Private ruling: Land subdivision with house construction
Published: September 2013
Ruling period: Year ending 30 June 2014 | Year ending 30 June 2015
Date scheme commenced: 1 July 2013

Ruling: Questions and Answers: | 1. Will the arrangement, you are presenting, for the sale of excess land constitute a capital gains event (rather than ordinary income)? | No. | 2. Will the arrangement, you are presenting, for the sale of excess land constitute ordinary income (rather than a capital gains event)? | Yes.

Relevant facts and circumstances: In 20XX, you purchased your existing residence, for which you have been under increasing mortgage stress and need to reduce your debt burden on your main residence. You decided the best way to achieve this was to subdivide land you had that is excess to your needs and sell that land. You have succeeded in obtaining permission from all relevant bodies. In due course, several allotments will be registered at the titles office. You have been unable to sell the excess land to a developer as a whole. Nor were you able to sell individual land parcels without houses being built first. So we are now seeking to construct houses on each of the subdivided blocks and then bring these to market. You will engage a building contractor to oversee all works and complete all construction. You propose to sell the house and land lots to the market through an estate agent or through the builder's agency. You will remain living in the main residence, which you currently occupy, during and after sale of excess land.

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

Reasons for decision: Summary: There are three ways profits from a land sub-division can be treated for taxation purposes: (1) As ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997), on revenue account, as a result of carrying on a business of property development, involving the sale of land as trading stock. (2) As ordinary income under section 6-5 of the ITAA 1997, on revenue account, as a result of an isolated commercial transaction entered into by a non-business taxpayer or outside the ordinary course of business of a taxpayer carrying on a business, which is the commercial exploitation of an asset acquired for a profit making purpose. (3) As statutory income under the capital gains tax (CGT) legislation, (sections 10-5 and 102-5 of the ITAA 1997), on the basis that a mere realisation of a capital asset has occurred. Taxation Ruling TR 92/3 is about whether profits on isolated transactions are of a commercial nature that fall on revenue account. Here, in relation to the disposal of property, paragraphs 9 and 49(g) state: The taxpayer must have the requisite purpose at the time of entering into the relevant transaction or operation. If a transaction or operation involves the sale of property, it is usually, but not always, necessary that the taxpayer has the purpose of profit-making at the time of acquiring the property. In very general terms, a transaction or operation has the character of a business operation or commercial transaction if the transaction or operation would constitute the carrying on of a business except that it does not occur as part of repetitious or recurring transactions or operations. Some factors which may be relevant in considering whether an isolated transaction amounts to a business operation or commercial transaction are…if the transaction involves the acquisition and disposal of property, the nature of that property ( Edwards v. Bairstow ; Hobart Bridge 82 CLR at 383 ). For example, if the property has no use other than as the subject of trade, the conclusion that the property was acquired for the purpose of trade and, therefore, that the transaction was commercial in nature, would be readily drawn… In the Federal Court of Australia case of Casimaty v Federal Commissioner of Taxation 97 ATC 5135 (Casimaty ), the legal principles in relation to the subdivision of land were discussed at length, which included, at 97 ATC 5142, a description of a mere realisation of a capital asset (on capital account) as: "liquidating or realising the old assets". In concluding his judgment that the subdivision of the taxpayer was a mere realisation of a capital asset, Justice Ryan said, at 97 ATC 5152: Nor did the taxpayer undertake any works on, or development of, the land beyond what was necessary to secure the approval by the municipal authorities of the successive plans of subdivision and enhance the presentation of individual allotments for sale as vacant blocks. Had he constructed dwelling houses , internal fencing or other improvements, it would have been easier to impute to him an intention to carry on a business of land development and improvement. [Emphasis added] In your case, the sale of your subdivision of land, including constructed houses, will be an isolated commercial transaction that will be assessable as ordinary income under section 6-5 of the ITAA 1997. This is because the houses that will be built will have no use other than as the subject of trade (per paragraph TR 92/3) and because you will not be liquidating or realising old assets (per Casimaty) since the constructed houses will be new assets. As affirmed in the judgment of Casimaty , the subdivision of land with the construction of dwelling houses is a commercial (business) venture.