Edited version of private ruling

Authorisation Number: 1011593760056

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Ruling

Subject: Income - property development

Will the proceeds from the disposal of the property with the development approval in place be included in your income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

No.

This ruling applies for the following periods:

1 July 2009 - 30 June 2010

1 July 2010 - 30 June 2011

The scheme commences on:

1 July 2009 - 30 June 2010

Relevant facts and circumstances

The rulee is a unit trust. The units are owned by a SMSF.

The unit trust purchased a property after 1985. The property consisted of a number of shops used as offices.

The unit trust borrowed from the bank to finance the balance of the purchase price.

Initially some of the offices in the property were leased to a business owned by the beneficiary of the SMSF and the rest leased to a party not connected to the unit trust.

The business that was owned by the beneficiary of the SMSF vacated the premises and the premises were leased to outside interests. The premises continue to be used to derive rental income.

The offices have vacant land at the back. The unit trust outlaid money for floor plans and approvals with a view to developing and selling the property.

Plans were drawn and a planning permit was issued for alteration and additions to the existing buildings and for the development of additional dwellings.

The building costs were found to be high for the project. The unit trust is now considering selling the land with approvals to possibly a builder.

Neither the unit trust nor any related entities have been involved in prior development activity and they do not own any other land or property.

A planning permit was provided which forms part of the facts.

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 Subsection 6-5(2)

Reasons for decision

Under subsection 6-5(2) of the ITAA 1997 the assessable income of a resident taxpayer includes the ordinary income derived directly or indirectly from all sources. Generally, income is derived periodically from activities or investments of the recipient. However, in some circumstances, the profit from an isolated transaction may be regarded as the income of the recipient.

Taxation Ruling TR 92/3 sets out the Commissioners view on whether profits made from isolated transactions are ordinary income. '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.

In this case, the rulee states that they are not in the business of property development and have no other land or property holdings relating to property development.

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:

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

(b) 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 relevant in considering whether an isolated transaction amounts to a business operation or commercial transaction. Relevant factors are listed and have been applied to the rulees circumstances as follows:

(a)       the nature of the entity undertaking the operation or transaction. The unit trust owns the property and attained the development application. No separate entity was formed to undertake the operation

(b)        the nature and scale of other activities undertaken by the taxpayer. The rulee states that they are not in the business of property development and have no other land or property holdings relating to property development

(c)        the amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained. The rulee states the estimated sale price of the property will be similar to the acquisition price of the property. In any case, apart from acquisition costs, the only funds expended by the rulee were fees relating to the development approval and preparation of the application, no capital works have been carried out

(d)        the nature, scale and complexity of the operation or transaction. The development application is not large in scale and complexity; it involves demolition and additions to the existing building and the construction of a number of dwellings

(e)        the manner in which the operation or transaction was entered into or carried out. The operation is limited to development approval stage and no works will be carried out

(f)         the nature of any connection between the relevant taxpayer and any other party to the operation or transaction. The rulee states that there are no related entities involved in the operation nor will the property be disposed of to a related entity

(g)        if the transaction involves the acquisition and disposal of property, the nature of that property. The property is a single block of land zoned for business use

(h)        the timing of the transaction or the various steps in the transaction. The rulee acquired the property some time after 1985. No further land was acquired. Plans were developed a number of years after acquisition. A planning permit was issued a year later. The buildings on the land have been used to derive rental income since acquisition.

Application to your situation

From consideration of the factors above it can be concluded that in this situation the disposal of the property with a development application in place would amount to the mere realisation of the asset to its best advantage.

As a result, the profit derived from the disposal by the unit trust is not assessable income under section 6-5 of the ITAA 1997. Rather, the proceeds would be subject to the capital gains tax provisions under part 3-1 of the ITAA 1997.

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