Edited version of private ruling

Authorisation Number: 1011580582604

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Ruling

Subject: Am I in business

Question

Will building the house for reward result in assessable income under section 6-5 of the Income Tax Assessment 1997 (ITAA 1997)?

Answer: Yes.

This ruling applies for the following periods

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

The scheme commences on:

1 July 2010

Relevant facts and circumstances

Your parents intend to subdivide the land where they live (main residence).

You intend to build your parents a new house on part of the subdivision, paying all development costs yourself.

The estimated costs for the development are substantial.

The estimated value of the house you will receive as payment is substantial.

The estimated time period of the building process is 14 months.

Your parents will then move into the new house and use it as their main residence.

Your parent's will transfer the old house into your name as payment for construction costs and time spent building the new house.

When transferred you intend to use the house as an investment property.

You work in plastering and ceiling services and will be applying a texture coat (rendering) to the external walls of the new house. You have estimated the total number of hours to apply a texture coat to the building to be 60 hours.

You have obtained a builder for development.

Relevant legislative provisions

Income Tax Assessment Act 1997, Section 6-5.

Income Tax Assessment Act 1997, Section 995-1.

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 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 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 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.

For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

Carrying on a Business or Isolated Transaction

Section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) defines a business as including any profession, trade, employment, vocation or calling, but does not include occupation as an employee.

Taxation ruling TR 97/11 outlines the factors that need to be considered to determine if someone is carrying on a business. These are as follows:

1. whether the activity has a significant commercial purpose or character;

2. whether the taxpayer has more than just an intention to engage in business;

3. whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity;

4. whether there is repetition and regularity of the activity;

5. whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business;

6. whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit;

7. the size, scale and permanency of the activity.

Details to consider:

· You sought the services of professionals to undertake this project.

· At the onset of the development there is an expectation of profit.

· Although the activity is being planned, organised and carried on in a businesslike manner, property development is not your normal employment and you had not undertaken such a development previously.

· There is no permanency in the activity; your sole purpose is to develop the property for your parents to occupy as their main residence, in return for payment being their old house and the subdivided portion of the land which it occupies.

· You do not intend on continuing in the property development field when this project is completed.

Considering the above facts the development is an isolated transaction and does not have the intention of carrying on a business.

Isolated Transactions refer to:

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

b) those transactions entered into by non-business taxpayers.

As you carry on a business in the field of plastering and ceiling services and you have entered into a property development transaction outside the ordinary course of this business, the transaction is an isolated transaction as referred to in category (a) above.

Section 6-5 of Income Tax Assessment Act 1997 (ITAA 1997) includes income according to ordinary concepts as part of assessable income.

The development of your parent's property and subsequent payment being the transfer of their old house into your name can be an isolated transaction.

Taxation Ruling TR 92/3 'Income tax: whether profits on isolated transactions are income' looks at situations where income from an isolated transaction will be ordinary income and therefore assessable under section 6-5 of ITAA 1997.

TR 92/3, in paragraph 1, defines the term 'isolated transactions' as:

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

b) those transactions entered into by non-business taxpayers.

This is appropriate to your situation as you carry on a business in the field of plastering and ceiling services and have entered into a property development transaction which is outside your ordinary course of business.

Paragraph 15 of TR 92/3:

If a taxpayer carrying on a business makes a profit from a transaction or operation, that profit is income if the transaction or operation:

(a) is in the ordinary course of the taxpayer's business (see paragraph 32 for an explanation of the circumstances in which a transaction is in the ordinary course of business) - provided that any gross receipt from the transaction or operation is not income; or

(b) is in the course of the taxpayer's business, although not within the ordinary course of that business, and the taxpayer entered the transaction or operation with the intention or purpose of making a profit; or

(c) is not in the course of the taxpayer's business, but

i.) the intention or purpose of the taxpayer in entering into the transaction or operation was to make a profit or gain; and

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

Paragraph 12 of TR 92/3:

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

Paragraph 13 of TR 92/3:

Some matters which may be relevant in considering whether an isolated transaction amounts to a business operation or commercial transaction are the following:

a) the nature of the entity undertaking the operation or transaction;

b) the nature and scale of other activities undertaken by the taxpayer;

c) the amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained;

d) the nature, scale and complexity of the operation or transaction;

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

f) the nature of any connection between the relevant taxpayer and any other party to the operation or transaction;

g) if the transaction involves the acquisition and disposal of property, the nature of that property; and

h) the timing of the transaction or the various steps in the transaction.

Paragraph 49 of TR 92/3 explains:

'In very general terms, a transaction has the character of a business operation or commercial transaction if the transaction would constitute the carrying on of a business except that it does not occur as part of repetitious or recurring transactions or operations. Some factors which may be relevant in considering whether an isolated transaction amounts to a business operation or commercial transaction are the following'. Those factors listed in paragraph 13 above are then considered in more detail.

Applying this to your circumstances:

There is an intention to obtain a profit by building the house for your parents to occupy as their main residence, in return for payment being their old house and the subdivided portion of the land which it occupies.

You have obtained a builder for development.

Developments costs are substantial and the value of the house to be received as payment is substantial.

The process of building the new house for your parents, paying all development costs yourself and receiving the old house as payment has the nature of a business or commercial transaction.

Note: The answer would be the same if you were a non-business taxpayer.

Conclusion

The profit from building the new house, being the payment of the old house to you by your parents is assessable under section 6-5 of ITAA 1997 as ordinary income.

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