Will the profit from the sale of subdivided Lots of land be treated as statutory income under the capital gains tax provisions in Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Yes. Based on the information provided, the proceeds from the sale of the subdivided lots will not be ordinary income and not assessable under section 6-5 of the ITAA 1997as either: • the carrying on of a business in accordance with the factors listed in Taxation • Ruling TR 97/11; or • a profit-making or commercial transaction in accordance with Taxation Ruling TR 92/3. Therefore, any proceeds received on the disposal of the subdivided Lots will represent a mere realisation of capital assets which will be assessed under the capital gains tax provisions contained in Parts 3-1 and 3-3 of the ITAA 1997. This ruling applies for the following periods : Year ending 30 June 20XX Year ending 30 June 20XX Year ending 30 June 20XX The scheme commences on: 1 July 20XX
In 19XX Person A and Person B (You) purchased a property. You purchased the property so that you could live there as your main residence and raise your family. You have grown xxxx, xxxx and it has occasionally been used as a xxxx. The land is X hectares. It was zoned Rural Residential and has been rezoned to General Residential Zone 1. After a series of major health issues, You decided that as you got older and dealt with potential a decline in mobility, you were concerned that you would not be able to look after and manage the land as would be required. You made contact with the local Council as to current zoning and requirements should you decide to undertake a subdivision and obtained a preliminary survey and advice from a surveyor about the suitability of your land for development. In the middle of 20XX, the formal planning application was submitted to the Council. In Month 20XX the Council passed the application with some amendments.
You have adjusted the development plan in accordance with Council's requirements and are awaiting a response. You are uncertain as to when actual subdivision activities can commence as you are dependent upon the actions and timeframes of several external bodies. You are hopeful that actual activity will commence by the middle of 20XX . As at Month 20XX the market value of the house and land unsubdivided was between $X - $X. The land will be subdivided to meet the criteria of the Sustainable Subdivision Framework Pilot Project. You are participating as a possible test case for sustainable subdivision within the Local Shire. It requires certain criteria to be met to ensure and promote environmentally sustainable development. There is no financial reward or compensation for participating in the project. In order to meet the requirements of the project, you are only subdividing the land into X Lots (including the existing house Lot) instead of the maximum X+ lots that would be allowed under the current local government planning scheme. The larger blocks allow for greater capacity to meet the sustainable requirements and to maintain current rural amenity.
The subdivision will require development of common roads and the provision of power, water and sewerage connection to each of the blocks. You have engaged the services of the following entities: • Business A - Survey and Mapping - Initial Survey • Business B - Landscape and Urban Design - Project Management • Business C - Consulting - Civil Construction • Accounting & Financial Services - Financial Services • Solicitors - Legal Services • Business D - Tree health survey and management plan including removal. • Local Real Estate - Real Estate Marketing and Sales The total estimated costs to complete the subdivision is expected to be in excess of $X. The subdivision costs will be funded by a combination of borrowings from your home loan account, superannuation savings and a loan from the Bank. The subdivided Lots will be held in the name of Person A and Person B. The existing house will be on X square metres, with the other X Lots varying in size between X to X square metres. The estimated value of the subdivided Lots will be approximately $X per Lot.
You intend on selling six Lots for a total of $X. You intend to keep one of the Lots for construction of a smaller energy efficient home for yourselves. You would also like to keep the existing house on the X square metre Lot, but you may have to sell it to help repay some of the subdivision costs incurred. One or two of the Lots may be sold by word of mouth however preliminary discussions have been held with a local Real Estate Agent, and you will most likely engage them to conduct the sale of the Lots. You have not undertaken any subdivision activities or any business of land development in the past. You do not have any plans to undertake subdivision activities or any business land development in the future. Your land as a whole has not been on the market for sale during your period of ownership. You are not registered for GST. Assumptions The sale of the Lots will occur during the period of this ruling.
Income Tax Assessment Act 1997 section 6-5 Income Tax Assessment Act 1997 Part 3-1 Income Tax Assessment Act 1997 Part 3-3