Private ruling: Subdivision and sale of farming land.
Date of advice: 1 March 2017
Published: August 2017
Ruling period: 1 July 2016 - 30 June 2020
Date scheme commenced: 1 July 2016

Ruling: Q1: Is the subject land a pre capital gains tax (CGT) asset? | A1: Yes. | Q2: Will the proceeds from the development and sale of individual subdivided lots be subject to the Capital Gains Tax provisions in Part 3-1 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A2: Yes. | Q3: Will CGT event A1 under section 104-10 of the ITAA 1997 occur on the sale of each individual subdivided lot? | A3: Yes. | Q4: Will the advanced funds received from the developer be considered to be additional proceeds from the sale of the land? | A4: No.

Relevant facts and circumstances: Your late parent (the deceased) owned a parcel of land ('the Property'). There is a house situated on the property. Your parent passed away pre 20 September 1985. Your parent left a Will (the Will). By operation of the Will, you became beneficially entitled to the Property together with all and any farming stock and equipment subject only to the provision that your surviving parent receive a life interest in the house located on the property. You and your surviving parent were appointed as executors of the Will and trustees of the estate of the deceased. The formal title transfer for the Property took place post 20 September 1985, after your surviving parent had passed away post 20 September 1985. You have operated a farming business on the Property in partnership with your spouse. You took over the commercial operation of the farming business from the date of death of your parent. You have advised that: a. You operate the business in a commercial manner. b. Your purpose and intention has always been to engage in a commercial activity. c. You operate your business with a view to making a profit. d. There is a recurrent and regular nature to the activity. e. The business is carried on in a similar manner to other farming businesses. f. Your operation is systematic, organised and carried on in a business-like manner. g. You keep records of your business activities. h. You undertake commercial sales of product. i. You have the relevant knowledge and skill to undertake the business. In recent years, you have derived additional sundry income in return for allowing a communications tower and signage to be located on the Property. You are now elderly and are considering retirement from farming. In addition, the Property is located in an area where residential development is encroaching and the subsequent potential for rezoning of the property will threaten the viability of the farming business as land holding costs will most likely exceed farming income generated. You have been approached by a property development company, X Pty Ltd, ('the Developer'), who have offered to undertake a potential subdivision of the Property into residential lots. You were originally approached by another entity prior to this and you entered into a Development Agreement with them. The original developer requested consent from you to lodge a combined planning scheme amendment and planning permit with the local council. The original Development Agreement has been cancelled and a new Development Services Deed (DSD) has been drafted. This was required as the Developer's group of companies changed with the addition of the Developer, X. You have advised that you do not have the skills or expertise to be involved in the subdivision of your land and would be completely passive throughout the process. The Developer would undertake all activities required to develop and realise the land including procuring the planning permit, obtaining all approvals, undertaking all work required by the planning permit or under the approvals, subdividing and attending to registration of any plan of subdivision of the land for the purposes of sale and selling the lots under the plan of subdivision. The Developer will make all decisions in relation to the marketing of the individual lots. The new DSD outlines the responsibilities of each party during the development process. You will remain the registered proprietor and beneficial owner of the land during development. The Developer will issue invoices to you for DSD. The Developer is able to appoint a project manager by-way of a project management agreement. Under the DSD, the Developer has the following rights and obligations with respect of development activities: a. at its discretion engage any contractors and consultants necessary; b. fund by way of debt or other all development costs; c. provide quarterly progress reports to the landowner; d. obtain a real estate agent to market and sell the lots; e. make all marketing and price related decisions regarding lots sales; and f. handle all proceeds of Lots sales. The agreement states that no partnership or joint venture is formed by the parties by way of the agreement. You have never been in the business of land acquisition and resale or development. The Developer is in the business of providing project services to develop the land. The Developer has no beneficial interest in the land. You will allow the Property to be used as security to provide a finance facility for the Developer to fund development costs. You have the right to obtain an advance of funds from the Developer subject to the draft Developer Facility Agreement (DFA). In return for the advance of funds, the developer will register a mortgage over the Property. You have negotiated the advance of funds to enable you to finance some real estate and living expenses. The advance of funds is to be repaid to the Developer from your share of monies from sales of the subdivided lots. Additional facts obtained: ● You currently have a number of farming animals on your farming property. These numbers have reduced due to your age and ability to manage a working farm; ● You were first approached by the developer only a few years ago; ● You have attended approximately one meeting in regard to the development every month for the last 18 months; ● You have not made any attempts to sell the farm land prior to being approached by the developer; ● You and the Developer are not associates; ● The scale of the development is proposed as follows: ● The land size is approximately 10 hectares; ● There is proposed to be under 100 lots; ● The project is scheduled for completion in late 201X - early 20XX; ● The development will we phased over stages; ● The project is expected to cost greater than $10 million; ● The project will be funded 100% by the developer, using a mixture of borrowings and investors' funds; ● Total estimated gross revenue from the development is greater than $15 million; ● No additional development, i.e buildings, will be undertaken on the subdivided land;

