groundwork was determined. The list of entities engaged in relation to the subdivision including the activities they undertook for the subdivision and the remuneration they received for their services was provided to the ATO. Documentation relating to the engagement of those entities such as authority and/ or engagement letters and tax invoices for professional services were also provided to the ATO. Activities you or your representative undertake in relation to the subdivision It is submitted that your child as your representative undertakes the following activities: • Approval of quotes and expenditure: The project manager procures service proposals / quotes from proven consultants / contractors and provides recommendations of appointment to your child based on scope and price. Your child is then required to approve the recommendations and any quotes and/ or service proposals. • Payment of invoices: All invoices are received by the project manager who checks whether the work claimed in the invoice has been completed in accordance with the scope of works and that the invoice matches the figures given in the quotes / service proposals and / or budget. The invoice is then disputed by the project manager or conformed. If confirmed, the invoice amount is then added to the 'completed' costs column in the spreadsheet maintained, then a recommendation is made to your child to pay. • Bookkeeping: As above, the project manager maintains a spreadsheet of all 'budgeted' and 'completed' costs to ensure expenditure remains on track and within budget. Your child keeps record of all costs related to the subdivision for accounting / taxation purposes. Estimated market value of the land A valuation report issued by a professional valuer was provided to the ATO. The valuation determined a pre subdivided land value of around $XXX. This value refers only to the number of lots available for sale. There are remaining lots which contain your main residence and it is submitted there are no current plans to sell these remaining lots of land. Based on the valuation, the estimated gross sales price for the lots available for sale is around $XXXX. You provided details of what you will receive or expected to receive in relation to the proceeds from the sale of the subdivided lots. The justifiable estimated proceeds are determined based on certain calculations. It is submitted that the subdivision activities are self-funded. Budget estimates The budget estimates for the preliminary works and for stage 1 of the subdivision were provided to the ATO. The tax agent confirmed that no projected cash flow statements, projected financials, financial or economic modelling, or business plans have been created. The budget for stage 2/3 has not been created as stage 2/3 will only be considered once enough of stage 1 has been sold to fund stage 2/3. Details of how the subdivided lots will be sold and whose services, if any, will be engaged to sell the subdivided lots Stage 1A - xx lots are expected to be sold in 20XX. A real estate agent has been engaged to sell this stage. Stage 1B, 2A and 3A - xx lots are expected to be sold in 20XX. No current sales agreement in place yet. Stage 1C & 2B - xx lots are expected to be sold in 20XX. No current sales agreement in place yet. Stage 3B - X lots - There are no current plans to sell or subdivide Stage 3B. These contain your house and sheds. You plan to live on this land for the remainder of your lives. Expected completion of the subdivision and Registered owner/s It is submitted the subdivision activities are expected to be completed approximately in 20XX. You as partners of the Partnership are the registered owner/s of the land prior to the subdivision and following completion of the subdivision. Subdivision activities you had undertaken in the past and details of subdivided lots sold As mentioned above, you undertook the First Subdivision which occurred in 6 Stages from 20XX through 20XX. Specific details are as follows: • The first stage of First Subdivision created xx low-density residential (2,000 m2 - 4,000 m2) lots, one business lot (general / store café) and various reserves under the relevant Plan which was placed "in order for dealings" (i.e. when title may be applied for) on 18 February 20XX. • The second stage of First Subdivision created xx low-density residential lots and one reserve on relevant Deposited Plan, which was placed "in order for dealings" on 18 April 20XX. • Lot X (balance of what was Part Lot Y and subject to this Planned Subdivision) was created and placed "in order for dealings" on 18 April 20XX. • The third stage of First Subdivision created xx low-density residential lots and was placed "in order for dealings" on 9 October 20XX. • The fourth stage of First Subdivision created xx low-density residential lots and was placed "in order for dealings" on 25 March 20XX. • The fifth stage of First Subdivision created xx low-density residential lots and one reserve and was placed "in order for dealings" on 17 March 20XX. • The sixth stage of First Subdivision created xx low-density residential lots and one reserve and was placed "in order for dealings" on 18 April 20XX. Details of subdivision activities you plan to undertake in the future There is currently the possibility that Stage 3B (the 8 lots that make up your residence), will be subdivided in the future. This would only occur if you, through death or incapacity, were unable to live on the land. Time will also determine the likeliness that Stage 3B will be completed. The longer the time period between the completion of the current subdivision and when the land can be subdivided, the less likely that it will be subdivided. Other than Stage 3B, there are no plans to complete any other subdivisions. GST Registration Your child made several requests for guidance from your previous accountant about the taxable status of the subdivision, but your child received limited advice from them. 21 May 20XX: The partnership was registered for GST with effect from 1 January 20XX. At the time of the GST registration, you or your child were not aware of the requirements before an entity could be registered for GST. 19 October 20XX: The new tax agent was instructed to take over your affairs and provide advice on the subdivision. January 20XX: Your child, via email, requested guidance from the previous accountant as to why the Partnership was registered for GST. The previous accountant responded by email that your child instructed them to register for GST and that it was decided that the Partnership was now 'conducting an enterprise'. With respect, you submit that your child does not have the technical expertise to make this decision and that your child relied entirely on the accountant. The previous accountant also stated in the email that he anonymously detailed the subdivision project to a tax lawyer, the ATO and the NTAA and they all said the project will not be tax free. Your child contended the accountant never gave that advice and your child doubted if the accountant ever appropriately sorted the advice, considering the complexity of the facts. Your child advised you of the difficulty in accepting whether the accountant's email response was