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Ruling

Subject: Assessability of compensation proceeds for financial loss

Question 1

Will the compensation payment received by the taxpayer give rise to a taxable gain pursuant to Part 3-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

No.

Question 2

If the receipt is not on capital account, is the compensation receipt assessable as ordinary income under section 6-5 of the ITAA 1997?

Yes.

Question 3

Alternatively, will the compensation give rise to assessable income from a profit-making scheme under section 15-15 of the ITAA 1997?

Yes.

Question 4

Alternatively, will the compensation give rise to assessable income pursuant to section 25A of the Income Tax Assessment Act 1936 (ITAA 1936)?

No.

Question 5

In the event that the receipt is assessable under section 6-5 or section 15-15 of the ITAA 1997, when was the land ventured in or committed to the profit making undertaking or scheme for the purposes of calculating the market value under paragraph 70-30(1)(a) and CGT event K4 of the ITAA 1997?

When the intention of the taxpayer changed and it embarked on the first stage of developing the remaining land following the sale of the business.

Relevant facts and circumstances

The taxpayer acquired a property. The property was acquired as part of the purchase of a business which the taxpayer intended to operate indefinitely.

At the time the property was purchased, it was not subject to any formal reservation. Nor was the taxpayer aware that part of it was proposed to be used for a road.

The taxpayer sold the business including the associated land.

The remaining land was subdivided into industrial lots.

During subsequent years, the taxpayer incurred various costs in respect of the remaining land held. Those costs primarily related to subdivision services, council applications, surveys, consulting and legal fees, water main extensions, water rates, valuation fees, sale related costs, registration of titles, excavations, advertising, and construction costs. The construction costs were in respect of the construction of buildings as requested by the purchasers of the subdivided blocks.

All but one of the subdivided lots of land were sold at arm's length to unrelated parties. This left the remaining one allotment of land.

The taxpayer applied to subdivide the remaining allotment of land into further industrial lots but the application was rejected. The public authority had objected to the subdivision but also accepted financial responsibility for a compensation claim arising from the refusal of the application.

The taxpayer applied for a permit for a warehouse development on the last remaining allotment of land. However, the application was put in abeyance after it was proposed to rezone the land from industrial to residential. The taxpayer objected to the proposed rezoning.

The land was subsequently rezoned from industrial to residential under a planning scheme.

The taxpayer applied for a planning permit to subdivide the remaining allotment of land into a number of residential lots. The proposed development consisted not only of the subdivision of the land into residential lots (including appropriate council and utilities fees), but the construction of a road, water, sewer and electricity reticulation, drainage, lighting, fencing, landscaping and consultants fees.

The public authority objected to the grant of the permit on the basis that a proportion of the land was identified as required for road purposes.

The council refused the permit application.

The refusal of the permit application was the subject of an application for review to a State tribunal.

The tribunal ordered that, inter alia, 'the tribunal directs that a permit must not be granted on the ground that the land is or may be required for public purpose'.

The taxpayer served a Notice of Claim for Compensation for financial loss pursuant to the relevant State legislation. This claim was rejected.

The matter was referred to the relevant court as a disputed claim for determination.

A claim for compensation of was lodged in the relevant State court. Compensation was claimed for financial loss.

The claim was based upon a valuation report.

The valuation report noted that their valuation had been undertaken in accordance with the relevant legislation which sets out the requirements for determining financial loss.

The valuer used two methods to estimate the value of the land - the Direct Comparison Method (where sales of broadacre parcels of land were analysed and a rate applied per hectare as a unit of comparison), and the Residual Analysis Approach (where an amount is determined for what a developer could afford to pay for the land based upon the expected gross realisation of the lots less an allowance for selling and legal costs, a profit and risk allowance and development and financial costs). The valuation report included an estimated cost of developing the land by in accordance with the development plan.

The proceeding was then subject to a court ordered mediation and the matter was settled with both the consideration for the sale of land and compensation payment being agreed at that time.

The settlement was documented in a single Deed of Settlement, transfer, release and indemnity.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 25(1),

Income Tax Assessment Act 1936 section 25A,

Income Tax Assessment Act 1936 paragraph 26(a),

Income Tax Assessment Act 1997 section 6-5,

Income Tax Assessment Act 1997 section 6-10,

Income Tax Assessment Act 1997 15-15,

Income Tax Assessment Act 1997 subsection 70-30(1),

Income Tax Assessment Act 1997 Part 3-1,

Income Tax Assessment Act 1997 section 104-10,

Income Tax Assessment Act 1997 section 104-220 and

Income Tax Assessment Act 1997 section 118-20.

