Private ruling: CGT - subdivision
Date of advice: 21 September 2015
Published: September 2015
Ruling period: Year ended 30 June 2014 | Year ended 30 June 2015 | Year ending 30 June 2016
Date scheme commenced: 1 July 2013

Ruling: Q1: Will the sale proceeds from the proposed subdivided land be assessable as ordinary income? | A1: No | Q2: Will the sale proceeds from the proposed subdivided land be a mere realisation of a capital asset and accounted for under the capital gains tax (CGT) provisions? | A2: Yes

Relevant facts and circumstances: You acquired the Property in the 20XX-YY financial year. The purchase of the Property was funded, principally, by a home loan. You and your family moved into the dwelling on the Property. The Property was used by you to pursue a semi-rural lifestyle. A developer offered to acquire the Property under a put and call option. You rejected this offer. Subsequently various actions were taken by the relevant local authorities to implement a new town/urban plan and seek the rezoning of an area of land that included the Property. You voiced your concerns over part of the plan that would affect the Property. You realised that development in the area surrounding the Property was inevitable and that your semi-rural lifestyle would have a limited life. You engaged industry professionals to assist in submitting a Planning Permit application in respect of the Property. Subsequently the Planning Permit for the Property was issued. The permit was obtained in order to subdivide the Property and sell the subdivided lots. A number of the Planning Permit conditions were contested. You obtained valuations to determine if the Property should be sold in globo; or subdivided, and then sold. As a result of the valuations you decided to subdivide the Property and sell the subdivided lots. To mitigate perceived risks with the development, a related entity has and will execute all contracts with third parties and will be paid for costs incurred plus a margin as a fee. There will be no buildings constructed as a part of the subdivision. The related trust borrowed funds for costs that it will incur. Work has commenced and is expected to be completed during the 2015-16 financial year. Further negotiations with the relevant local authorities will result in a portion of the Property being compulsorily acquired. Your initial plan was to continue to reside in the dwelling on the Property while the subdivision was carried out, however you have since purchased another residential property and intend to build a house on it as soon as possible. A number of the lots have already sold and settled with further contracts signed. You have had limited previous involvement in property development on a small scale through a related entity. You have provided details of those developments. The only other property transactions you have been involved with are: • The sale of a rental property; and • The sale of a block of land; the block of land was sold when you acquired the Property.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Part 3-1 | Income Tax Assessment Act 1997 Section 104-10

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. The initial property has been held for private purposes for an extended period of time and has been used in your family's hobby farming activities. The land is no longer suitable for a semi-rural lifestyle because of urban and residential encroachment in the surrounding area. Accordingly, the proceeds from the sale of the subdivided blocks will not be included in your ordinary income. Rather, the sale will be considered a capital transaction subject to the capital gains tax provisions in Part 3-1 of the ITAA 1997.