accurate as it appeared to be 'self-serving'. To date, you continue to maintain the GST registration, with the sole intent to confirm your option. To be clear, your intent is to not claim any additional GST and any GST refund that have been claimed will be refunded once your opinion is confirmed. To enable this, both lodgement deferrals and amendment deferrals will be requested as required. Documentation forming part of the facts The following documents and the planned or required activities outlined in those documents form part of the facts upon which this Private Binding Ruling was decided: • The unexecuted Revegetation Agreement for Lot X which details a requirement for revegetation works on the land, and a commitment to maintain the revegetation for the duration of the maintenance period; • Stormwater Drainage Strategy Concept Plans; • Opinion of Probable Cost of Left Turn Slip Lane which details the proposed works to create a slip lane from the highway to the existing road both of which are outside the borders of the property; • Water Modelling; • Acid Sulfate Soils Self-Assessment Form confirming that more than 100 cubic metres of excavation is planned by the development; • Letter to project manager from the relevant government authority noting that the site works do not involve disturbance of acid sulfate soils and as such, no acid sulfated soil management is required for the site; • Wildlife Management and Relocation Strategy Plan; • Geotechnical Report including details how the land is to be remediated and compacted to ensure it is capable of development; • Noise Management including details of the requirement to build a high bund for the entire length the development that abuts the Highway; and Map of Preliminary Noise Modelling Future Traffic with bund. • Lot X Plan of Subdivisions confirming the provision of a network of streets, footpaths, curbs, nature strip trees, street lighting, electricity; and multiple reserves for recreation and drainage, pedestrian access way and fire service route and landscape buffer; • Stage 1A - Civil Specification; • Stage 1A - Underground Power Distribution Plan - In addition to detailing the electrical power supply, details the location of the streetlight poles; • Proposed Subdivision Lot X on the relevant Development Plan dated 2 June 20XX; • Stage 1A Clearing Plan - detailing vegetation which will be cleared; • Stage 1A Common Service Details; • Stage 1A Earthworks Plan - details extensive earthworks to be undertaken; • Stage 1A Common Fencing Plan; Common Fencing Details Sheet 1; • Stage 1A Common Fencing Details Sheet 2 - includes details of the construction of missionary brick wall on top of Bund; • Stage 1A - Sewer Reticulation Plan; • Stage 1A - Roads Plan; • Stage 1A - Longitudinal Sections; • Stage 1A - Intersection Details; • Stage 1A - Road Details Sheet 1; • Footpath Plan; and Footpath Details; • Stage 1A - Line marking and Signage Plan; • Stage 1A Drainage Plan; • Stage 1A Drainage Details; • Stage 1A Drainage Details Sheet 2; • Stage 1A Subsoil Drainage Plan; • Stage 1A Water Reticulation Plan; • Stage 1A Underground Power Distribution Plan (2 Drawings); • Stage 1A - Residential - NBN Legend - Lots Enable#; • Stage 1A - Residential Lots - NBN Pit and Pipe Plan - Enable#; • Stage 1A - Civil Services - 209 Pages; • Appendix 2 Proforma Payment Claim Form Quality Assurance Forms; • Appendix 3 Dewatering Management Plan; • Appendix 4 Geotechnical Report; • Development Guide Plan for City Airport providing framework for future detailed planning at subdivision and development stage. • Valuation Report including appendices to the Report; • Agreement with relevant Water Authority and the Developers/ Owners signed on 22 March 20XX by the Project Manager as Agent for the Developers for the design and construction of water reticulation to service the proposed subdivision; • Letter from relevant Power Authority dated 4 May 20XX confirming completion and compliance of Underground Distribution Scheme for the subdivision including a quote for Subdivision Energisation; and • Notice of Authorisation to Accept Costs dated 5 June 20XX and to relevant Power Authority authorising the commissioning of contractor to carry out the Underground Power Design for Stage 1A of the subdivision.

Relevant legislative provisions: Income Tax Assessment Act 1997 Part 3-1 | section 6-5 | section 15-15 | section 70-10 | section 70-30 | section 70-35 | section 70-40 | section 70-45 | section 70-105 | section 104-220 | section 108-70 | section 108-80 | section 112-25 | section 118-25 | section 128-10 | section 128-15 | section 128-20

Reasons for decision: Summary: Based on the facts, it is the Commissioner's position that your activities constitute the carrying on the business of land development, subdivision and sale. Profits from the carrying on the business of land development, subdivision and the sale of subdivided land as trading stock are assessable to you as ordinary income under section 6-5. Section 15-15 is about profit-making undertaking or plan. It does not apply to profits that are assessable as ordinary income under section 6-5 - see paragraph 15-15(2)(a). | Detailed Reasoning - Application of law: Legislative references are to the Income Tax Assessment Act 1997 unless otherwise specified. Broadly profits from land development, subdivision and sale of subdivided land can be treated for taxation purposes in the following three ways: • As ordinary income under section 6-5 (revenue account) resulting from the carrying on a business of land development and the sale of subdivided land as trading stock; • As ordinary income under section 6-5 (revenue account) resulting from isolated business or commercial transaction entered into by a non-business taxpayer, or outside the ordinary course of business of a taxpayer carrying on a business, which is the commercial exploitation of an asset acquired for a profit making purpose; • As statutory income under the capital gains tax (CGT) legislation. | Detailed Reasoning - Change of intention: While holding an asset for a long period of time may seem to indicate that it is a long term capital investment asset, the intention of the taxpayer at the time of acquiring the asset and throughout the ownership period that the taxpayer owns that asset is an important factor to consider. Federal Commissioner of Taxation v. Myer Emporium Ltd (1987) 163 CLR 199; 87 ATC 4363; (1987) 18 ATR 693) (Myer case) is one of the leading cases which shows that the intention at the time of acquiring the asset is an important consideration in determining whether the proceeds received on disposal of the asset are on a capital or revenue account. Based on the Myer case, the relevant intention or purpose of the taxpayer is not a subjective test. Rather, it is the intention or purpose as discerned from an objective consideration of the facts and circumstances of the case. In circumstances where there has been a change of intention in respect of a property from holding the asset as a long term capital asset, to one of selling the asset for a profit the question which arises is whether the sale was a 'mere realisation' of capital asset. Where the sale of property is held to be