Reasons for decision

Characterisation of compensation

Taxation Ruling TR 95/35 considers the taxation treatment of compensation receipts. If an amount of compensation is received wholly in respect of the disposal of an underlying asset, or part of an underlying asset of a taxpayer, the compensation represents consideration received on the disposal of the asset (paragraph 4 of TR 95/35).

To identify the underlying asset in relation to the payments received by the taxpayer, an analysis of all the possible assets of the taxpayer is required to determine the asset to which the compensation amount is most directly related. The underlying asset is the asset that is disposed of or has suffered permanent damage or has been permanently reduced in value because of some act, happening, transaction, occurrence or event which has resulted in a right to seek compensation from the person or entity causing that damage or loss in value. This process is also known as the look-through approach (paragraphs 3 and 70 to 82 of TR 95/35).

The compensation arose due to the refusal by the council to a development application to subdivide the remaining allotment of land into residential lots. The refusal was due to a proportion of the land being identified as required for a public purpose - a road.

The public authority was liable for the compensation under the relevant State Act.

The right to compensation arose when the tribunal directed that a permit must not be granted on the ground that the land was or may be required for a public purpose.

As part of a court ordered settlement, the taxpayer received two amounts concurrently with the disposal of the land; an amount for the transfer of the land and an amount as compensation for financial loss.

The settled compensation amount was broadly based on a valuation report.

The link between the compensation payment and the reduction in the value of the land demonstrates that the underlying asset for the compensation payment is the land and not some other asset (such as the right to seek compensation).

Capital gains and losses

Section 104-10 of the ITAA 1997 provides that a CGT event A1 happens if you dispose of a CGT asset. The land is a CGT asset under section 108-5 of the ITAA 1997.

The time of disposal is either when the contract for disposal is entered into, or if there is no contract, when the change of ownership occurs (subsection 104-10(3) of the ITAA 1997).

As there was no contract of sale for the land, CGT event A1 happened on the date when the change of ownership occurred.

A capital gain is made if the capital proceeds (compensation payment and the amount paid for the transfer of the land), are more than the asset's cost base. A capital loss is made if those capital proceeds are less than the asset's reduced cost base (subsection 104-10(4) of the ITAA 1997).

However, a capital gain that is made from a CGT event is reduced if, because of the event, another provision includes an amount in assessable income (section 118-20 of the ITAA 1997).

If no other provision includes an amount for the disposal of the land in assessable income, the capital gain or capital loss will be disregarded as the land was acquired before 20 September 1985 (paragraph 104-10(5)(a) of the ITAA 1997).

Assessable income

Subsection 6-5(2) of the ITAA 1997 provides that an Australian resident's assessable income includes ordinary income derived from all sources during the income year.

Ordinary income is income according to ordinary concepts (subsection 6-5(1) of the ITAA 1997).

The ordinary income provisions will apply if the taxpayer was:

§ carrying on a business of property development

§ carrying out a business operation or commercial transaction, or

§ the profits resulted from isolated transactions.

'Isolated transactions' are those transactions that are outside the ordinary course of business of a taxpayer carrying on a business, or those transactions that are entered into by non-business taxpayers (paragraph 1 of Taxation Ruling TR 92/3).

Further, section 6-10 includes in assessable income amounts that are not ordinary income but are included in assessable income by provisions about assessable income. This type of income is called statutory income.

Section 15-15 of the ITAA 1997 is a statutory income provision and it provides that assessable income includes profit arising from the carrying on or carrying out of a profit-making undertaking or plan if:

§ the profit is not included in assessable income under section 6-5 of the ITAA 1997, and

§ the property was acquired before 20 September 1985.

In most cases, it has been unnecessary to determine whether the profits in question are assessable as ordinary income under section 6-5 of the ITAA 1997 (formerly subsection 25(1) of the Income Tax Assessment Act 1936 (ITAA 1936)), or as statutory income under section 15-15 of the ITAA 1997 (formerly paragraph 26(a) of the ITAA 1936).

