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Ruling

Subject: Capital gains tax - disposal of a CGT asset

Question 1:

Will the profit from the sale of your rental property be treated as ordinary income and included in your assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer:

No

Question 2:

Will the profit from the sale of your rental property be treated as a capital gain and included in your assessable income under section 102-5 of the ITAA 1997?

Answer:

Yes

This ruling applies for the following period:

Year ending 30 June 2013

The scheme commences on:

01 July 2012

Relevant facts and circumstances

You entered into a contract to purchase a property in 200X.

Upon settlement of the property, the existing house was rented out.

The property was subdivided into a number of blocks of land (including the block where the existing house stood).

A number of units were developed on the vacant blocks of land.

These units were sold 'off the plan' prior to construction.

The proceeds from the sales were treated as ordinary income.

You still own the existing house which has only ever been used as a rental property.

The existing house has never been renovated or redeveloped.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 subsection 100-25(2)

Income Tax Assessment Act 1997 section 102-5

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 Subdivision 115-A

Income Tax Assessment Act 1997 section 115-100

Reasons for decision

Question 1:

Ordinary income

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that assessable income includes income according to ordinary concepts. This is called ordinary income.

According to Taxation Ruling TR 92/3, profits from isolated transactions will be assessable under section 6-5 of the ITAA 1997 as ordinary income where the intention or purpose in entering into the transaction was to make a profit or gain and the transaction was entered into and the profit was made in the course of carrying out a business operation or commercial transaction.

Paragraph 9 of TR 92/3 provides that the requisite intention or purpose to make a profit or gain should usually, but not always, be present at the time the property was acquired.

In determining whether an isolated transaction amounts to a business operation or commercial transaction, paragraph 13 of TR 92/3 outlines a number of factors which may be relevant. They are as follows:

· 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.

All factors are considered in combination when determining whether a 'business' is being carried on. The assessment depends on the large or general impression of the transaction.

In your case, you purchased a property and then subdivided it into a number of blocks of land (including the block where the existing house stood).

Although you developed and sold the other blocks of land; the block where the existing house stood has never been renovated or redeveloped. It has only ever been used to provide you with rental income.

On balance, all evidence suggests that you only ever intended to use the existing house as a rental property. As such, the sale of the property is not considered to be the carrying on or carrying out of a profit making undertaking.

Therefore, any profit made from the sale of your rental property is not assessable under section 6-5 of the ITAA 1997.

Question 2:

Capital gain

A capital gain or capital loss arises if a CGT event happens to a CGT asset (section 102-20 of the ITAA 1997).

The most common CGT event happens if you dispose of an asset to someone else. The disposal of a CGT asset causes a CGT event A1 to happen (section 104-10 of the ITAA 1997).

You will make a capital gain if the capital proceeds from the disposal are more than the asset's cost base. Any net capital gain for the income year is required to be included in your assessable income (section 102-5 of the ITAA 1997).

In your case, you own a property and have been using it to produce rental income since you acquired it.

As your rental property is a CGT asset, its disposal will result in a CGT event A1.

Accordingly, any profit made from the sale of your rental property will be treated as a capital gain and included in your assessable income under section 102-5 of the ITAA 1997.

Additional information

Subdivision 115-A provides that a CGT discount is available to a trust if:

· the CGT event occurred after 21 September 1999,

· the asset was acquired at least 12 months before the CGT event, and

· the cost base of the asset has not been indexed.

Where these conditions are met, a trust is entitled to reduce their capital gain by 50 percent (section 115-100). This does not apply when a capital loss is made.

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