Private ruling: Subdivision of land
Published: January 2014
Ruling period: Year ending 30 June 2014 | Year ending 30 June 2015
Date scheme commenced: 1 July 2013

Ruling: Q1: Will the sale of lots subdivided be assessable on capital account as the mere realisation of an asset and therefore assessable as a capital gain? | A1: Yes.

Relevant facts and circumstances: You entered into a contract to purchase vacant land which had an existing shed on it. Your intention when you purchased the land was to build a house as an owner-builder to live in. You borrowed funds to purchase the land. When the contract settled you immediately moved into the shed. The house was designed and you commenced obtaining the relevant approvals. Due to various factors you decided to subdivide the land. Council records showed that development approval (DA) to subdivide the land into lots had been granted previously. This DA had lapsed. You decided to subdivide the land into allotments and sell all but one of them. You lodged a subdivision application and approval was granted. You borrowed undertaken work as part of the subdivision approval conditions. No other work will be undertaken on the lots to be sold. The new lots were registered. You have engaged a real estate agent to sell all but two of the lots. You will not erect buildings on the lots. You have retained two lots. You are building your home on one of the lots and living in a shed located on the other. Once your home is complete you will sell the lot where the shed is located. You will use the funds from the sale of the lots to pay off your debts and fund the construction of your home. You have never owned property prior to purchasing this land. You had attempted to purchase land on which to build your house but had been unsuccessful. You have never been involved with property development in the past. You are been employed in a field unrelated to property development. You do not intend to repeat this activity again.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 102-5

Reasons for decision: Summary: The sale of the subdivided lots is considered to be merely a realisation of a capital asset. Therefore any gain on the sale is assessable as a capital gain. | Detailed Reasoning - Detailed reasoning: There are three ways profits from sub-divided land can be treated for taxation purposes: · as ordinary income as a result of carrying on a business of property development involving the sale of land as trading stock · as ordinary income as a result of an isolated business transaction entered into by a non-business taxpayer which is the commercial exploitation of an asset acquired for a profit making purpose, or · as statutory income under the capital gains tax (CGT) legislation on the basis that a mere realisation of a capital asset has occurred. The proceeds from the mere realisation of an asset are not ordinary income, even though the realisation is carried out in an enterprising way so as to secure the best price. However, an isolated business transaction entered into with a view to making a profit may give rise to income according to ordinary concepts. This would also apply if a capital asset is ventured in an undertaking or scheme which involves more than the mere realisation of an asset. | Detailed Reasoning - Carrying on a business of property development: Taxation Ruling TR 97/11 provides the Commissioner's view of the factors used to determine if you are in business for tax purposes. In the Commissioner's view, the factors that are considered important in determining the question of business activity are: · whether the activity has a significant commercial purpose or character · whether the taxpayer has more than just an intention to engage in business · whether there is regularity and repetition of the activity · whether the activity is of the same kind and carried on in a similar manner to that of ordinary trade in that line of business · whether the activity is planned, organised and carried out in a businesslike manner such that it is described as making a profit · the size, scale and permanency of the activity, and · whether the activity is better described as a hobby, a form of recreation or a sporting activity. No one indicator is decisive. The indicators must be considered in combination and as a whole. Whether a 'business' is carried on depends on the large or general impression. | Detailed Reasoning - Isolated business transactions: The Commissioner's view on whether profits from isolated transactions are assessable as ordinary income is found in Taxation Ruling TR 92/3. The ruling states profits on an isolated transaction will be ordinary income when: · the intention or purpose of a taxpayer in entering into the transaction was to make a gain or profit · the transaction was entered into, and the profit was made, in the course of carrying on a business transaction or a commercial transaction. For one-off land subdivision to be considered to be of a business or commercial nature, it is usually necessary that a taxpayer has the purpose of profit-making at the time of acquiring the property. | Detailed Reasoning - Application to your circumstances: The issue under consideration is whether your activities in subdividing the original land will amount merely to the advantageous realisation of a capital asset or to a business of property development or to an undertaking in the nature of trade carried on by you. As you have never carried out a subdivision before and weighing all considerations including the size and scale of the activity, we do not consider you were carrying on a business of property development. However, as previously stated the proceeds from the subdivision may still be assessable as an isolated transaction. Paragraph 265 of Miscellaneous Taxation Ruling MT 2006/1 provides that if several of the following factors are present it may be an indication that a business activity or a profit-making undertaking or scheme is being carried on: · there is a change of purpose for which the land is held · additional land is acquired to be added to the original parcel · the parcel of land is brought into account as a business asset · there is a coherent plan for the subdivision of the land · there is a business organisation, for example a manager, office and letterhead · borrowed funds financed the acquisition or subdivision · interest on money borrowed to defray subdivisional costs was claimed as a business expense · there is a level of development of the land beyond that necessary to secure Council approval for the subdivision · buildings have been erected on the land. An analysis of the indicators above leads us to form the conclusion that your activity amounts to no more than the mere realisation of an asset. The following considerations were taken into account when forming this decision: · you are an individual and the only entity involved in the transaction · no business structure has been created to undertake the subdivision · your intention upon purchasing the land was to build a house and live on the property. You have partially achieved this intention as you have moved into a shed on the land and commenced building your home. · you are retaining one block on which you will live in your house · you did not need to apply to have the land rezoned as a subdivision approval (lapsed) had been granted previously · the development work undertaken was the minimum amount to meet the council subdivision requirements · you have no previous experience or dealings in property development and do not intend to repeat the experience. As such the sale of the lots will be assessable to you on capital account and therefore assessable as a capital gain.