Private ruling: CGT
Published: July 2012
Ruling period: Year ended 30 June 2012 | Year ending 30 June 2014 | Year ending 30 June 2015 | Year ending 30 June 2016 | Year ending 30 June 2017
Date scheme commenced: 1 July 2011

Ruling: Q1: 1. Are the proceeds from the development of your property assessable under sections 6-5 or 15-15 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A2: Yes, however any capital gain or capital loss you make on the disposal of each subdivided block will be disregarded for CGT purposes.


Relevant legislative provisions: Income Tax Assessment Act 1997 - Section 6-5. | Income Tax Assessment Act 1997 - Section 15-15. | Income Tax Assessment Act 1997 - Section 104-10. | Income Tax Assessment Act 1997 - Subsection 104-10(5).

Reasons for decision: Detailed Reasoning - Income tax provisions: Under section 6-5 of the ITAA 1997, your assessable income includes the ordinary income you derived directly or indirectly from all sources, during the income year. Additionally, section 15-15 of the ITAA 1997 includes profit arising from the carrying on or carrying out of a profit-making undertaking or plan. However, this provision does not apply to a profit that is assessable as ordinary income under section 6-5 of the ITAA 1997, or which arises in respect of the sale of property acquired on or after 20 September 1985. Although the legislation does not define income according to ordinary concepts, a substantial body of case law has evolved to identify various factors that indicate the nature of ordinary income. 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. Additionally, if a taxpayer acquires an asset with the intention of using it for personal enjoyment but later decides to commit the asset, either: · as the capital of a business or · into a profit-making undertaking with the characteristics of a business operation or commercial transaction, this activity constitutes the carrying on of a business, or a business operation or commercial transaction. The profit from such activity is income even though the taxpayer did not have the purpose of profit-making at the time of acquiring the asset. Some of the factors to consider when looking at whether an isolated transaction amounts to a business operation or commercial transaction are listed at paragraph 13 of TR 92/3. They are: (a) the nature of the entity undertaking the operation or transaction (b) the nature and scale of other activities undertaken by the taxpayer (c) the amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained (d) the nature, scale and complexity of the operation or transaction (e) the manner in which the operation or transaction was entered into or carried out (f) the nature of any connection between the relevant taxpayer and any other party to the operation or transaction (g) if the transaction involves the acquisition and disposal of property, the nature of that property and (h) the timing of the transaction or the various steps in the transaction. Profits on the sale of subdivided land can therefore be income according to ordinary concepts within section 6-5 of the ITAA 1997, or as a profit making undertaking or plan within section 15-15 of the ITAA 1997, if the taxpayer's subdivisional activities have become a separate business operation or commercial transaction, or an isolated profit making venture. 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, the property was originally purchased solely to provide a quiet, peaceful, country lifestyle for your family and the property has only been used for domestic purposes. You have never been in the business of land development and you will have minimal involvement in the subdivision of the land. Therefore, the proceeds you receive from the development of your property are not ordinary income and not assessable under sections 6-5 or 15-15 of the ITAA 1997. The proceeds represent a mere realisation of a capital asset which will fall for consideration under the CGT provisions in Part 3-1 of the ITAA 1997. | Detailed Reasoning - CGT provisions: CGT event A1 in section 104-10 of the ITAA 1997, relating to the disposal of a CGT asset, will happen when you dispose of each subdivided block. You will make a capital gain if the capital proceeds from the disposal of the block are more than the cost base of the block. You will make a capital loss of those capital proceeds are less than the reduced cost base of the block. Subsection 104-10(5) of the ITAA 1997, however, contains an exception, where any capital gain or capital loss made is disregarded if the asset was acquired before 20 September 1985. In your case, you acquired the original parcel of land prior to 20 September 1985. Therefore, any capital gain or capital loss you make will be disregarded for CGT purposes.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | 2. Are the proceeds from the development of your property subject to the CGT provisions in Part 3-1 of the ITAA 1997? | Relevant facts: You and your spouse purchased a property before 20 September 1985. | The intention was to provide a quiet, peaceful, country lifestyle for your family and the property has only been used for domestic purposes. | The area where the property is situated has since been rezoned to residential. | For lifestyle reasons, you now wish to downsize and move to a more manageable property. | You were approached by a developer company in 200X with a proposal to develop and market the property. You entered into a development agreement in 20YY. | · You will grant development rights to the developer, permitting them to do all things necessary to undertake the development. | · You will pay the developer a development fee, calculated by reference to the net proceeds of the development, subject to the amount payable to you and your spouse. | · The amount payable to you and your spouse is calculated as the agreed land value plus a percentage of the net proceeds. | · The developer is solely responsible for the day to day management, costs and marketing strategies of the development. | The developer expects the completed subdivision to result in less than Z lots, subject to planning approval. | The development will be released in stages and is expected to take a number of years to complete. | Neither you nor your spouse has any prior history of property development.