a 'mere realisation' the sale is on capital account to which the CGT rules in Part 3-1 will generally apply. These proceeds are not ordinary income. A sale that is more than a 'mere realisation' will be on revenue account and proceeds will generally be assessable as either income from the carrying on of a business or income from a profit-making undertaking or scheme. The doctrine of 'mere realisation' was first developed in the Full High Court case of Scottish Australian Mining Co Ltd v. Federal Commissioner of Taxation (1950) 81 CLR 188 (Scottish Australian Mining) and has been relied upon by numerous cases since. The Full High Court in Scottish Australian Mining found that based on the facts of that case, the subdivision of the land was considered no more than a mere realisation of a capital asset, and its subdivision was merely an enterprising way to realise an asset to its best advantage. For many years it was felt that the doctrine of 'mere realisation' was applied so broadly that it was thought that only in exceptional circumstances would an isolated transaction fall within the ordinary concepts of income. However, this all changed in 1982 when the landmark Full High Court case of FC of T v. Whitfords Beach Pty Ltd (1982) 150 CLR 355; 82 ATC 4031 (Whitfords Beach) was decided. In this case, Justice Mason stated that: "37. However, apart altogether from this factor, the facts previously mentioned show that there was involved more than mere realization of an asset. Deane J. was right in pointing to the circumstance that the asset was divided and improved in the course of a business of dividing and improving the asset. In this respect I do not agree with the proposition which appears to be founded on remarks in some of the judgments that sale of land which has been subdivided is necessarily no more than the realization of an asset merely because it is an enterprising way of realizing the asset to the best advantage. That may be so in the case where an area of land is merely divided into several allotments. But it is not so in a case such as the present where the planned subdivision takes place on a massive scale, involving the laying out and construction of roads, the provision of parklands, services and other improvements. All this amounts to development and improvement of the land to such a marked degree that it is impossible to say that it is mere realization of an asset. We need to bear in mind that the subdivision of broad acres into marketable residential allotments involves much more in the way of planning, development and improvement than was formerly the case." (at page 385) Therefore, the decision in Whitfords Beach has narrowed the scope of the 'mere realisation' doctrine developed by Scottish Australian Mining, which so many of the preceding cases relied upon. The case of Whitfords Beach highlights that while 'mere realisation' may still be possible where blocks are merely subdivided to several blocks with minimal activity, where the size and scale of the activity reaches such a level (such as constructing roads, the provision of parklands, services and other activities), this all amounts to a development and improvement of the land to such a marked degree that it is no longer possible to say it is a mere realisation of an asset. The decision in Whitfords Beach also highlights that the requirements of modern day residential subdivision, which involve much more development and improvement of land than was formerly the case, makes it far more difficult for contemporary residential subdivisions to satisfy the 'mere realisation' doctrine. In your Private Binding Ruling application you make reference to the cases of FC of T McClelland [1970] HCA 39; 120 CLR 487 (McClelland), and Scottish Australian Mining in order to support your proposition that the intended sale is a 'mere realisation'. In addition to the general comments made by Justice Mason in Whitfords Beach at page 385 (as presented above), the Justices in that case also made the following specific statements about the cases of McClelland and Scottish Australia Mining. In respect to McClelland's case, Justice Mason made the following comments: "17. The majority of the Judicial Committee in McClelland v. F.C. of T. 70 ATC 4115; (1970) 120 C.L.R. 487, held that the second limb of sec. 26(a) necessarily contemplated that the profit-making undertaking or scheme of which it speaks will be an ''operation of business'' or a ''business deal''. The minority were not prepared to subscribe to such a limitation, so it seems, though they considered that the object of the provision was to overcome Jones v. Leeming . In McClelland the majority held that the profit made by a residuary beneficiary in an estate who, holding an interest in land through the estate, got in the outstanding interest and sold the greater part of the land to obtain finance was not taxable because her dominant purpose was to retain as much land as possible. Consequently, the transaction was not a ''business deal'' or ''operation of business''. I have some difficulty with this conclusion. I should have thought that by buying in an outstanding interest with a view to selling the greater part of the land to advantage the taxpayer entered into a ''business deal'' or an ''operation of business''. It is not easy to describe what occurred as the mere realization of an asset". (at page 378) "18. Unfortunately there is an element of ambiguity in the expressions ''business deal'' and ''operation of business'' as there is in the adjectives ''business'', ''commercial'' and ''trading'' which have about them a chameleon-like hue, readily adapting themselves to their surroundings, different though they may be. In some contexts ''business deal'' and ''operation of business'' may signify a transaction entered into by a person in the course of carrying on a business; in other contexts they denote a transaction which is business or commercial in character. Although the majority in McClelland thought that sec. 26(a) was mainly, if not wholly declaratory, of the existing concept of income, they did not by their references to ''business deal'' and ''operation of business'', necessarily mean a transaction entered into in the course of carrying on a business." (at page 379) "19. It is of importance to note their Lordships' statement (at pp. 494-495) that not only are wagers and lottery tickets excluded from profit-making undertakings or schemes, but ''also... the purchase of investments bought by a private investor as a hedge against inflation and sold - perhaps long afterwards - at more than the purchase price'', and the further statement (at p. 495) that ''The undertaking or scheme, if it is to fall within s. 26(a), must be a scheme producing assessable income, not a capital gain.'' There are two separate strands of thought embedded in these observations: (1) that the transaction must have about it some business or commercial flavour - the purchase of an investment by a private investor is not enough; and (2) the profit in view must be an income, not a capital, gain, according to ordinary concepts." (at page 379) "20. Not all that was said in McClelland can now be accepted. The majority judgment fails to