The classification of land subdivisions crosses the line from ‘mere realization’ to a business or profit-making scheme
Whether a subdivision of land will be taxed on ‘capital account’, or as part of a business or profit-making scheme comes down to a question of fact and degree. This question inevitably involves consideration of two main issues; firstly, whether the land was acquired for a profit-making purpose and, secondly, the degree of activity involved (and the taxpayer’s involvement therein).
The following two cases are often used to assist in determining how to classify the profits arising from the subdivision and sale of land.
(A) Statham & Anor v FCT[1988] FCA 463 (Statham’s case)
Description of activity: subdivision of farmland by the executor
Outcome: Mere realization of capital asset (capital account)
Details Mentioned in the previous blog related to Property Development Businesses (3) - A ‘mere realization of a capital asset’
(B) Stevenson v FCT [1991] FCA 224 (‘Stevenson’s case)
Description of activity: Subdivision and sale of farmland (significant involvement by the taxpayer)
Outcome: Carrying on a business of land development
Summary of facts:
- The taxpayer farmed for many years on land acquired from his father (476 acres that have been owned by the family for 70 years).
- Commence subdivision and sell-down of the land (after being unable to sell Broadacres anywhere near his asking price).
- Subdivided land into 220 lots and sold off over several years.
- Taxpayer’s involvement in the subdivision was extensive, Of note:
- Taxpayer managed the project (e.g., he dealt with council) and also personally cleared some of the lands to save on costs.
- No construction of buildings on the land but there were significant works done (e.g., constructing 6 km of water main to the farm, sewerage pump station, storm water drains, and roads).
- Roads, electricity, water, and sewerage works are all done by contractors engaged, managed, and paid by the taxpayer.
- Significant borrowings. Expenses incurred about the subdivision exceeded $1,500,000.
- The taxpayer controlled the marketing of blocks after subdivision and fixed the price to be asked for the land.
TAX TIP – Compare the subdivisions in Statham and Stevenson
In circumstances where a subdivision is carried out in a manner that is different from Statham, it becomes a question of degree as to whether the subdivision has ‘crossed the line’ into a business or profit-making transaction. Some factors are decisive (e.g., acquiring the land for a profit-making intention, or the construction of buildings over and above council requirements) and will generally be problematic. The closer the subdivision mirrors that in Stevenson (i.e., high level of taxpayer involvement, significant borrowings and expenses, etc.), the more likely the subdivision will move beyond a ‘mere realization’ and into a ‘land development business’ or ‘profit-making scheme’ territory.