Private ruling: Subdivision of land
Published: November 2014
Ruling period: Year ended 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Question and answer: | Will the proceeds from the sale of the subdivided land be assessable on revenue account under section 6-5 or section 15-15 of the Income Tax Assessment Act 1997 as income from an isolated profit making transaction? | No

Relevant facts and circumstances: You and your spouse acquired a block of land many years before 20 September 1985 and have owned it for over forty years. About one year after acquisition, you and your spouse built a house as your main residence in which your family was raised. For the bulk of the period of your ownership, the land was also used for a business activity. You and your spouse carried on the business for over thirty years until the late 19XX's, when you entered retirement. You have decided to subdivide your property to fund your retirement. Your property will be subdivided into less than 10 blocks and most blocks will be sold. The remaining blocks are to be retained and sold in future to further fund your retirement. No additional land will be acquired to undertake any of the development activities. You and your spouse do not have the skills or the financial resources to develop and subdivide the land. You were approached by a developer who has presented you with a draft Management Agreement and Sales of Land Agreement. You have provided a copy of these documents. According to the draft Management Agreement, the Manager will be responsible for: • Obtaining all statutory and other approvals for the development • Instructing consultants as necessary and supervising their work • Arranging, co-ordinating and supervising the progress of development contracts • Arranging and calling for tenders and negotiating terms of contracts for development work • Programming, co-ordinating and supervising the progress of development contracts • Arranging for the preparation of plans of subdivision and applications for the issue of Certificates of Title for the lots contained in the subdivision • Arranging for the installation of all relevant services, such as water and electricity to each lots resulting from the development and, ensuring each lot will be ready for sale as a fully serviced residential lot. You and your spouse have not been involved in carrying on a property development business nor do you ever intend to commence one.