In Federal Commissioner of Taxation v. Whitfords Beach Pty Ltd [1982] HCA 8; (1982) 150 CLR 355; 82 ATC 4031; (1982) 12 ATR 692 (Whitfords Beach Case), Gibbs CJ, when considering both subsection 25(1) of the ITAA 1936 and the second limb of paragraph 26(a) of the ITAA 1936, stated that:

If the words of the second limb are literally construed they are wide enough to include profits which are income according to ordinary concepts as well as profits of a capital nature. In so far as they include profits which are income in character they appear to overlap to some extent the provisions of sec. 25(1): see White v. F.C. of T., at p. 219, and F.C. of T. v. Bidencope 78 ATC 4222 at p. 4223; (1978) 140 C.L.R. 533 at p. 552. In practice in some (if not most) cases it has been found unnecessary to determine whether the profits in question were assessable under sec. 25(1) or sec. 26(a); it was enough to decide whether or not they were taxable. In A.C. Williams v. F.C. of T. 72 ATC 4157; (1972) 128 C.L.R. 645 Stephen J., at ATC p. 4166; C.L.R. pp. 652-653, has given examples of cases in which it was regarded as immaterial under which provision (sec. 25(1) or sec. 26(a)) the receipts in question became assessable income, the question in issue being whether they were assessable at all … The present case is not one in which the alleged profit-making undertaking or scheme forms part of a larger operation. The alleged scheme forms the whole of the taxpayer's operations. The question that arises is whether profits arising from the carrying on or carrying out of a profit-making scheme that itself constitutes the whole of the taxpayer's business are taxable under sec. 26(a), notwithstanding that in the absence of the provisions of that paragraph the profits would fall within sec. 25(1).

It is necessary to determine whether the payments received by the taxpayer in relation to the land are assessable as income under sections 6-5 and/or 15-15 of the ITAA 1997, or whether the disposal of the land can be characterised as the mere realisation of an asset and therefore not assessable as income.

Mere realisation of an asset

In Californian Copper Syndicate (Limited and Reduced) v. Harris (Surveyor of Taxes) (1904) 5 TC 159, the Lord Justice Clerk stated that:

It is quite a well settled principle, in dealings with questions on Income Tax, that where the owner of an ordinary investment chooses to realise it, and obtains a greater price for it than he originally acquired it at, the enhanced price is not profit … assessable to Income Tax. But it is equally well established that enhanced values obtained from realisation or conversion of securities may be so assessable, where what is done is not merely a realisation or change of investment, but an act done in what is truly the carrying on, or carrying out, of a business... What is the line which separates the two classes of cases may be difficult to define, and each case must be considered according to its facts; the question to be determined being - Is the sum of gain that has been made a mere enhancement of value by realising a security, or is it a gain made in an operation of business in carrying out a scheme of profit-making?

The Oxford Dictionary of English edited by Angus Stevenson. Oxford University Press, 2010. Oxford Reference Online, states that the word 'mere' is used to emphasise how small or insignificant someone or something is. It follows that the mere realisation of an asset is one in which small or insignificant steps are taken to realise that asset to best advantage.

The courts have attempted to draw a line between the mere realisation of an asset in an enterprising way, and what surpasses that line and is assessable as income.

In the Whitfords Beach Case, the taxpayer company purchased land in 1954 for the purpose of the shareholders having access to shacks on a beachfront and not for the purpose of profit-making by sale or for any business purpose. In 1967, the shareholders sold their shares to three companies who had the intention that the taxpayer would cause the land to be developed, subdivided and sold at a profit. Mason J stated that:

… the facts previously mentioned show that there was involved more than mere realization of an asset. Deane J. was right in pointing to the circumstance that the asset was divided and improved in the course of a business of dividing and improving the asset. In this respect I do not agree with the proposition which appears to be founded on remarks in some of the judgments that sale of land which has been subdivided is necessarily no more than the realization of an asset merely because it is an enterprising way of realizing the asset to the best advantage. That may be so in the case where an area of land is merely divided into several allotments. But it is not so in a case such as the present where the planned subdivision takes place on a massive scale, involving the laying-out and construction of roads, the provision of parklands, services and other improvements. All this amounts to development and improvement of the land to such a marked degree that it is impossible to say that it is mere realization of an asset. We need to bear in mind that the subdivision of broad acres into marketable residential allotments involves much more in the way of planning, development and improvement than was formerly the case.