Relevant legislative provisions: Income Tax Assessment Act 1997 Part 3-1 | Income Tax Assessment Act 1997 Part 3-3 | Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 102-20 | Income Tax Assessment Act 1997 section 104-10 | Income Tax Assessment Act 1997 subsection 104-10(3) | Income Tax Assessment Act 1997 paragraph 104-10(5)(a) | Income Tax Assessment Act 1997 Division 128 | Income Tax Assessment Act 1997 section 128-15 | Income Tax Assessment Act 1997 section 128-20

Reasons for decision: Summary: You are taken to have acquired the Property at the date of your late parent's death. Accordingly, the land will retain its pre-CGT status in your hands. | Detailed Reasoning - Detailed reasoning: Division 128 of the Income Tax Assessment Act 1997 (ITAA 1997) applies to the passing of an asset from a deceased individual's legal personal representative to a beneficiary in their estate (provided the asset was owned by the deceased individual at the time of their death). Paragraph 203 of Taxation Ruling TR 2006/14 Income tax: capital gains tax: consequences of creating life and remainder interests in property and of later events affecting those interests states the following in regard to a trust to which Division 128 applies: Accordingly, 'a trust to which Division 128 applies' requires more than the identification of the trust as a deceased estate. The Commissioner considers that the words 'a trust to which Division 128 applies' should be interpreted as a deceased estate to the extent that it is a trust over an asset originally owned by a deceased individual and which may pass to the beneficiary in accordance with section 128-20 (that is, under the will, by intestacy and so on). A CGT asset passes to a beneficiary if the beneficiary becomes the owner in one of the ways set out in section 128-20 of the ITAA 1997 and this includes under the Will of the deceased. | Detailed Reasoning - Acquisition Date: In relation to the assets owned by the deceased prior to their death, subsection 128-15 of the ITAA 1997 provides that you will be taken to have acquired those assets on the date of the deceased's death. This is as a result of the assets passing to the beneficiary in accordance with section 128-20 of the ITAA 1997. | Detailed Reasoning - Application to your circumstances: You are a beneficiary under the Will. Your surviving parent, the life tenant, passed away post 20 September 1985. In instances where the deceased passed away before 20 September 1985, the beneficiary is taken to have acquired their share in the deceased's assets prior to 20 September 1985 and upon disposal of these assets any capital gain or loss made by the beneficiary is disregarded. This is the case even if legal title to the asset does not pass until after the life tenant dies on or after 20 September 1985. In your case, your parent acquired the land pre 20 September 1985 and also passed away pre 20 September 1985. As they died prior to 20 September 1985, you are taken to have acquired the land at their date of death, prior to 20 September 1985. Accordingly, the land that you acquired will retain its pre-CGT status in your hands. Each subdivided block will be treated as a separate asset under the capital gains tax provisions. The subdivided lots are taken to have been acquired by you when you acquired the original land at the date of your late parent's death. | Summary: Proceeds from the sale of the subdivided lots will be subject to the Capital Gains Tax provisions in Part 3-1 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: You intend to enter into a DSD with the developer to subdivide your farming land for sale. You have advised this will involve subdivision of 10 hectares into under 100 lots, with completion scheduled in late 201X to early 20XX. The Commissioner must determine whether the proceeds to be received from the sale of the subdivided lots are: ● assessable ordinary income under section 6-5 of the ITAA 1997 as income from carrying on a business of property development; ● assessable ordinary income under section 6-5 of the ITAA 1997 as income from an isolated commercial transaction with a view to a profit; or ● a realisation of a capital asset and assessable as a capital gain under Parts 3-1 and 3-3 of the ITAA 1997. Section 6-5 of the ITAA 1997 includes in your assessable income, where you are an Australian resident, all ordinary income which you derive during an income year. Ordinary income is defined as income according to ordinary concepts. Ordinary income generally includes income that arises in the ordinary course of a taxpayer's business. However, in certain circumstances proceeds not within the ordinary course of the taxpayers business may form part of their ordinary income. The decisions in Casimaty v. Federal Commissioner of Taxation (1997) 97 ATC 5135; 37 ATR 358 ( Casimaty ) and McCorkell v Federal Commissioner of Taxation 98 ATC 2199; (1998) 39 ATR 1112 ( McCorkell ) demonstrate that if a taxpayer does not intend to make a profit when he or she acquires farming land then the likelihood that any profit made on