Sale of subdivided farm land - Income or capital gain?

Will the gain realised on the sale of subdivided primary production land be a capital gain pursuant to subsection 104-10(4) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes, the realised gains from the sale of the subdivided primary production land in these circumstances will be capital gain for the purposes of subsection 104-10(4) of the ITAA 1997.

The taxpayer and another entity jointly purchased a primary production property to expand their existing businesses. After the acquisition, deregulation of their industry was announced and the taxpayers were advised that it would not be viable to carrying on the enterprise. Consequently the taxpayers unsuccessfully attempted to sell some of their land. They did not develop a coherent subdivision plan. After receiving further advice they subdivided the property and subsequently sold a number of blocks. The subdivision work was undertaken by the taxpayers to secure the approval by the local authority town planning scheme and make the land more suitable for the requirements of buyers.

With one exception, the taxpayers were not involved in the marketing and sale of the properties.

The taxpayers have not ceased their primary production activities and have retained some of the subdivided land for this purpose.

Casimaty v FC of T 97 ATC 5135; (1997) 37 ATR 358 (Casimaty's case) and McCorkell v FC of T 98 ATC 2199; (1998) 39 ATR 1112 (McCorkell's case) demonstrate that in circumstances where there is an absence of profit making intention when farming land is acquired, the likelihood of any profit made on the eventual sale of land being income according to ordinary concepts is greatly diminished.

However, profits on the sale of subdivided land can still 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. The Commissioner's guidelines in this regard are set out in paragraph 13 of Taxation Ruling TR 92/3.

The taxpayers did not undertaken the sale of the primary production land as a separate business operation.

The Commissioner accepts that the activities are no more than the realisation of an capital asset as per Casimaty's and McCorkell's cases. Any realised gain on the transaction will be a capital gain for the purposes of subsection 104-10(4) of the ITAA 1997.