Like Wilson J., I have difficulty with the decision of Williams J. in Scottish Australian Mining Co. Ltd. v. F.C. of T. (1950) 81 C.L.R. 188. The taxpayer there, after giving up its mining business in 1924, devoted itself to the subdivision of its land. This entailed the construction of roads, the building of a railway station, the granting of land to public institutions such as schools and churches and the setting aside of land for parks. I should have been inclined to the view that the taxpayer had ceased to carry out its mining business and that it had commenced to carry on the business of land development.

This conclusion would have been more consistent with the later decisions of this Court in Fox, and White v. F.C. of T. (1968) 120 C.L.R. 191. In Fox (in which no mention was made of Scottish Australian) the activities were less extensive, though they did involve land subdivision and improvement (reclamation). The only difference between Scottish Australian and Fox seems to lie in the circumstance that there was a new taxpayer in Fox. He was a new taxpayer whose function it was to get in the bankrupt's assets so that a distribution among creditors could take place.

From what I have said it will be seen that it is my opinion that what the respondent did amounted to more than realization of an asset and constituted the carrying on of the business of land development. Accordingly, the gross income is assessable under sec. 25(1).

But for this conclusion I would have held that the activity of the respondent amounted to the carrying out of a profit-making undertaking or scheme which exhibited the characteristics of a business deal so that net profit of the respondent would have been assessable under the second limb of sec. 26(a), if not under sec. 25(1).

Murphy J was in no doubt as to whether the land development was a profit-making undertaking or scheme. His Honour stated that:

The land development scheme falls easily within the conception of a profit-making undertaking or scheme. The development involved not only subdivision, but planning and building of roads and other services, as well as other activities involved in modern land development schemes, and it was undertaken for profit-making. This is not a borderline case. It is altogether different from, for example, simple realisation of a large allotment by subdivision into several smaller blocks.

Further, Wilson J concluded:

But that is not to say that the magnitude of the operation is wholly irrelevant to the determination of its nature, in answering the question whether more than mere realisation is involved in the treatment of a capital asset. … I am inclined to question whether some of the earlier cases have not assumed too readily that the conversion of broadacres into residential allotments with all the services and facilities that are requisite to an urban environment is no more than the realisation of a capital asset in an enterprising way. But that question need not be pursued here, because this case exhibits the additional feature that at the material time the subject land as a matter of law could not be sold otherwise than in its unsubdivided state. The business upon which the taxpayer embarked in 1967 required active measures to be undertaken in order to remove the legal impediment to development of the subject land. That change in its character was essential to the successful achievement of the taxpayer's purpose. Taken together with all the attendant circumstances, it satisfies me that the taxpayer ventured the subject land as the capital of the business in such a way as to make the proceeds of that business assessable income within the meaning of sec. 25 of the Act.

In Stevenson v. Commissioner of Taxation (1991) 29 FCR 282; 91 ATC 4476; (1991) 22 ATR 56 (Stevenson's Case), the taxpayer owned and worked a farm he had bought in 1953. Permission to sell residential blocks of land was sought in and after 1975 with conditions attached requiring expenditure on the provision of water and sewerage before the blocks could be sold. The taxpayer, having tried to sell the land, decided in 1976 to fulfil the conditions himself and to sell the land in subdivided blocks. By the end of 1986, about 180 of more than 220 blocks of land had been sold.

Jenkinson J found the answer (that the proceeds of sale were assessable) in the observations of Deane J in the Federal Court in Whitfords Beach Pty Ltd v. Commissioner of Taxation (Cth) (1979) 44 FLR 312; 79 ATC 4648; (1979) 10 ATR 549 (and confirmed by Mason J in the Full High Court), where he stated:

Where a person who carries on a business sells an asset which had been held as a capital asset, one must, in each case, ask the question whether the asset was devoted to the particular business to such an extent that it can properly be said that the proceeds of sale represent profits made in the ordinary course of that business. In a case where the asset has been divided and the divided parts improved in the course of a business of dividing and improving such assets, it would be rare that one could say that the profits from sale of the individual improved items (after making allowance for the value of the original asset) represented part of the proceeds of mere realization of a capital asset as distinct from profits made in the ordinary course of that business. Where the activities of dividing and improving are of sufficient scale and scope, the fact that no prior independent business existed will not prevent those activities themselves constituting a business of which the profits arising on sale are the ordinary proceeds.