the eventual sale of land being considered ordinary income is greatly diminished. The Commissioner accepts that where the activities are no more than the realisation of a capital asset as per the Casimaty and McCorkell cases, any realised gain on the transaction will be a capital gain under the CGT provisions in Part 3-1 of the ITAA 1997. However, profits made on the sale of subdivided land can still be ordinary income if the activities become a separate business operation or commercial transaction. For example, in Case W59 89 ATC 538; 20 ATR 3728 Deputy President Mr I.R. Thompson considered that the Applicant was carrying on a business of subdividing, developing and selling land. The tribunal made this finding because the taxpayer had a significant degree of personal involvement in planning, negotiating with local councils and other bodies, obtaining finance, employing contractors, and selling the blocks. In addition, the subdivision and development was substantial (the land had been divided into over 180 small blocks). Similarly, the decision in Federal Commissioner of Taxation v Whitfords Beach Pty Ltd 82 ATC 4031; (1982) 150 CLR 355, considered that in the operation of a business, it is relevant to take into account the purpose with which the taxpayer acted and, since the taxpayer was a company, the purposes of those who control it are its purposes. Therefore, in this case, when the shares in the taxpayer were purchased by three development companies, it transformed the company which held land for the domestic purposes of its shareholders to a company whose purpose was to engage in a commercial venture with a view to profit. In addition to taking other factors into consideration, including the scale and magnitude of the subdivision, it was concluded that the taxpayer's activities involved more than a mere realisation of an asset. The principle has been established that profits arising from an isolated business or commercial transaction will be ordinary income if the taxpayer's purpose or intention in entering into the transaction is to make a profit, even though the transaction may not be part of the ordinary activities of the taxpayer's business ( FC of T v. The Myer Emporium Ltd (1987) 163 CLR 199; 87 ATC 4363; 18 ATR 693) ( Myer Emporium ). Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income (TR 92/3) discusses the application of the principles outlined in the Myer Emporium case and provides guidance in determining whether profits from isolated transactions are ordinary income and therefore assessable under section 6-5 of the ITAA 1997. Paragraph 16 of TR 92/3 provides: 16. If a taxpayer not carrying on a business makes a profit, that profit is income if: (a) The intention or purpose of the taxpayer in entering into the profit-making transaction or operation was to make a profit or gain: and (b) The transaction or operation was entered into, and the profit was made, in carrying out a business operation or commercial transaction. You acquired the land as a beneficiary of your late parent's estate. You did not purchase the land subject to subdivision and sale with the intent of entering into a profit making transaction. Your intent at the time of acquisition/purchase was to farm the land in partnership with your spouse and in fact, you have always farmed the land since acquisition and are continuing at present. The subdivision and sale of the land is considered to be outside the ordinary course of the activities from which you and your spouse derived your income. The transaction will not occur within the ordinary course of business being carried on by you and your spouse as you are not involved in the property development industry. Therefore, the activity would be best described as an isolated transaction. Whether an isolated transaction is business or commercial in character will depend on the circumstances of each case. In Myer Emporium , the High Court did not set out guidelines as to what constitutes a business operation or commercial transaction. However, the main indicia that are set out in TR 92/3 and relevant case law are as follows: (a) whether the landowner held the land for a considerable period of time prior to any subdivision and sale; (b) whether the landowner conducted farming or other non-developmental activities, prior to beginning the process of developing and selling the land; (c) whether the landowner originally acquired the land as a private residence or for recreational purposes; (d) whether the landowner originally acquired the property as an investment, such as long term capital appreciation or to derive income; (e) whether the land was originally acquired near the urban fringe of a major city or town; (f) if the property has been recently rezoned, whether the landowners actively sought that rezoning; (g) whether a potential buyer made any offers to the landowners before they commenced discussion to enter into a proposed or final development agreement; (h) whether the landowners had tried to sell the land without subdivision; (i) whether the landowner had any history of buying and profitably selling developed land or land for development; (j) whether the operations will be planned, organised and carried on in a business-like manner; (k) whether the landowners have changed their business activity relating to the land from one business to another (eg. from farming to property development); (l) the scope, scale, duration and degree of complexity of the proposed development; (m) who initiated the proposal to develop the land for resale; (n) whether the development and pre-sale arrangement is sophisticated; (o) whether the landowners will be actively involved in any development activities; (p) the level of legal and financial control maintained by the landowners in the proposed or final development agreement; and (q) the level of financial risk borne by the landowner in acquiring, holding and/or developing the land. Your