Private ruling: Land subdivision and property development
Published: June 2012
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Are the proceeds of the sale of the 2 vacant blocks of land and the house and land package assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) as ordinary income. | A1: Yes | Q2: Are the proceeds of the sale of the X vacant blocks of land and the house and land package assessable under the capital gains tax provisions of the ITAA 1997? | A2: No

Relevant facts and circumstances: You purchased a house and land and the adjacent block in the 1970's. The house was your principal place of residence until you moved to a new principal place of residence. Your child continued to live in the home since this time. The house needed substantial repairs that were not cost effective given the state of the home. In addition, the land was too large for your child to manage. The house was later demolished. The original block and the adjacent block were subdivided into 4 blocks in total. Two of the subdivided blocks were sold as vacant land within a month of each other. The other two blocks had identical houses (built by a builder) constructed on the land. One of the blocks was to be your child's home (that you would retain ownership of). The second house was contracted for sale via a real estate agent. The second house was sold within 2 months of the sale of the last vacant block of land. You state that you were aware that you would not make any extra money from the construction of the homes but you believed it would be cheaper to build two homes rather than one. This is because you believed it would be easier to sell the property with a house on it, and once sold it would cover the cost of the second home while construction of the child's home could be completed at a cheaper price. You state that you are not carrying on a property development business. You have not engaged in property development before and you do not intend to be involved in property development in the future. The subdivision of the blocks was paid for from your savings. The monies for construction of the two houses was withdrawn from your superannuation fund, as you found that it was easier than going to the bank for the funds. You state you re-contributed the proceeds received from the sale of the house and land back into your superannuation fund. You state that your intention in completing the above activities was to facilitate your retirement, construct a house for your child that was of a more manageable size, but realise as much income from the previous property to allow you to assist your child and grandchildren and still have funds remaining for your retirement.