Although decisions in numerous court cases have turned on their own facts, one of the elements that the courts considered when determining if a transaction was the mere realisation of an asset, is the intention or purpose of the taxpayer in entering into the transaction.

Intention or purpose

The relevant intention or purpose (of making a profit or gain) is not the subjective intention or purpose of the taxpayer. Rather, it is 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 (paragraphs 7, 8 and 38 to 40 of TR 92/3).

When ascertaining the intention or purpose of the taxpayer in entering a transaction, Hunt J, in the Supreme Court of NSW in Allied Pastoral Holdings Pty Ltd v. Federal Commissioner of Taxation [1983] 1 NSWLR 1; 83 ATC 4015; (1983) 13 ATR 825, stated that:

It is but a very familiar principle of the law of evidence that subsequent behaviour may be regarded in order to indicate a state of mind which existed at an earlier time: Herald & Weekly Times Ltd. v. McGregor (1928) 41 C.L.R. 254 at p. 265 (Isaacs J.). Remoteness of the statements and acts in time goes to the weight, not to the admissibility, of the evidence: Barrett v. Long (1831) 3 H.L.C. 395 at p. 414 (Parke B.); 10 E.R. 154 at p. 162; and it matters not whether they precede the point in time at which the state of mind is relevant: ibid.; or succeed it: Simpson v. Robinson (1848) 12 Q.B. 511 at p. 513 (Lord Denman C.J.); 116 E.R. 959 at p. 960. See also In re Grove; Vaucher v. Treasury Solicitor (1888) 40 Ch.D. 216 at p. 242 (Lopes L.J.).

It is not necessary that the profit be obtained by a means specifically contemplated (either on its own or as one of several possible means) when the taxpayer enters into the transaction. It is sufficient that the taxpayer enters into the transaction with the purpose of making a profit in the most advantageous way and that a profit is later obtained by any means which implements the initial profit-making purpose. Thus, a taxpayer may contemplate making a profit by sale but may ultimately obtain it by other means (such as compulsory acquisition, through a company liquidation or a distribution in specie) that were not originally contemplated (paragraphs 14 and 57 of TR 92/3).

In a joint judgment of the Full High Court in Federal Commissioner of Taxation v. Myer Emporium Ltd [1987] HCA 18, (1987) 163 CLR 199; 87 ATC 4363; (1987) 18 ATR 693 (Myer's Case), the court stated that:

Generally speaking, however, it may be said that if the circumstances are such as to give rise to the inference that the taxpayer's intention or purpose in entering into the transaction was to make a profit or gain, the profit or gain will be income, notwithstanding that the transaction was extraordinary judged by reference to the ordinary course of the taxpayer's business. Nor does the fact that a profit or gain is made as the result of an isolated venture or a "one-off" transaction preclude it from being properly characterized as income (Whitfords Beach 150 CLR at 366-367, 376; 82 ATC at 4036-4037, 4042; 12 ATR at 695-696, 705). The authorities establish that a profit or gain so made will constitute income if the property generating the profit or gain was acquired in a business operation or commercial transaction for the purpose of profit-making by the means giving rise to the profit.

Further, in a joint judgment of the Full Federal Court in Moana Sand Pty Ltd v. Federal Commissioner of Taxation 88 ATC 4897; (1988) 19 ATR 1853, the court applied Myer's Case and held that a profit on the disposal of land by means of compulsory acquisition was income according to ordinary concepts. The Court reached this conclusion notwithstanding the finding of fact that the taxpayer acquired the land for two purposes. The purposes were working and/or selling the sand and thereafter holding the land until it became 'ripe' for subdivision, when it would be sold either to another family company for the purpose of subdivision or to a third party subdivider, whichever gave the largest financial return to the taxpayer.

If a transaction involves the sale of property, it is usually, but not always, necessary that the taxpayer has the intention or purpose of profit-making at the time of acquiring the property (paragraphs 9 and 41 of TR 92/3).

Change of intention or purpose

Despite a taxpayer not having the purpose of profit-making at the time of acquiring an asset, where their intention of use of the asset changes, the resulting profit from the activity becomes income (paragraph 42 of TR 92/3).

