Edited version of private ruling

Authorisation Number: 1011556194072

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: Income tax - property disposal

Question

Will the proceeds from the sale of the property be assessable under the capital gains tax (CGT) provisions under Part 3-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following periods:

1 July 2009 - 30 June 2010

1 July 2010 - 30 June 2011

1 July 2011 - 30 June 2012

The scheme commences on:

1 July 200X

Relevant facts and circumstances

You are a husband and wife. You have a self managed superannuation fund (SMSF).

You made initial enquiries on the subdivision of your main residence to create a separate lot. The residence was acquired prior to 1985.

You state the intention at the time was to build a dwelling on the lot which would be rented out to provide an income stream for retirement.

You would have had to borrow the monies for construction of the dwelling which at your respective ages was not a viable financial option.

You and the SMSF formulated a joint venture agreement (JVA) whereby you would supply the land and the SMSF would finance the construction of the dwelling.

The JVA was prepared to comply with the Superannuation Industry (Supervision) Act 1993.

The subdivision and all other matters necessary to commence construction were completed.

Construction of the dwelling took approximately 18 months. There were a number of protracted disputes with the builder over issues relating to the construction of the dwelling and damage to adjacent fixtures.

The protracted problems in the construction of the dwelling lead to a decline in the health of one partner. This affected your finances. You were unable to achieve budgeted billing fees in the business over two consecutive years.

After the completion of the contract with the builder there were a number of items required to be completed prior to offering the dwelling for rent.

Further time elapsed in engaging contractors for this completion work. In finishing the property a further dispute ensued over building regulations with the contractor engaged to complete the capital works.

The SMSF could not borrow money. You contributed money to the project on an "as required" basis.

While the house is habitable, it has not been fully completed. The property still requires fencing, landscaping and a driveway.

The property has never been offered for rent. Given the incomplete nature of the property you decided not to rent out the property to cover costs as the discounted rent would attract a tenant that would not take care of the property.

You have provided a copy of the JVA which forms part of these facts.

The parties to the JVA are going to sell the property in its current state through a real estate agent.

The proceeds realised from this planned sale would be distributed among the parties in accordance with the JVA.

The only other asset of the SMSF is a cash account.

Both you and the SMSF do not have any prior involvement in property development or land subdivision activity.

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA of the ITAA 1936 to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA of the ITAA 1936 applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5.

Income Tax Assessment Act 1997 Part 3-1.

Reasons for Decision

Taxation Ruling TR 92/3 sets out the Commissioners view on whether profits made from isolated transactions are ordinary income and therefore assessable under section 6-5 of the ITAA 1997.

'Isolated transactions' refers to:

· those transactions outside the ordinary course of business of a taxpayer carrying on a business; and

· those transactions entered into by non-business taxpayers.

Whether a profit from an isolated transaction is income according to ordinary concepts depends very much on the circumstances of the case. However, where a taxpayer who does not carry on a business makes a profit from an isolated transaction, that profit is income if:

· the intention or purpose of the taxpayer in entering into the profit-making transaction or operation was to make a profit or gain, and

· the transaction or operation was entered into, and the profit was made, in carrying out a business operation or commercial transaction.

Intention

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.

It is not necessary that the intention or purpose of profit-making be the sole or dominant intention or purpose for entering into the transaction. It is sufficient if profit-making is a significant purpose.

The taxpayer must have the requisite purpose at the time of entering into the relevant transaction or operation. Where 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 land or property.

Carrying out a commercial transaction

Paragraph 13 of TR 92/3 lists factors which are relevant in considering whether an isolated transaction amounts to a business operation or commercial transaction. Relevant factors 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;

· 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.

No single factor is determinative rather it will be a combination of factors that will lead to a conclusion as to the character of the activities.

Application to your situation

From an objective consideration of the facts it could not be concluded that the significant purpose in entering into the arrangement was to make a profit from an isolated transaction. This is based on the following facts:

· the building contract was completed several years ago. Currently the dwelling is habitable but not complete, and

· the property is to be sold in its current state without landscaping, fencing or a driveway, and

· there were a number of extenuating circumstances leading to the decision to sell the property, and

· neither you nor the SMSF have been or are currently involved in any other property development or land subdivision activity.

It would be difficult to conclude that there was an intention from the outset to carry out an isolated profit making transaction considering the time period that has elapsed since construction. The facts support the contention that the land was subdivided and the property was constructed for the purpose of generating an income stream in retirement, despite this not eventuating.

Where there is not an objective intention to make a profit or gain, proceeds from an isolated transaction are not considered ordinary income.

In this case the sale of the property is considered to be the mere realisation of a capital asset. The proceeds are assessable under the CGT provisions in Part 3-1 of the ITAA 1997.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).