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Ruling

Subject: capital gains tax and acquisition and disposal of property

Question 1

Is the profit from disposal of the dwelling assessable under Income Tax Assessment Act 1997 Section 6-5?

Yes.

This ruling applies for the following period

Year ended 30 June 2009

The scheme commenced on

1 July 2008

Relevant facts and circumstances

You and your spouse purchased a block of land several years ago from a development company.

The block of land was situated in a new land development in a popular area for home owners and rental properties.

Settlement occurred several months later.

Finance was obtained through a bank and was approved for land purchase and construction costs. The loan was for an investment home loan.

You engaged the services of a builder and construction commenced shortly after settlement on the land. There was no relationship between the vendor of the land and the builder.

The construction costs were documented on a spreadsheet provided as Attachment A and the building contract price listed in the residential Building Contract provided as Attachment D. The discrepancy between the two costs arose as you and your spouse were responsible for the construction of some aspects. As you were considering renting the property, additional costs incurred also included a number of fittings.

The bank finance was approved on the basis that it would be repaid from the sale of the property or continue for an extended period if the house was tenanted. This arrangement was made at the time finance was approved as you and your spouse were undecided whether you would retain the dwelling for income producing purposes or dispose of the dwelling.

During this period, rental rates were rising rapidly and you believe the bank was eager to increase their loan portfolio and would be happy for the loan to continue.

The construction was completed and you and your spouse took possession of the dwelling within a number of months of construction commencing.

You and your spouse have not previously built a dwelling and subsequently sold it a short time after construction had been completed.

A dated letter attributed to your real estate agent provided an assessment of the rental income obtainable on a weekly basis. The letter was not on company letterhead nor was it signed by the author.

The amount of rental income would allow you and your spouse to either break even after interest and other rental expenses were deducted, or incur a small loss.

The dwelling was listed with a real estate agent for sale and the real estate agent contract signed in the same month as you took possession of the dwelling. The real estate agent has provided a signed, undated letter on company letterhead confirming you provided verbal instruction to your agent that if the property did not sell within a specified timeframe that the dwelling be placed on the rental market. You and your spouse remained undecided on your decision regarding the dwelling.

At this time, the stock market was unstable with the price of shares dropping.

You and your spouse are nearing the end of your working life and you decided to adopt a conservative approach and sell the dwelling.

You believe if you had retained the dwelling for income producing purposes you would have made a loss in the relevant financial year given there were a number of interest rates rises.

An offer was made on the dwelling several months after it was listed for sale and you decided to accept the offer and sell the dwelling. Settlement occurred less than 2 months later.

You and your spouse are seriously considering undertaking another development in the future.

Relevant legislative provisions

Income Tax Assessment Act 1997- Section 6-5.

Reasons for decision

Sale of property - profit-making scheme

The assessable income of a taxpayer includes profit arising from the sale of any property acquired by them for the purpose of profit-making by sale, or from the carrying on or carrying out of any profit-making undertaking or scheme.

Taxation Ruling 92/3 provides guidance of whether profits on isolated transactions are income. Income will be assessed as ordinary income where it is income according to ordinary concepts.

'Ordinary income' will be assessable income if it is 'income according to ordinary concepts'.

There is no definition of 'ordinary income' in income tax legislation. In determining whether an amount is ordinary income, the courts have established the following principles:

- what receipts ought to be treated as income must be determined in accordance with the ordinary concepts and usages of mankind, except in sofar as statute dictates otherwise

- whether the payment received is income depends upon a close examination of all relevant circumstances; and

- it is an objective test.

Examples or ordinary income include salary and receipts.

Paragraph 9 advises that if a transaction or operation involves the sale of property, it is usually, but not always, necessary that the taxpayer has the purpose of profit-making at the time of acquiring the property. The relevant intention or purpose of the taxpayer of making a profit or gain is not the subjective intention or purpose of the taxpayer. Rather, it is the taxpayer's intention or purpose discerned from an objective consideration of the facts and circumstances of the case.

Paragraph 13 provides guidance in considering whether an isolated transaction amounts to a business operation or commercial transaction. These include

- the nature of the entity undertaking the operation or transaction;

- the nature and scale of other activities undertaken by the taxpayer;

- the amount of money involved in the operation or transaction and the magnitude

- of the profit sought or obtained;

- the nature, scale and complexity of the operation or transaction;

- the manner in which the operation or transaction was entered into or carried out;

- the nature of any connection between the relevant taxpayer and any other party

- to the operation or transaction;

- if the transaction involves the acquisition and disposal of property, the nature of

- that property; and

- the timing of the transaction or the various steps in the transaction.

Paragraph 35 advised that where a profit from an isolated transaction is assessable income, two elements must be existent. They are:

- the intention or purpose of profit-making must exist in relation to that transaction and;

- the transaction must be a business operation or commercial transaction.

For a transaction to be characterised as a business operation or commercial transaction, it is sufficient if the transaction is business or commercial in character.

In your situation, you purchased a vacant block of land. You engaged a building contractor and construction commenced. You took possession of the dwelling several months later. The dwelling was listed with a real estate agent for sale and the real estate agent contract was signed in the same month you took possession of the dwelling. An offer to purchase the property was made several months later and settlement occurred shortly after. You provided an undated letter from your real estate agent confirming your verbal instructions to list the property on the rental market if the property was not sold. Your instructions to the real estate agent, to place the property on the rental market if the dwelling failed to sell, is seen as an alternate plan in isolation to the original intension or purpose when first entering into the transaction.

After weighing all the circumstances surrounding the purchase of the vacant land, construction of a dwelling and subsequent disposal of that dwelling, we consider that you have undertaken an isolated transaction of a commercial nature with the intent to derive profit from the acquisition of vacant land, the construction of a dwelling and the disposal of a dwelling. This transaction will give rise to ordinary income being assessed under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 97).

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