differentiate between the United Kingdom and the Australian systems of arriving at taxable incomes and employs expressions derived from the United Kingdom Income Tax legislation which have no place in our legislation. And there is the possibility that it insufficiently acknowledges that the operation of the second limb of sec. 26(a) may extend to some gains of a capital nature according to general revenue law." (at page 379) While in respect of the same case Justice Murphy stated: "3. The land development scheme falls easily within the conception of a profit-making undertaking or scheme. The development involved not only subdivision, but planning and building of roads and other services, as well as other activities involved in modern land development schemes, and it was undertaken for profit-making. This is not a borderline case. It is altogether different from, for example, simple realisation of a large allotment by subdivision into several smaller blocks. The profit therefore comes within sec. 26(a) as profit from a profit-making undertaking or scheme. The taxpayer relied upon the judgment of the Privy Council in McClelland v. F.C. of T. 70 ATC 4115; (1970) 120 C.L.R. 487 to support the contention that the taxpayer's land development scheme did not fall within sec. 26(a). In McClelland's case the majority of the Privy Council misunderstood sec. 26(a) and largely nullified it. Contrary to their holding and consistently with the minority in the Privy Council and the majority view of the High Court in that case, sec. 26(a) has a wide application to capital gains." (at page 386) While in respect of Scottish Australian Mining Justice Mason made the following specific statement about that case. "38. Like Wilson J., I have difficulty with the decision of Williams J. in Scottish Australian Mining Co. Ltd. v. Federal Commissioner of Taxation (1950) 81 CLR 188. The taxpayer there, after giving up its mining business in 1924, devoted itself to the subdivision of its land. This entailed the construction of roads, the building of a railway station, the granting of land to public institutions such as schools and churches and the setting aside of land for parks. I should have been inclined to the view that the taxpayer had ceased to carry out its mining business and that it had commenced to carry on the business of land development." (at page 385) Therefore, as highlighted above, care needs to be taken in seeking to rely on the cases of McClelland and Scottish Australia Mining, without having regard to the substantial concerns the Full High Court raised in Whitfords Beach about those two particular cases. | Detailed Reasoning - Taxation Ruling TR 97/11: Taxation Ruling TR 97/11 (the Ruling) provides the general indicators of a 'business' (in dot points below) established by the courts. The Ruling deals with carrying on a primary production business, however, the principles discussed in the Ruling apply to any set of operations. The general indicators of a business are also covered in TR 2003/4 (see paragraphs 15-23 and further at paragraphs 62-92). While no single indicator is determinative and the determination is based on the 'large or general impression gained' ( Martin v. FC of T (1953 ) 90 CLR 470 at 474; 5 AITR 548 at 551), the prospect of profit is highly significant when assessing if an activity has the character of a business ( Stone v. FC of T [2002] FCA 1492 at [68]). § Significant commercial purpose of character This indicator is particularly linked to the size and scale of the activity, the repetition and regularity of activity and the profit indicators. A business is generally carried out on such a scale and in such a way as to show it is being operated on a commercial basis and in a commercially viable manner and, with an intention of producing a significant commercial gain. | Detailed Reasoning - Applying to your circumstances: In this case, you (or your child acting on your behalf) engaged a skilled entity as project manager, to deal with the detailed requirements for a land subdivision. All transactions done by the project manager in relation to the land development were on your behalf as the Developers (copy of agreement/s provided to the ATO by your tax agent). You have previously done a land development activity in the First Subdivision. It is submitted the subdivision occurred in 6 Stages spanning over a certain number of years. The lots ranged generally from 2,000 m2 to 4,000 m2 with several being larger. For the planned subdivision of Lot X, you hold two conditional subdivision approvals based on the Valuation Report provided to the ATO. The first one dated 21 July 20XX is valid for a 4-year period for Stage 1 of the development; and the second one dated 29 October 20XX is valid for a 4-year period for Stages 2 & 3 of the development. Based on the Valuation Report, the estimated value of the land pre subdivision is around $XXX. The estimated gross sales price of the lots available for sale is around $XXXX. The detailed engineers' drawings provided to the ATO show the scope and scale of the site works to be completed on the land. The civil contract contains a tender for the price of around $X.XX million to complete the site works and all associated works including: • Demolition • Earthworks • Land clearing • Retaining walls • Fencing • Sewer reticulation • Stormwater drainage • Roadworks • Footpaths • Nature strips with tree plantings • Street lighting • Communications • Underground power • Water reticulation • 3-metre high bund for the length of the development abutting the Highway • Creation of multiple reserves with the necessary revegetation works/maintenance. Notably with the significant amount of land set aside for the reserves, you will not be selling/realising this land for a monetary amount, instead this land will be gifted to the council for zero consideration. This act is consistent with a commercial/ business type deal which is seeking to maximise profits by developing a higher density subdivision which necessitates the gifting of reserves/ parkland, as opposed to someone merely seeking to realise/sell land by only subdividing the land into several large sized lots where the gifting of such land would not be required. In addition to the works on the subject property, the proposed development will see you developing a slip road from the Highway to another road. These are works outside of your property. Undertaking works to develop infrastructure for the benefit of properties other than your own, just to ensure the development can proceed, is consistent with activities done in a commercial setting (i.e. a business deal) as opposed to someone merely seeking to sell their land. The above factors point heavily to the development being an undertaking in a commercial like manner, which provides support to the finding that a business of land development has commenced. You engaged skilled entities in relation to the subdivision and paid for professional services. These entities include the following: • town planner and project manager • civil, electrical and telecommunications engineers • environmental scientists and consultants • geotechnical and structural engineers • licensed and engineering