In the Whitfords Beach Case, Gibbs CJ, in deciding what the intention or purpose of the taxpayer company was, stated that:

The purpose of those controlling the taxpayer was to engage in a business venture with a view to profit. Moreover, although the taxpayer was not formed for the purpose of selling land, after December 1967 it became a company which existed solely for the purpose of carrying out the business operation on which the new shareholders had decided to embark when they acquired their shares. It is in the light of these circumstances that the extensive work of development and subdivision is seen to be more than the mere realization of an existing asset and to be work done in the course of what was truly a business venture. For these reasons, although the case is not without its difficulties, I have concluded that the profits were income within ordinary concepts and taxable accordingly.

A further case that illustrates that the intention of a taxpayer may change over time is that of Stevenson's Case. Jenkinson J in the Federal Court stated that:

I find as fact that by the end of 1976 the taxpayer had firmly decided to subdivide the land himself into residential blocks. He no longer had any intention of selling the land to another person to develop. I find also that shortly after he had obtained approval from CC for a progressive mortgage advance of $250,000 and then entered into the agreement for the external water supply and sewerage work to be undertaken, he committed the whole of the land to his development of it. His subsequent conduct over the years satisfies me that that intention and commitment never wavered thereafter.

Consideration of factors to determine the nature of the activity

TR 92/3 sets out some matters that may be relevant in considering whether an isolated transaction amounts to a business operation or commercial transaction and therefore the proceeds assessable under section 6-5 of the ITAA 1997. These 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

§ 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.

The Full High Court in Federal Commissioner of Taxation v. St Hubert's Island Pty Ltd (in liq) (1978) 138 CLR 210; 78 ATC 4104; (1978) 8 ATR 452 (St Hubert's Island Case), considered whether the taxpayer was carrying on a business when determining whether land was trading stock of the taxpayer. Jacobs J stated that:

Even though the concept of trading involves repeated acts of selling a person will in ordinary language be described as trading if, having purchased a commodity in bulk for the purpose of resale he then proceeds to sell it on the occasions where and in the quantities for which there is a market. Such trading is not common but it is not unknown. A form of trade well known in the past was to charter a ship, load it with a cargo consisting of some commodity for which there was a market across the seas and carry that commodity to the various places where a market for that commodity could be expected to be found. The person who did that could properly be described as a trader and the cargo was his trading stock. It was not necessary, before he and his cargo could be so described, that he repeat or intend to repeat the venture. The one venture was a single trading operation. And that, it seems to me, is the position here. Once it is recognised that land may be trading stock then an acquisition of land for the purpose of resale, after development improvement and subdivision, in subdivided lots, and a continued activity in fulfilment of that intention brought into existence a trading operation.

The taxpayer operated the business for a number of years. There is no evidence to suggest that the taxpayer had the intention of property development during that period of time. The taxpayer subsequently sold the business and associated land.

However, the activities that the taxpayer subsequently engaged in when subdividing and selling the remaining land after the sale of the business, showed that it had a clear intention of more than merely realising its asset.

The sale of the last remaining allotment of land that was subject to the compensation payment cannot be looked at in isolation. It was part of a much larger parcel of land. Therefore, the intentions and actions of the taxpayer when it developed and sold the land that remained following the sale of the business are relevant to determining the assessability of the payments received by the taxpayer.

The taxpayer took more than small or insignificant steps to realise the land, it was engaged in property development for the following reasons:

§ The taxpayer subdivided the remaining land into industrial lots. However, the activity that the taxpayer engaged in was more than subdividing the land into separate allotments and realising the value of the land. It provided water extensions, excavations and constructed buildings at the request of purchasers.

§ Having sold all but one of the lots, the taxpayer then applied for a permit for a warehouse development on the last remaining allotment of land. Although the warehouse development did not proceed due to a proposal to rezone the land from industrial to residential, it indicates that the intention of the taxpayer was not one of merely realising the land, but one of property development.

§ Subsequent to the rezoning of the last remaining allotment of land from industrial to residential, the taxpayer submitted a planning permit to subdivide it into further residential lots. The proposed subdivision included the construction of a road; water, sewer, and electricity reticulation, drainage, lighting, fencing and landscaping. According to the valuer's estimate, the taxpayer stood to gain a significant profit on this development. This proposed extensive development of the land is further evidence that the taxpayer had the intention of property development, not of merely realising the land to best advantage.

§ From the information supplied in the ruling request it appears that the taxpayer was aware even before the business was sold, that part of the land was identified as being required for a future road. This meant that there was an impediment to the development of that part of the land that was identified as being required for a road. However, that did not prevent the taxpayer from developing the other land that was not subject to that impediment.

§ The taxpayer did not sell the broadacre land to another person to develop.

An objective analysis of the facts reveals that the extent of the operations involved in the program of subdivision have the hallmarks of a business enterprise or commercial transaction or, at the very least, a profit making undertaking or plan.

Therefore, after applying the factors in TR 92/3 and relevant cases, the Commissioner considers the transaction amounts to a business operation or commercial transaction and therefore the proceeds assessable under section 6-5 of the ITAA 1997.

Trading stock: time of CGT K4 event

Subsection 104-220 of the ITAA 1997 provides that CGT event K4 happens if you start holding as trading stock an asset that you already own (but do not hold as trading stock), and you make an election under paragraph 70-30(1)(a) of the ITAA 1997 to be treated as having sold the asset for market value.

Subsection 70-30(1) of the ITAA 1997 provides that just before the asset became trading stock, you are treated as having sold the asset to an arm's length person and immediately bought it back. You can elect for the amount of the asset to be either the cost or market value.

For the purposes of when the CGT event occurs, subsection 104-220(2) provides that the time of the event is when you start to hold the asset as trading stock.

Land is treated as trading stock if it is held for the purpose of resale and a business activity which involves dealing in land has commenced (St Hubert's Island Case). It is not necessary that the acquisition of land be repetitive. A single acquisition of land for the purpose of development, subdivision and sale by a business commenced for that purpose would lead to the land being treated as trading stock (Taxation Determination TD 92/124).

The change of intention of the taxpayer to that of property development occurred when it entered into the first stage of developing the remaining land following the sale of the business. At that point in time CGT event K4 happened and, if market value is elected as the method of determining the asset amount, the value of the land as trading stock will be the market value of it at that point in time (see ATO Interpretative Decision ATO ID 2004/532).

The market value of the land is determined having regard to the 'highest and best use' that can be made of the land at that point in time. Due weight is given to the land's potential utility and to the probability of consent being given for such potential use (paragraph 1 of Taxation Determination TD 97/1). In this case, the valuation should be based upon the zoning of the land as being industrial.

Application of section 25A of the ITAA 1936

Subsection 25A(1) of the ITAA 1936 provides that the assessable income of a taxpayer shall include profit arising from the sale by the taxpayer of any property acquired by the taxpayer for the purpose of profit-making by sale, or from the carrying on or carrying out of any profit-making undertaking or scheme.

However, subsection 25A(1B) of the ITAA 1936 provides that section 25A of the ITAAA 1936 does not apply to a profit arising in the 1997-98 year of income or a later year of income from the carrying on or carrying out of a profit-making undertaking or scheme, even if the undertaking or scheme was entered into, or began to be carried on or carried out, before the 1997-98 year of income.

As the compensation for financial loss was received in the 2011 income year, subsection 25A(1B) of the ITAA 1936 applies. Accordingly, section 25A of the ITAA 1936 does not operate to include in assessable income profit arising to the taxpayer from the sale of property.

Conclusion

The conduct of the taxpayer over the years has been one of developing the land, rather than realising it, in much the same manner as the taxpayers in Whitfords Beach Case and Stevenson's Case. The change of intention of the taxpayer to property development occurred when it entered into the first stage of developing the remaining land following the sale of the business.

Although the time taken to dispose of the last remaining lot of land was over an extended period, this was due to issues relating to the rezoning of the land and the proposed use of part of the land for a road. This does not mean, however, that the taxpayer's intention of property development had changed. It merely meant that the disposal of the land was delayed until those matters had been resolved.

Ultimately, the resolution of those issues resulted in the taxpayer disposing of the last remaining lot of land to the public authority, rather than further subdividing that lot into firstly, a warehouse development, then secondly, a residential development.

Accordingly, the proceeds from the compensation payment and the amount paid for the transfer of the property are assessable income under section 6-5 of the ITAA 1997, or alternatively, the profit on the transaction is assessable income under section 15-15 of the ITAA 1997 as a profit-making undertaking or plan.

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