Private ruling: CGT - Land subdivision
Published: April 2014
Ruling period: Year ended 30 June 2015 | Year ended 30 June 2016 | Year ended 30 June 2017 | Year ended 30 June 2018 | Year ended 30 June 2019
Date scheme commenced: 1 July 2014

Ruling: Q1: 1. Will the proceeds received from the sale of the subdivided blocks of land be assessable pursuant to section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A3: Yes.

Relevant facts and circumstances: You purchased your main residence post CGT. It has always been used as your main residence. Your current plan is to downsize to a smaller property. The residence has been on the market for multiple years, listed with more than one real estate agent. You have not received any formal offers for the property. In the same year, you also purchased a number of adjacent properties. The houses have always been rented out. No significant renovations or extensions have been done to the properties. It was suggested to you that a developer would not be willing to purchase all of the properties for a price that aligns with your expectations. You would prefer to subdivide the properties and sell the blocks individually. You plan to redefine the boundaries of your main residence and split the property into smaller blocks that will be more attractive to buyers. The boundaries of the investment properties would also alter slightly. Alternatively, you are considering outsourcing the subdivision to a third party. A local real estate agent has discussed with you that for a fee his company could take on the proposed subdivision from application stage through to demolishing the investment houses and undertaking the necessary works required by council. You are unsure at this stage whether you will arrange the works yourselves, or outsource to the real estate agent. You are not contemplating undertaking any works other than those required by council in order to approve the subdivision. You have not progressed with subdivision plans or formal applications to council. As a result you do not have any estimates of the proposed subdivision. It is proposed that only the minimum capital will be outlayed. You do not have a history of property development, or have any plans for future developments. The subdivision is only being considered to facilitate the sale of your home. You are not registered for GST.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5, | Income Tax Assessment Act 1997 Part 3-1 and | Income Tax Assessment Act 1997 Section 118-165.

Reasons for decision: Summary: Under section 6-5 of the ITAA 1997, the assessable income of an Australian resident includes ordinary income derived both in and out of Australia during an income year. Ordinary income is defined as income according to ordinary concepts. In FC of T v The Myer Emporium (1987) 163 CLR 199; 87 ATC 4363; (1987) 18 ATR 693 ( Myer Emporium ), the Full High Court expressed the view that profits made by a taxpayer who enters into an isolated transaction with a profit making purpose can be assessable income. Taxation Ruling TR 92/3 considers the assessability of profits on isolated transactions in light of the principles outlined in Myer Emporium . According to Paragraph 1 of TR 92/3, the term isolated transactions refers to: • those transactions outside the ordinary course of business of a taxpayer carrying on a business, and • those transactions entered into by non-business taxpayers. Paragraph 6 of TR 92/3 provides that a profit from an isolated transaction will generally be income when both the following elements are present: • your intention or purpose in entering into the transaction was to make a profit or gain, and • the transaction was entered into, and the profit was made, in the course of carrying on a business or in carrying out a business operation or commercial transaction. In contrast, paragraph 36 of TR 92/3 notes that the courts have often said that a profit on the mere realisation of an investment is not income, even if the taxpayer goes about the realisation in an enterprising way. However, if a transaction satisfies the elements set out above it is generally not a mere realisation of an investment. In your case, you do not carry on a business of buying, selling or developing land. You purchased the property as your main residence, and the other properties have been used as a passive investment since purchase. You will have minimal involvement in the subdivision of the land and will only change the land to the extent that you are required for council purposes. Accordingly, the proceeds from the sale of the subdivided blocks will not be included in your ordinary income. Rather, the subdivision is considered to be a mere realisation of a capital asset and the proceeds will be subject to the capital gains tax provisions in Part 3-1 of the ITAA 1997. This will be the case even if the subdivision is outsourced to a third party.

2. Will the proceeds received from the sale of subdivided blocks of land be taxed under the capital gains tax provisions of the ITAA 1997? | 3. If the subdivision is outsourced to a third party, will the proceeds received from the sale of the subdivided blocks of land be taxed under the capital gains tax provisions of the ITAA 1997?