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 102-5

Reasons for decision: Summary: There are three ways profits from a land development, subdivision and sale of house and land packages can be treated for taxation purposes: • As ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA1997), on revenue account, as a result of carrying on a business of property development, involving the sale of land and buildings as trading stock; or • As ordinary income under sections 6-5 or 15-15 of the ITAA 1997, on revenue account, as a result of an isolated business transaction entered into by a non-business taxpayer or outside the ordinary course of business of a taxpayer carrying on a business, if the profit or gain arises from the carrying on or carrying out of a profit making undertaking or plan; or • As statutory income under the CGT legislation, (section 102-5 of the ITAA 1997), on the basis that a mere realisation of a capital asset has occurred. Under section 6-5 of the ITAA1997, a taxpayer's assessable income includes the ordinary income that is derived directly or indirectly from all sources during the income year. If the proceeds from the sale of the subdivided lots that are the subject of this ruling are ordinary income, the proceeds will be assessable under this section. Although the tax legislation does not provide specific guidance on what is meant by 'income according to ordinary concepts', a substantial body of case law has evolved to identify various factors that indicate whether an amount is income according to ordinary concepts. | Detailed Reasoning - Will you be 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. Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production provides the Commissioner's view of the factors used to determine if you are in business for tax purposes. In the Commissioner's view, the factors that are considered important in determining the question of business activity are: • Does the activity have a significant commercial purpose or character? • Does the taxpayer have more than a mere intention to engage in business? • Is there an intention to make a profit or a genuine belief that a profit will be made? • Will the activity be profitable? • Is there repetition and regularity in the activity? i.e., how often is the activity engaged in? • How much time does the taxpayer spend on the activity? • Is the activity of the same kind and carried on in a similar way to that of the ordinary trade? • Is the activity organised in a business-like manner? • What is the size or scale of the activity? • Is the activity better described as a hobby, a form of recreation or a sporting activity? No one indicator 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. | Detailed Reasoning - In your case: • The land was originally purchased many years before 20 September 1985 for the building of your main residence and for the purpose of conducting your business activity and was used for these purposes. • The purpose of carrying out the subdivision is to fund your retirement. • There has been and will be no repetition or regularity of the property development activity. • You and your spouse will not be engaged in the business of property development and have not previously been involved in subdivisions. It is considered that you and your spouse will not be carrying on a business of property development, and therefore the proceeds from sale of the lots will not be ordinary income as per section 6-5 of the ITAA 1997. | Detailed Reasoning - Will the subdivision and disposals of the subdivided blocks constitute an isolated profit making undertaking?: Taxation Ruling TR 92/3 : Income tax: whether profits on isolated transactions are income discusses profits on isolated transactions and the application of the principles outlined in the decision of the Full High Court of Australia in FCT v. Myer Emporium Ltd (1987) 163 CLR 199; 87 ATC 4363; (1987) 18 ATR 693. This ruling states that profits on isolated transactions may be ordinary income. In most circumstances, profit from an isolated transaction will be ordinary income when: (a) the intention or purpose of a taxpayer in entering into the transaction was to make a profit or gain; and (b) the transaction was entered into, and the profit was made, in the course of carrying on a business or in carrying on a business operation or commercial transaction. For a transaction to be characterised as a business operation or a commercial transaction, it is sufficient that the transaction is business or commercial in nature. Some of the factors to consider when looking at whether an isolated transaction is business or commercial in nature 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. | Detailed Reasoning - Profits of the sale of subdivided land can be income: Profits on the sale of subdivided land can be income according to ordinary concepts within section 6-5 of the ITAA 1997, if the taxpayers' subdivisional activities have become a separate business operation or commercial transaction, or an isolated profit making venture. In Scottish Australian Mining Co Ltd v. FC of T (1950) 9 ATD 135; (1950) 81 CLR 188 (at ATD p 140; CLR p195) his Honour, Williams J, in considering whether the subdivision of land was a profit making venture, said: The facts would, in my opinion, have to be very strong indeed before a court could be induced to hold that a company which had not purchased or otherwise acquired land for the purpose of profit-making by sale was engaged in the business of selling land and not merely realizing it when all that the company had done was to take the necessary steps to realize the land to the best advantage, especially land which had been acquired and used for a different purpose which it was no longer businesslike to carry out. In Statham & Anor v. FC of T 89 ATC 4070 ( Statham ) the Full Federal Court considered the subdivision of rural land which involved a large scale subdivision of 105 lots with a substantial outlay to obtain a large profit. It was considered that the mere magnitude of the realisation does not convert the activity into a business, undertaking or scheme. The Court considered the size of the subdivision, the amount of money involved, the involvement of the parties and the length of time the subdivision was to be developed over to determine whether the activities amounted to more than a mere realisation of assets. The Court determined that the owners were not in the business of selling land and that the activities amounted to a mere realisation of the asset by the most advantageous means. In FC of T v. Williams 72 ATC 4188; (1972) 127 CLR 226 ( Williams ) the High Court considered that development carried out on land to be subdivided, such as grading, levelling, road building and provision for water and power, was to enable the owner to secure the best price for the land and did not amount to carrying out a profit making scheme. The proceeds resulted from the mere realisation of a capital asset and were not income. Casimaty v. FC of T 97 ATC 5135; (1997) 37 ATR 358 ( Casimaty ) considered the sale of farming land. The proceeds were held to not be income according to ordinary concepts, but rather constituted the mere realisation of a capital asset, carried out in an enterprising way so as to secure the best price. Consequently, the profit derived from the subdivision and sale of the land by the taxpayer was not assessable income under section 6-5 of the ITAA 1997. By contrast in Stevenson v. FC of T 91 ATC 4476; (1991) 22 ATR 56; (1991) 29 FCR 282 ( Stevenson ) the court considered that the magnitude of the subdivision and the degree of involvement in the planning and managing of the subdivisional activities amounted to the carrying on of a business. The facts in this case involved a 220 block subdivision and the taxpayer was actively involved in the planning, employment of contractors and marketing of the blocks. Similarly, in FC of T v. Whitfords Beach Pty Ltd 82 ATC 4031; (1982) 150 CLR 355; (1982) 12 ATR 692; (1982) 39 ALR 521; (1982) 56 ALJR 240 ( Whitfords ) the court found that the taxpayers' activities in relation to the subdivision of the land amounted to more than realisation of a capital asset and constituted the carrying on of a business of land development. The taxpayer in this case was a company which was originally formed to acquire land to secure the shareholders continued access to their properties and at some stage subdivide the land and give each shareholder a separate title to a lot. | Detailed Reasoning - Application to your circumstances: The factors listed at paragraph 13 of TR 92/3 need to be considered in relation to the proposed subdivision to determine whether the proceeds will be income in nature. The relevant factors are: • The land in your case was acquired pre CGT for both business purposes and for main residence purposes • You and your spouse derived income from your business activity for over thirty years • You and your spouse have held the property for over forty years • You and your spouse will engage an arm's length developer to plan, oversee and complete all subdivision work. The services that will be provided under the Management Agreement are to develop/divide the property and to carry the cost of developing the property. • You and your spouse have not been involved in any other development or subdivision activities. • No additional land has been acquired to undertake any of the development activities. Your situation is similar to that in Statham, Williams and Casimaty's Cases. You did not acquire the property with a profit-making purpose and you and your spouse will engage a property developer to carry out all subdivision transactions. In addition, the number of proposed subdivided blocks is less than ten. This can be contrasted to Stevenson's Case which involved a 220 block subdivision and where it was the taxpayer who was actively involved in the planning, employment of contractors and marketing of the blocks. Applying the above cases and the factors outlined in TR 92/3, and the principle in Myer Emporium that there was no profit making intention at the time of acquisition, the land development activities and subsequent disposals are not activities which will be entered into with a profit-making purpose of commercial like transaction. Therefore, the disposal of the subdivided blocks will amount to the 'mere realisation of a capital asset' and is subject to the CGT provisions in Part 3-1 of the ITAA1997.

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