ATO Interpretative Decision
ATO ID 2005/157
Income Tax
Capital Allowances: project pools - project amount - taxable purposeFOI status: may be released
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Does the taxpayer's subdivision of their parcel of land which will make them a capital gain when realised constitute a project carried on for a taxable purpose within the project pooling provisions of Subdivision 40-I of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
No. The project is not a project being carried on for a taxable purpose by the taxpayer within the project pooling provisions of Subdivision 40-I of the ITAA 1997.
Facts
The taxpayer owns a parcel of land on which they carried on a primary production business. Subsequently, the taxpayer commenced to subdivide the land into two parcels to maximise the return on the sale of the property. The taxpayer incurred expenditure on legal advice and various consultants in relation to the subdivision.
The amount received by the taxpayer from the realisation of the subdivision will be taken into account in working out a net capital gain to be included in the taxpayer's assessable income.
Reasons for Decision
Section 40-830 of the ITAA 1997 allows a deduction over the project life for project amounts allocated to a project pool.
To be a 'project amount' under subsection 40-840(2) of the ITAA 1997, an amount must be capital expenditure which, in addition to satisfying paragraphs 40-840(2)(a) and 40-840(2)(b) of the ITAA 1997, must also satisfy paragraph 40-840(2)(c) of the ITAA 1997; namely, that it must be directly connected with a project that the taxpayer carries on or proposes to carry on for a taxable purpose.
'Taxable purpose' is defined in subsection 40-25(7) of the ITAA 1997 to be the purpose of producing assessable income; the purpose of exploration or prospecting; the purpose of mining site rehabilitation; or environmental protection activities.
The phrase 'purpose of producing assessable income' is defined in subsection 995-1(1) of the ITAA 1997 to mean something done:
- (a)
- for the purpose of gaining or producing assessable income, or
- (b)
- in carrying on a business for the purpose of gaining or producing assessable income.
Therefore, a project is carried on or proposed to be carried on for the purpose of producing assessable income if it is carried on or proposed to be carried on:
- (a)
- for the purpose of gaining or producing assessable income, or
- (b)
- in carrying on a business for the purpose of gaining or producing assessable income.
Accordingly, to satisfy the 'taxable purpose' requirement, a taxpayer's project must be an income-producing activity. In this case, the taxpayer's project is subdividing and selling a capital asset, being their former farming land.
As stated in paragraph 36 of Taxation Ruling TR 92/3, the courts have often said that a profit on the mere realisation of an investment is not income, even if the taxpayer goes about the realisation in an enterprising way (Californian Copper Syndicate (Limited and Reduced) v. Harris (1904) 5 TC 159; Allied Pastoral Holdings Pty Ltd v. FC of T 83 ATC 4015; (1983) 13 ATR 835; Statham & Anor v. FC of T 89 ATC 4070; (1989) 20 ATR 228).
The amount the taxpayer receives from the sale of the subdivided land will be taken into account in working out a net capital gain to be included in their assessable income. In this case, the holding of a parcel of land as an investment which makes a capital gain upon realisation means that the asset is not being used to gain or produce assessable income for the taxable purpose required by the project pooling provisions even though a net capital gain is statutorily required to be included in assessable income.
As the test in paragraph 40-840(2)(c) of the ITAA 1997 is not satisfied, there is no project being carried on for a taxable purpose within the project pooling provisions of Subdivision 40-I of the ITAA 1997.
Date of decision: 6 May 2005Year of income: Year ended 30 June 2005
Legislative References:
Income Tax Assessment Act 1997
Subdivision 40-I
subsection 40-25(7)
section 40-830
subsection 40-840(2)
paragraph 40-840(2)(a)
paragraph 40-840(2)(b)
paragraph 40-840(2)(c)
paragraph 40-840(2)(d)
subsection 995-1(1)
Case References:
Californian Copper Syndicate (Limited and Reduced) v. Harris
(1904) 5 TC 159
83 ATC 4015
13 ATR 825 Statham & Anor v. FC of T
89 ATC 4070
20 ATR 228
Related Public Rulings (including Determinations)
Taxation Ruling TR 92/3
Taxation Ruling TR 2005/4
ATO ID 2003/206
ATO ID 2003/1090
Keywords
Capital Allowances CoE
Project amount
Project pool
Taxable purpose
Uniform capital allowances system
ISSN: 1445-2782