surveyors • archaeological and anthropological consultants on Aboriginal heritage • traffic noise consultants • hydrologists • bushfire practitioners and planners • licensed valuers. The commercial nature of the activity is similar to other commercial developments as you, undertaking the land subdivision are required to comply with all the legal requirements inherent to all land subdivisions. § More than a mere intention to engage in business A mere intention to carry on a business is not enough. There must be activity. Brennan J in Inglis v. FC of T 80 ATC 4001 at 4004-4005; (1979) 10 ATR 493 at 496-497 said that: 'The carrying on of a business is not a matter merely of intention. It is a matter of activity.... At the end of the day, the extent of activity determines whether the business is being carried on. That is a question of fact and degree.' Relevantly, this indicator is particularly related to whether the activity is preparatory or preliminary to the ultimate activity; and whether there is an intention to make a profit. | Detailed Reasoning - Applying to taxpayers' circumstances: The extent and degree of preparation for the planned subdivision could be gleaned from the information provided, for example: • the engagement of a skilled project manager • the transactions and agreements entered into by the project manager on your behalf as your representative with the relevant entities relating to underground power design, telephone and water requirements for the subdivision; • the tender on the site works that will be completed on the land with a significant tender price; • the details of the Noise Management Plan, Dewatering Management Plan and Geotechnical Investigation and Report; • the total number of lots for the planned subdivision of Lot X; • the valuation report requested for pre subdivided land and the estimated gross sales price of subdivided lots provide a reasonable indication that there is more than a mere intention to engage in the land subdivision activity. § Purpose of profit and a prospect of profit The Ruling explains that the prospect of profit is considered a very important indicator and that you should be able to show how the activity can make a profit. The Ruling further explains that you need to show that the other indicators of business are present with sufficient strength to outweigh any objective view that the activity may be inherently unprofitable. | Detailed Reasoning - Application to your circumstances: You were approached by a real estate agent who proposed a plan to sell Lot X as an englobo piece of land at a price which would be increased if you carried out the initial groundwork to allow subdivision of the property. You received a valuation for the englobo land of around $XXX which was much lower than you expected. You informally appointed your child as project manager of the subdivision and instructed her to attend to the completion of the subdivision on your behalf. At the same time, your child appointed a professional project manager to complete the subdivision on your behalf. Given that valuation for pre subdivided land to the equivalent of a number of lots available for sale is only around $XXX and the estimated gross sales price of subdivided land by lots is around $XXXX, it is fair to conclude that there is a prospect of profit in the land development and subdivision activity for you. That is, you undertake the activity for the purpose of profit and a prospect of profit including the ability to keep a number of lots for yourselves and for your family. § Repetition and regularity of activity You conducted a land development activity before in the First Subdivision which was large scale occurring in 6 Stages spanning over a certain number of years. The lots created were low density residential lots including a business lot for the general store and café. The lots ranged generally from 2,000 m2 - 4,000 m2 with several being larger. The proposed development of Lot X is of a large scale, being constructed over 6 stages (Stages 1A, 1B, 1C, 2A, 2B and 3A) to create specified number of lots to be sold. Even if we were to consider this development in isolation, the construction of significant number of residential lots over 6 stages then propose to sell each lot independently, is significant repetition by itself. This supports a finding that a business of land development has commenced. The Commissioner notes there is also a Stage 3B, however you do not propose to sell or proceed with the 7th Stage at this point of time. § Activity is of the same kind and carried on in a similar manner to that of the ordinary trade It is submitted that you are retired farmers. However, you appointed your child as project manager of the subdivision and instructed her to attend to the completion of the subdivision on your behalf. Your child does not have any experience in property subdivision as your child wasn't involved in the First Subdivision. However, your child appointed a skilled project manager to complete the subdivision. The project manager procures service proposals and quotes from proven consultants and contractors; makes recommendations of appointment to your child based on scope and price. Your child approves the recommendations of service proposals and quotes on your behalf (as the parents). Despite your child doesn't have any experience in managing a subdivision project, your child able to do so on your behalf by engaging a skilled project manager to progress the subdivision. The proposed activities outlined in the planning documentation and PBR application is similar in manner to the ordinary trade of participants who are in the business of subdividing broad acres into smaller residential lots and then selling them individually to customers. This would lend support to a view that a business of property development has commenced. § Activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit The Ruling explains (at paragraph 68) that in Newton v. Pyke case, the court suggested that a business should be conducted systematically. A business is characteristically carried on in a systematic and organised manner rather than on an ad hoc basis. The Ruling also states (at paragraph 69) that in JR Walker case, Ryan J was satisfied, that the taxpayer had organised his activities in a business-like way through the keeping of books of account. In the present case, you paid the services of skilled entities to carry out the subdivision project in order to comply with the legal requirements from Local and State Governments. The development is expected to be finished in about 6-year period and will be constructed across six stages (Stages 1A, 1B, 1C, 2A, 2B, and 3A) in a well-planned and organised manner, by professional subcontractors on your behalf, with the aim of you being able to generate a sizable profit from these activities. The fact that you have entered into such a long drawn out and planned project would lend support to the view that you are undertaking these activities in a business-like manner directed for the purpose of making a profit, as opposed to someone merely seeking to realize the sale of land. § Size, scale and permanency of activity The Ruling explains (at paragraph 82) that the smaller the scale of the activity the more important the other indicators become when deciding whether a taxpayer is carrying on a business. In the present case, the size and scale of the activities in this development has gone beyond just subdividing the land into several lots such that it can be held to be nothing more than merely realising land in an enterprising way. The planned subdivision is planned to take place on a massive scale, involving the laying out and construction of roads, the provision of parkland/reserves, services and other improvements, all of which will take several years to complete, over multiple stages. All this amounts to the development and improvement of the land to such a marked degree that it is impossible to say that it is a mere realization of an asset. This fact would lend support to the view that you have commenced a business of land development. § Activity is better described as a hobby, a form of recreation or a sporting activity In this case, the activity is not considered a hobby, a form of recreation or a sporting activity, so this indicator is not relevant to your circumstances. | Detailed Reasoning - Conclusion: Based on the facts, it is the Commissioner's position that your activities constitute the carrying on the business of land development, subdivision and sale. Profits from the carrying on the business of land development, subdivision and sale of subdivided land as trading stock are assessable to you as ordinary income under section 6-5. Section 15-15 is about profit-making undertaking or plan; it does not apply to profits that are assessable as ordinary income under section 6-5 - see paragraph 15-15(2)(a). | Summary: You changed intention when you allowed the real estate agent to manage the initial planning and application for the subdivision. This resulted to the grant of conditional approvals for stages 1, 2 and 3 of subdivision from Lot X comprising a specified number of residential lots. Lot X except for the 'Infrastructure Land' become your trading stock as you are determined to have commenced carrying on the business of property development, subdivision and sale and you hold the land for the purposes of that business. Based on the facts provided, it is the Commissioner's position that Lot X become your trading stock in the 20XX income year. The subdivision of that land comprising a specified number of residential lots being available for sale also become your trading stock as part of the Planned Subdivision in the 20XX income year. | Detailed Reasoning - Question 4 - Change of intention by owners / partners of the Partnership: For the Planned Subdivision of Lot X, you as owners / partners of the Partnership changed intention when you decided to allow the real estate agent to instigate and manage all groundwork for the initial planning of the subdivision including the application for the subdivision. The real estate agent retained a project manager on your behalf, to submit the subdivision application for Lot X. This resulted to the grant of the subdivision approvals subject to certain conditions: • to create Stage 1 of subdivision from Lot X, comprising XXX residential lots and one balance lot in July 20XX; and • to create Stages 2 and 3 of subdivision from Lot X comprising XX residential lots in October 20XX. There are XXX residential lots in total for the Planned Subdivision of Lot X. It is submitted that a certain number of lots will be up for sale and this is supported by the Valuation Report where it estimates the value of the subdivided land for the number of lots to be sold. The remaining X lots contain your main residence and there are no current plans to sell these lots of land. | Detailed Reasoning - Questions 5, 6 and 7 - Part of Lot 501 become trading stock and when; St Hubert's Island decision: Subsection 70-10(1) states: Trading stock includes: a) anything produced, manufactured or acquired that is held for purposes of manufacture, sale or exchange in the ordinary course of a business; and b) live stock. In considering whether property is trading stock, Taxation Determination TD 92/124 Income Tax: property development: in what circumstances is land treated as '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. 3. It is not necessary that the acquisition of land be repetitive. A single acquisition of land for the purpose of development, subdivision and sale by a business commenced for that purpose would lead to the land being treated as trading stock. Based on paragraph 3 of TD 92/124, 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 - see R & D Holdings Pty Ltd v DCT [2006] FCA 981 (R & D Holdings) and FCT v St Hubert's Island Pty Ltd (In Liq) [1978] HCA 10; (1978) 138 CLR 210 (St Hubert's Island). In R & D Holdings, the Court held that the Property was held for the purpose of strata subdivision and sale of the subdivided lots. As such it was trading stock as at end of the relevant income year. In St Hubert's Island, by majority the Full High Court allowed the Commissioner's appeal and held that the land was trading stock. Land that is not initially acquired for subdivision, development and sale, but is later 'held' for that purpose will also be trading stock. 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 & 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 that broadacre land (that is not yet subdivided) ventured into a business of subdivision, development and sale can be trading stock 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). ATO ID 2004/532 explains that when an asset is ventured into the business of development, subdivision and sale is a matter of fact. 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. Where broadacre land is to be subdivided as part of a property development the entire broadacre may not be trading stock. Certain parts of the broadacre land were 'Infrastructure Land' to be dedicated to the Crown or a public authority for the purpose of roads, parks, sewerage, etc. That dedication would be reflected in registration of a plan of subdivision. It's 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 broadacre. The Tribunal held that whilst the broadacre as originally acquired was an article of trading stock, the 'Infrastructure Land' could never be part of the taxpayer's trading stock (AAT Case 12, 361; 37 ATR 1192; 97 ATC 485). However, infrastructure and external costs were allocated to the value of trading stock - see Federal Commissioner of Taxation v. Kurts Development Ltd (1998) 86 FCR 337; (1998) 39 ATR 493; 98 ATC 4877 and ATO ID Interpretative Decision ATO ID 2003/150 . | Detailed Reasoning - Application to your circumstances: In your case, you are determined to have commenced carrying on the business of property development, subdivision and sale. Land you hold for the purposes of development, subdivision and sale in the business is trading stock. Any part of the land dedicated to the Crown or a public authority for the purposes of roads, parks, sewerage, etc will not be trading stock. However, costs in developing the 'Infrastructure Land' will be allocated to the value of trading stock. You confirmed that in November 20XX, you received the development costings which enabled