Profit from subdividing one block into 2 assessable income

The AAT has decided that the profit arising from the subdivision of a property into 2 lots and the sale of those lots was assessable as ordinary income.

In August 2016, Yvonne McCarthy and her husband purchased at auction a residential property in Western Australia for $675,000 as joint tenants. In November 2016, less than 2 weeks after settlement, the taxpayer and her husband applied to the local council for approval of a plan to subdivide the property into 2 lots.

Approval for the subdivision was granted and in July 2017, 2 months after a long-term tenant vacated the property, the house was demolished. The one lot was sold for $480,000 under a contract dated 3 August 2017 and the other lot was sold for $490,000 under a contract dated 2 January 2018.

The issue was whether the profit from the sale of the 2 lots was assessable under s 6-5 of the ITAA 1997 as ordinary income, as contended by the ATO, or under the CGT provisions, as contended by the taxpayer.

The AAT agreed with the ATO that, at the time of the purchase of the property, one of the purposes for the purchase was a potential profit by subdivision and sale and that it was a not insignificant purpose. The AAT was not convinced by the taxpayer’s evidence that they had purchased the property with a view to renting it out for the long term. It was particularly significant that work on the subdivision must have commenced very shortly after the auction, as the application was finalised 10 days before the purchase was completed.

Accordingly, the AAT applied the Myer Emporium principle to decide that the profit was assessable as ordinary income under s 6-5. (McCarthy and FCT [2021] AATA 1511, AAT, Boyle DP, 28 May 2021.)