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

Reasons for decision: Summary: The proceeds received on the sale of the two vacant blocks of land and the house and land package are assessable as ordinary income. While the activity is not considered to be a business of property development, it constitutes a profit-making undertaking or scheme (or an adventure or concern in the nature of trade) and is therefore considered an isolated commercial transaction conducted with a view to a profit. The activities undertaken for the development go beyond that of a mere realisation of a capital asset as they involve significant change and value adding to the original asset. | Detailed Reasoning - Detailed reasoning: You held two blocks of land, one contained a house. You demolished the house (which is not your principal place of residence) and subdivided the X blocks into X blocks. Some of the vacant blocks of land were sold. On the remaining blocks, two new houses were built, one was sold and one is to be your child's new home. We will need to determine whether the income received from the sale of the two vacant blocks and the sale of the house and land: · is assessable ordinary income under section 6-5 of the ITAA 1997 as you were carrying on a business of property development · is assessable ordinary income under section 6-5 of the ITAA 1997 as you conducted an isolated commercial transaction with a view to a profit, or · is a mere realisation of a capital asset. | Detailed Reasoning - Income from carrying on a business of property development: The question of whether a business is being carried on is a question of fact and degree. The courts have developed a series of indicators that are applied to determine the matter on the facts provided. Taxation Ruling TR 97/11 provides the Commissioner's view of the factors used to determine if you are in business for tax purposes. Indicators include commercial significance or character, regularity and repetition, organisation, size, scale and permanency. No one factor 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 gained. From the facts provided, and in applying the business indicators to your circumstances, we make the following observations: · you have not previously been engaged in property development · you do not intend to commence a property development business · you have had minimal involvement in the construction and sales processes for the development (as you are engaging other parties for these purposes). · this is a one-off activity that is unlikely to be repeated. Therefore, the large and general impression gained after examining your activity against the business indictors indentified in TR 97/11, is that you are not considered to be carrying on a business of property development. | Detailed Reasoning - Income from an isolated transaction: Paragraph 234 of Miscellaneous Taxation Ruling MT2006/1 distinguishes between a business and an adventure or concern in the nature of trade (or profit-making undertaking or scheme). It provides that the term 'business', would encompass trade engaged in, or on, a regular or continuous basis. However, it goes on to say that an adventure or concern in the nature of trade may be an isolated or one-off transaction that does not amount to a business deal but has the characteristics of a business deal. The question of whether an entity is carrying on an enterprise often arises where there are one-off property transactions. The decision to be made is whether the activities are an adventure or concern in the nature of trade as opposed to the mere realisation of a capital asset. Taxation Ruling TR 92/3 sets out the Commissioners view on whether profits made from isolated transactions are ordinary income. '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. Whether a profit from an isolated transaction is income according to ordinary concepts depends very much on the circumstances of the case. However, where a taxpayer who does not carry on a business makes a profit from an isolated transaction, that profit is income if: · the intention or purpose of the taxpayer in entering into the profit-making transaction or operation was to make a profit or gain; and · the transaction or operation was entered into, and the profit was made, in carrying out a business operation or commercial transaction. | Detailed Reasoning - Intention or purpose: The relevant intention or purpose of the taxpayer (of making a profit or gain) is not the subjective intention or purpose of the taxpayer. Rather, it is the taxpayer's intention or purpose discerned from an objective consideration of the facts and circumstances of the case. It is not necessary that the intention or purpose of profit-making be the sole or dominant intention or purpose for entering into the transaction. It is sufficient if profit-making is a significant purpose. In your case, in undertaking the development and sale of the vacant blocks of land and the house and land, it appears that you will make sufficient profit to cover the cost of building your child's home and re-contributing the money you withdrew from your superannuation fund to undertake the development. Therefore, it would be reasonable to conclude that a significant purpose in undertaking the development is to make a profit or gain to enable you to achieve the above purposes. | Detailed Reasoning - Carrying out a commercial transaction: For a transaction to be characterised as a business operation or a commercial transaction, it is sufficient if the transaction is business or commercial in character. Paragraph 13 of TR 92/3 lists factors which may be relevant in considering whether an isolated transaction amounts to a business operation or commercial transaction. | Detailed Reasoning - Relevant factors include:: · the nature of the entity undertaking the operation or transaction; · the nature and scale of other activities undertaken by the taxpayer; · the amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained; · the nature, scale and complexity of the operation or transaction; · the manner in which the operation or transaction was entered into or carried out; · if the transaction involves the acquisition and disposal of property, the nature of that property; and · the timing of the transaction or the various steps in the transaction. In addition to the above general factors, MT 2006/1 provides a list of specific factors relevant to real property and development, if several of these factors are present it may be an indication that a business or an adventure or concern in the nature of trade is being carried on. These factors are as follows: · there is a change of purpose for which the land is held; · additional land is acquired to be added to the original parcel of land; · the parcel of land is brought into account as a business asset; · there is a coherent plan for the subdivision of the land; · there is a business organisation - for example a manager, office and letterhead; · borrowed funds financed the acquisition or subdivision; · interest on money borrowed to defray subdivisional costs was claimed as a business expense; · there is a level of development of the land beyond that necessary to secure council approval for the subdivision; and · buildings have been erected on the land. No single factor is determinative; rather it will be a combination of factors that will lead to a conclusion as to the character of the activities. Paragraph 284 to 287 of MT 2006/1 provides an example of a subdivision of land that amounts to an enterprise by way of constituting an isolated profit-making scheme or transaction. This example reads as follows: 284. Prakash and Indira have lived in the same house on a large block of land for a number of years. They decide that they would like to move from the area and develop a plan to maximise the sale proceeds from their land. 285. They consider their best course of action is to demolish their house, subdivide their land into two blocks and to build a new house on each block. 286. Prakash and Indira lodge the necessary development application with the local council and receive approval for their plan. They arrange for : their house to be demolished ; the land to be subdivided ; a builder to be engaged ; two houses to be built ; water meters, telephone and electricity to be supplied to the new houses ; and a real estate agent to market and sell the houses. 287. Prakash and Indira carry out their plan and make a profit. They are entitled to an ABN in respect of the subdivision on the basis that their activities go beyond the minimal activities needed to sell the subdivided land. The activities are an enterprise as a number of activities have been undertaken which involved the demolition of their house, subdivision of the land and the building of new houses. In your case, your proposed development is similar to the example given above. Your development consisted of demolishing your existing home, subdividing the original block of land (and the adjacent block) and building two new houses on two of the new blocks. In addition; · you have engaged professionals to handle the development (builder) and sale of the house and land (real estate agent) · the activity is similar to the type that a property developer would conduct, since you are developing the land in an organised and professional manner · you provide that the money received from the sale of the 2 vacant blocks of land and the sale of the house and land package would be sufficient to cover the cost of building the second home and make the building of your child's home cheaper. · you provide that once the sale had occurred on the house and land you would be able to re-contribute monies that were withdrawn from your superannuation fund. Based on the information provided, it is considered that the transaction is commercial in character as the number of activities undertaken goes beyond the minimal activities needed to simply subdivide and sell the land. In addition, the development has enabled you to fund the construction of a new house for your child without the need to access finance and also provided sufficient profit to enable you to re-contribute monies to your superannuation fund. This indicates that the transaction is beyond that of a mere realisation of a capital asset and is in the form of an adventure or concern in the nature of trade (or profit-making undertaking or scheme). Therefore, on a weighing of the facts of your case we find that this transaction will be entered into, and any profits made, in the course of carrying out an isolated commercial transaction with a view to a profit. Accordingly, the proceeds will be considered ordinary assessable income under section 6-5 of the ITAA 1997. | Detailed Reasoning - Realisation of a capital asset: As discussed above, the activities undertaken for the development go beyond that of a mere realisation of a capital asset as they involve significant change and value adding to the original assets. The activities are indicative of a profit-making undertaking and are therefore assessable as ordinary income and not under the capital gains tax provisions.

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