proposed sale of the subdivided land is considered below with reference to these factors: ● You have held the property for a considerable time prior to the development being contemplated. Your parent passed away pre 20 September 1985 and property was transferred to you post 1985 and development negotiations with the developer only started recently, in the last few years. Prior to that you had been approached by another developer associated with the developer. The land has been farmed for over 30 years since your parent died and continues to date. ● The reason for subdividing and selling part of the land is to allow for your retirement. ● You have not actively been involved in the development and sale of the subdivided lots. Your involvement has been passive in nature and you will engage the Developer to attend to all matters necessary to effect the land development and sale. This will include the Developer securing planning permits, obtaining approvals, undertaking all works required by the planning permit or under the approvals, subdividing and attending to registration of any plan of subdivision of the land for the purposes of sale and selling the lots under the plan of subdivision. The Developer will also make all decisions in relation to marketing of the lots, dealing with authorities, engaging consultants, builders, engineers, etc. The Developer will also attend to the marketing and sale of the lots. ● In accordance with the proposed DSD, you will continue to be engaged in your primary production activities on the land lots subject to the land subdivision and development until such time as the land development activity impedes this. It is the developer who bears all risk in the development activity. ● The proposed development land was zoned by council for farming use when acquired. However, it is situated where residential development is encroaching and the subsequent potential for re-zoning will threaten the viability of farming as land holding costs will increase. ● Prior to being approached by the original developer you had not tried to sell or develop the land. ● Your land is 10 hectares and you propose to subdivide into under 100 lots, with completion scheduled in late 201X to early 20XX. ● You have not applied for any rezoning of the land. The intention is for the Developer to apply for rezoning. ● The land will remain legally owned by you throughout the development until such time as the subdivided lots are sold. The land will not be transferred to any other entity to effect the development and sale. ● You do not bear the costs of the development. You will allow the developer to use the subject land as security to provide a finance facility for the developer to fund development costs. ● You have the right to obtain an advance of funds from the Developer subject to the draft DFA. This advance will enable you to finance some real estate and living expenses. This advance will be repaid to the developer out of your share of monies from lot sales. You will not lend personally to finance the subdivision. ● You will not keep records. The Developer will keep itemised accounts and record all costs and payments made, and make them available to you. | Detailed Reasoning - Conclusion: Based upon the facts of the proposed subdivision and sale outlined above and in light of the relevant indicia it is not considered you have ventured into a business activity of property development and sale of land for profit. Therefore, proceeds from the proposed subdivision and sale of lots will not be assessable ordinary income under section 6-5 of the ITAA 1997 as income from carrying on a business of property development. We also do not consider that your passive involvement in the development amounts to you engaging in a business-like operation or commercial transaction. As such, the profits or gains you make from the proposed subdivision and sale of lots will not be assessable ordinary income under section 6-5 of the ITAA 1997 as income from an isolated commercial transaction with a view to a profit. On balance, we consider that the proceeds from the sale of your land will not be assessable under section 6-5 of the ITAA 1997 as either ordinary income or a profit-making scheme. The proceeds represent a mere realisation of your capital assets in the most enterprising way available so as to maximise the proceeds of sale. Any profit on sale of the subdivided lots will be subject to the Capital Gains Tax provisions in Part 3-1 of the ITAA 1997. | Summary: Yes, CGT event A1 will occur when you execute the sale contract in respect to each subdivided lot. | Detailed Reasoning - CGT event on disposal: Section 102-20 of the ITAA 1997 provides that you make a capital gain or capital loss if, and only if, a CGT event happens to a CGT asset that you own. In accordance with section 104-10 of the ITAA 1997, CGT event A1 happens when you dispose of an asset. Subsection 104-10(3) of the ITAA 1997 considers the timing of the event. The time of the event is either when you enter into a contract for the disposal, of if there is no contract, when the change of ownership occurs. In your situation, CGT event A1 will occur when you execute the sale contract in respect to each subdivided lot in accordance with the DSA. However, in accordance with paragraph 104-10(5)(a) of the ITAA 1997, any capital gain or loss you make will be disregarded as you are considered to have acquired the land before 20 September 1985. | Summary: The advanced funds are a loan from the developer to the landowner. | Detailed Reasoning - Detailed reasoning: The advanced funds received from the developer are merely considered to be a loan from the developer. However, your proceeds from the sale of the land that you will otherwise be entitled to receive under the DSA will be used to repay this loaned amount. They will not be considered to be additional capital proceeds for the disposal of the land at the time the loan is made.