Determining whether a land subdivision is just selling property or part of a business or profit-making scheme depends on specific factors. Two key cases help understand this:

Understanding "Mere Realisation of a Capital Asset"

In simple terms, the concept of "mere realisation of an asset" refers to making a profit by selling something without actively running a business to generate that profit. When this happens, the profit is treated as a capital gain rather than income, which is usually more beneficial for tax purposes.

For example, selling a property that wasn't intended for business purposes or part of a profit-making plan is considered a mere realisation of an asset. This includes selling a home or a property used for long-term renting, or even selling a building used in your business operations.

Let's take a farming scenario as an example, like the Statham's case. In this case, the executor of a farmer's estate decided to sell off part of the farmland after the farmer's passing. The executor didn't do much beyond basic preparations for the sale, like hiring contractors to handle infrastructure work and listing the land with a real estate agent. Since the executor wasn't actively involved in running a business or making significant changes to the land, the profit from selling the lots was considered a capital gain.

If you have any questions about how this might apply to your situation, feel free to get in touch with Tax Ideas Accountants & Advisers at +61 2 83181545 or book an appointment through our live calendar.

The Kratzmann case, while often cited, doesn't serve as a reliable precedent for many taxpayers. Here's why:

Some people disagree about whether a taxpayer can give up on a plan to make money. They point to statements from previous court cases like Westfield v FCT and Myer's case. These statements suggest that if a transaction is not part of the usual business and the profit wasn't made in the intended way, then it might not be considered taxable income.

In Tax Ruling 92/3, the ATO talks about whether a profit made from selling real estate needs to happen in the way the taxpayer originally planned for it to count as a profit-making scheme. Unfortunately, the ATO's stance is that if a taxpayer aims to make a profit through one method but ends up making it through a different method, it still counts as a profit-making scheme. This means even if someone plans to make money by selling land but ends up making money through something like the government taking the land, it's still seen as a profit-making scheme.

The ATO listed important things to think about when deciding if a property deal is a regular business transaction or just a one-time thing. Here are some examples:

The ATO released TR 92/3 after the Myer's case, which explains when profits from a one-off transaction are considered income (profit-making scheme). According to this ruling, such profits are typically seen as income instead of capital gains when: