bg-imgs

Property Development Businesses (4) - Keeping a large-scale land subdivision on ‘capital account’ (1)

0 Comments

 

It is evident from the case law summarised above that, when dealing with a land development that involves the subdivision and sale of land, it is a question of degree as to whether the sale will cross the line from being a ‘mere realisation of a capital asset’ to being taxed as part of a land development business or a profit-making scheme. However, that being said, it is certainly possible to make a number of general statements regarding the tax treatment of such land developments.

For instance, when dealing with large-scale land subdivisions, case law suggests that where the land was acquired for a ‘non-profit’ making purpose (e.g., the land was acquired for farming or was inherited), it is possible to undertake the subdivision in such a way that makes it more likely the subdivision will be viewed as a ‘mere realisation of a capital asset’. This is particularly important where the land was used in carrying on a business connected with the taxpayer (e.g., farming) as the capital gain can potentially be reduced under the SBCs, in addition to the 50% discount. The approach taken by the taxpayer in Statham (and mirrored in Casimaty and McCorkell) should be followed to the extent possible to give the taxpayer the best chance of arguing the transaction is on ‘capital account’. Ideally, this means the subdivision would need to be undertaken as follows:

(a) Land must not be acquired for a profit-making purpose.

The land (and any additional land acquired, if any) must not be acquired for a profit-making purpose and it must be held for some time and farmed (or used privately etc.) prior to the subdivision. If the land has only been held and/or farmed for a short time, this may suggest the taxpayer partly acquired the land for a profit-making purpose (this is particularly so where the land had development potential – e.g., refer to Crow v FCT [1988] FCA 290).

(b) Extent of, and taxpayer’s personal involvement in, the subdivision must be limited.

The level of development should be limited to that required by the council to get the subdivision through. There should be no construction of buildings. Further, it is crucial that the taxpayer’s involvement in the subdivision is limited. There should be no direct contractual arrangements between the taxpayer and any contractor engaged to undertake the necessary work to meet council requirements. Rather, the taxpayer should rely upon a third party to engage and manage contractors (although the taxpayer is able to authorise payment for contractors).

 

  • Should you have any queries, please contact Tax Ideas Accountants & Advisers on +61 2 83181545
  • Alternatively, you can book an appointment in our live calendar.

Written by Panbo Ye

I help people discover POWERFUL unknowns in Tax Ideas | Wealth Strategies | Retirement Planning | Finance Solutions!

Leave a Reply

    Search form

    Categories

    See all

    Related Post

    Growth Is Just One Click Away

    Don't feel like calling? Just share your goals and situation & our expert will get in touch.

    Schedule A Meeting with "The Ideas"!

    How long would you like the meeting to be?