you and your child, to roughly estimate the value of the property and the profit that could made. This is the time when you decided to sell the portion of the land (you could not make this decision until you had the costings). It is noted that Lot X was created on Plan XYZ which was placed 'in order for dealings' on 18 April 20XX. On 15 January 20XX, you received the valuation for the englobo land which was much lower than you expected. On 21 January 20XX, you informally appointed your child as project manager for the subdivision and you instructed your child to attend to the completion of the subdivision on your behalf. On that same date, your child appointed a skilled project manager to complete the subdivision on your behalf. In March 20XX, a civil engineer had been appointed and by November 20XX, the urban water management plan was completed and submitted to the City Council. On 25 May 20XX, your Partnership was registered for GST with effect from 1 January 20XX. Therefore, based on the facts provided, it is the Commissioner's position that Lot X become your trading stock in the 20XX income year. The subdivision of that land comprising XXX residential lots in total with the XXX lots being available for sale also become your trading stock as part of the Planned Subdivision in the 20XX income year. | Summary: You must make the election under subsection 70-30(2) as soon as is reasonable after realising that you have started to hold the land as trading stock. However, the Commissioner will allow you additional time to make that election later. | Detailed Reasoning - Detailed reasoning: Subsection 70-30(1) states: If you start holding as trading stock an item you already own, but do not hold as trading stock, you are treated as if: a) just before it became trading stock, you had sold the item to someone else (at arm's length) for whichever of these amounts you elect: • its cost - worked out under subsection (3) or (4); • its market value just before it became trading stock; and b) you had immediately bought it back for the same amount. Subsection 70-30(2) states: You must make the election by the time you lodge your income tax return for the income year in which you start holding the item as trading stock. (If you do not make the election by then because you do not realise until later that you started to hold the item as trading stock, you must make the election as soon as is reasonable after realising that.) However, the Commissioner can allow you to make it later (in either case). For completeness, subsection 70-30(3) provides the item's cost is what would have been its cost for the purposes of section 70-45 (about valuing trading stock at the end of the income year) if it had been your trading stock ever since you last acquired it. However, if you last acquired the item for no consideration, its cost is worked out using the table in subsection 70-30(4). If you elect to be treated as having sold the asset item for its cost, any resulting capital gain or loss is disregarded under subsection 118-25(2). If you elect to be treated as having sold the asset item for its market value, any resulting capital gain or loss is also disregarded under subsection 104-220(4) because the asset is a pre-CGT land based on the facts provided. | Summary: An increase in your trading stock's value over the year is assessable income to you, while a decrease is an allowable deduction to you. You can choose a different method of valuation each year for any part of your trading stock using any of the three bases of valuation prescribed by law. | Detailed Reasoning - Detailed reasoning: Section 70-35 provides that you include the value of your trading stock in working out your assessable income and deductions. Subsection 70-35(1) states: If you carry on a business, you compare: a) the value of all your trading stock on hand at the start of the income year; and b) the value of all your trading stock on hand at the end of the income year. You may not need to do the stocktaking if you are a small business entity for the purposes of Division 328. Your assessable income includes any excess of the value at the end of the income year over the value at the start of the income year. On the other hand, you can deduct any excess of the value at the start of the income year over the value at the end of the income year - subsections 70-35(2) and (3). The closing value for an item of trading stock at the end of one income year automatically becomes its opening value at the beginning of the next income year - section 70-40. Section 70-45 provides that trading stock must be valued at the end of the income year at either its: cost; market selling value; or replacement value. You can choose a different method each year for different items of stock. The choices given to a taxpayer in valuing trading stock on hand are explained by Fullagar J in Australasian Jam Co Pty Ltd v FC of T 10 ATD 217; (1953) 88 CLR 23 (at para 3): The section in terms allows to the taxpayer considerable freedom of choice. He may adopt one method of valuation for one part of his stock, and another method for another part. And he is not bound to adhere from year to year to any method of valuation for any part of his stock: he may change the basis as to the whole or any part of his stock from year to year at will. On the other hand, the section is imperative in that it requires him to adopt for each article of his stock one or other of the three prescribed bases of valuation. He is not at liberty to adopt some other basis of his own. And... the value at which his stock is brought into account at the beginning of a year shall be the value at which it was brought into account at the close of the preceding year: in other words, the opening figure of any year must be identical with the closing figure of the preceding year. | Detailed Reasoning - Application to your circumstances: If the value of your closing stock is more than that of your opening stock, you must include the difference as part of your assessable income. If the value of your closing stock is less than that of your opening stock, you can reduce your assessable income by the difference. An increase in your trading stock's value over the year is assessable income, while a decrease is an allowable deduction. You can choose a different method of valuation each year for any part of your trading stock using any of the three bases of valuation prescribed by law. For more information on the trading stock rules, refer to ATO Document QC 51614. | Summary: Whether the terms of your Will allow your assets (e.g. subdivided lots) to devolve to your LPR or to be gifted to your heirs as beneficiaries of your Estate, the cost base and reduced cost base rules in subsection 128-15(4) will apply. Where the 'gifting' of the subdivided lots is within the meaning of passing in section 128-20, any capital gain or loss made by the LPR is disregarded under subsection 128-15(3). Subsequent disposal of the subdivided lots by the beneficiary will be subject to CGT. Where the unsold subdivided lots devolve to your LPR under the Will, the rules in section 70-105 will apply if the LPR will carry on the business after your death and the subdivided lots will continue to be held as trading stock. | Detailed Reasoning - Detailed reasoning: Subsection 70-105(1) provides that when you die, your assessable income up to the time of your death includes the market value at that time of the trading stock of your business (if any). The entity on which the trading stock devolves is treated as having bought it for its market value at that time - subsection 70-105(2). However, your legal personal representative (LPR) can elect to have included in your assessable income (instead of the market value) the amount that would have been the value of the trading stock at the end of an income year ending on the day of your death if the business is carried on after your death and the trading stock continues to be held as such - subsections 70-105(3) and (5). If an election is made, the entity on which the trading stock devolves is taken to have bought the stock for that same value - subsection 70-105(6). However, in the case of standing or growing crops, crop-stools and trees planted and tended for sale, the LPR may elect a nil value - subsection 70-105(4). An election can only be made on or before the day when your LPR lodges your income tax return for the period up to your death. However, the Commissioner can allow it to be made later - subsection 70-105(7). When you die, a capital gain or capital loss from a CGT event that results for a CGT asset you owned just before dying is disregarded - section 128-10. Depending on the terms of your Will, the assets you owned just before dying may devolve to your LPR or pass to a beneficiary in your estate - subsection 128-15(1). The LPR or beneficiary is taken to have acquired the asset on the day you died - subsection 128-15(2). The cost base and reduced cost base rules for both the LPR and the beneficiary are set out in the table in subsection 128-15(4). Note item 2 in the table where it refers to assets that are trading stock of the deceased just before their death, the first element of the cost base and reduced cost base of those assets will be the amount worked out under section 70-105. Note also item 1 in the table where it refers to post CGT assets owned by the deceased just before their death, the first element of the cost base and reduced cost base of those assets will be the cost base and reduced cost base of the assets on the day the deceased died. If the asset passes to a beneficiary for the purposes of section 128-20, any capital gain or capital loss the LPR makes is disregarded - subsection 128-15(3). Where a post-CGT improvement to a pre-CGT asset was made and the improved asset (subdivided lots) is inherited by a beneficiary following your death, the improvement and the asset are treated as one asset when acquired by the beneficiary - Taxation Determination TD 96/18 . For more information on cost base of inherited assets, refer to ATO Document QC 66053. | Detailed Reasoning - Application to your circumstances: Where the terms of your Will allow the unsold subdivided lots to be gifted to your heirs (beneficiaries), the cost base rules in subsection 128-15(4) will apply. Based on the facts provided, the land is a pre-CGT asset so the beneficiaries of your deceased estate (Estate) will get the market value cost base of the lots at the time of your death. The post-CGT improvements to the pre-CGT land will not be treated as separate CGT assets under section 108-70(2) because that provision does not apply to a CGT event that happens because of a person's death as explained in TD 96/18. Where the 'gifting of the asset' is within the meaning of passing in section 128-20, any capital gain or loss made by the LPR is disregarded under subsection 128-15(3). Subsequent disposal of the asset by the beneficiary will be subject to CGT. For the purpose of calculating the capital gain or capital loss on subsequent disposal, the beneficiary is deemed to have acquired the asset, including the improvements, at the date of your death for market value at that date (subsections 128-15(2) and 128-15(4)). Where the terms of your Will allow the unsold subdivided lost to devolve to your LPR, the cost base rules in subsection 128-15(4) will also apply to the LPR, that is the LPR will get the market value cost base; and this is consistent with the rules in subsection 70-105(2). The rules in section 70-105 will apply if under the Will, the LPR will carry on the business after your death and the subdivided lots will continue to be held as trading stock. | Summary: Yes. The interaction of the CGT rules and the trading stock rules will apply because the subdivided lots are trading stock of your business. The capital improvements made to the pre-CGT land in connection with its subdivision and development are considered related to each other and so the total cost of the improvements is to be allocated over to all the subdivided lots. The capital improvements will only be treated as separate CGT assets where the threshold conditions in section 108-70 are satisfied. | Detailed Reasoning - Detailed reasoning: The subdivision of land into subdivided lots is not a CGT event - subsection 112-25(2). If the original land was a pre-CGT asset, then each new subdivided lot retains its pre-CGT status - CGT Determination Number 7 TD 7 . Section 108-80 sets out the factors that need to be considered in deciding whether the capital improvements (e.g. the subdivision and land development costs) to the pre-CGT land (the new subdivided lots) are related to each other. The capital improvements made to pre-CGT land in connection with its subdivision and development, and which are related to each other in accordance with section 108-80 may be treated as separate CGT assets under section 108-70 if the total of their cost bases when a CGT event happens in relation to the asset, is: • more than the improvement threshold for the relevant income year, and • more than 5% of the capital proceeds from the event. Intangible capital improvements can be separate CGT assets from the pre-CGT asset to which those improvements are made if the relevant threshold conditions are satisfied - Taxation Determination TD 2017/1 . | Detailed Reasoning - Application to your circumstances: In your case, the capital improvements are undertaken as part of the overall land development and subdivision project to ensure that the developed land would comply with the legal requirements and are necessary for the completion of the project. As such the subdivision and land development costs are considered related to each other and the total cost of the capital improvements is to be allocated over to all the subdivided lots. Where the capital improvement expenditure applicable to each subdivided lot is less than the improvement threshold for the relevant income year and 5% of the capital proceeds from the CGT event then, for the purposes of any subsequent disposal of the subdivided lots, the capital improvements will not be taken as separate CGT assets. The interaction of the CGT rules and the trading stock rules will apply because the subdivided lots are trading stock of your business.

Whether you are carrying on a business of land development, subdivision and sale? | This ruling applies for the following periods: