Edited version of your private ruling

Authorisation Number: 1012469909488

Subject: Capital Gains Tax

Question 1

As the original intention was to retain the property for investment purpose and rental income, is the gain on the sale of the property a receipt of capital, and not income?

Yes

Question 2

If it is treated as capital does the taxpayer qualify for the 50% discount given the period of time he and his ex wife owned the property was well over 12 months?

No

Question 3

If the gain on sale is not permissible as a capital gain, is the sale required to be treated as subject to GST?

Not applicable

This ruling applies for the following periods

01/07/2010 - 30/06/2011

The scheme commences on

01/07/2010

Relevant facts and circumstances

This ruling is based on the facts as stated in the private ruling application provided by the tax agent and set out below.

The facts of the property:

The property (the Property) was purchased in 19XX in joint names of the taxpayer and the spouse it was their principal residence.

In 20XX the taxpayer and spouse purchased a new residence and the Property became a rental property.

In 20YY the Property was transferred into the spouse's name and continued to be a rental property

The Property was transferred to the taxpayer under court order as part of a divorce settlement in August 20ZZ.

At the time the Property was transferred, development had commenced on the Property to build townhouses.

The initial intention for the development was that the townhouses be retained as rental properties.

A condition of the divorce settlement was that one or more (as necessary) of the townhouses be sold to clear the ex-spouse's existing debt on the property.

One of the townhouses was sold in March 20QQ.

The three remaining townhouses are currently being rented.

There is no intention to sell any of the remaining townhouses.

The facts of the development:

The development was carried out by the taxpayer who is a registered builder.

The development was carried out in the taxpayer's own name.

The taxpayer usually conducts his building business through his trust which is registered for GST.

The taxpayer in his own right is not registered for GST.

The development was inadvertently recorded in the trust's books.

GST was claimed on the development costs via the trust's business activity statements.

GST was remitted on the sale of the townhouse via the trust's business activity statement.

Does Part IVA apply to this ruling?

No

Detailed reasoning

Question 1

As the original intention was to retain the property for investment purpose and rental income, is the gain on the sale of the property a receipt of capital, and not income?

Answer

As stated in Taxation Ruling 92/3 Income tax: whether profits on isolated transactions are income ("TR 92/3"):

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

· 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

· 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

· is not in the course of the taxpayer's business, but

· the intention or purpose of the taxpayer in entering into the 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.

16. If a taxpayer not carrying on a business makes a profit, 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.

The initial intention for the development was that all four town houses be retained as rental properties.

With regard to the development of the town houses, if you are found to be carrying out an isolated commercial transaction or carrying on a business, the income from the activity will be assessable income. On the other hand if you are not considered to be conducting a commercial transaction the gain made from selling the town house will be subject to Capital Gains Tax (CGT).

There is no evidence advanced by you to indicate that you built the town houses to make a profit or as part of a business where the property would be trading stock. Therefore, the proceeds from the sale of your property would not be ordinary income and would not be assessable as ordinary income. However, the properties are capital assets and the sale would fall for consideration under the CGT provisions.

Question 2

If the proceeds from the sale of the property is a capital gain does the taxpayer qualify for the 50% discount given the period of time tax payer and ex spouse have owned the property was well over 12 months?

Answer

Section 109-5 of the Income Tax Assessment Act 1997(ITAA 1997) provides rules regarding the time of acquisition of a CGT asset:

General acquisition rules

109-5(1)  In general, you acquire a * CGT asset when you become its owner. In this case, the time when you * acquire the asset is when you become its owner.

109-5(2)  This table sets out specific rules for the circumstances in which, and the time at which, you acquire a * CGT asset as a result of a * CGT event happening.

The property was transferred to the taxpayer under court order as part of a divorce settlement in August 2010; therefore this is the date of acquisition.

Subsection 115-25 (1) of the ITAA 1997 states

115-25(1)To be a discount capital gain, the capital gain must result from a CGT event happening to a CGT asset that was acquired by the entity making the capital gain at least 12 months before the CGT event.

In August 20XX the taxpayer acquired the property as part of a court settlement. Part of the property was sold in March 20YY, 8 months after acquisition, therefore the taxpayer is not entitled to the 50% discount as he did not hold the property for 12 months at the time of sale.

Subsection 126-5(1) ITAA 1997 states: 

(1)  There is a roll-over if a CGT event (the trigger event ) happens involving an individual (the transferor ) and his or her spouse (the transferee ), or a former spouse (also the transferee ), because of:

(a)  a court order under the Family Law Act 1975 or under a State law, Territory law or foreign law relating to breakdowns of relationships between spouses; …

Section 112-140 ITAA 1997states:

A same-asset roll-over allows one entity (the transferor ) to disregard a capital gain or loss it makes from disposing of a CGT asset to, or creating a CGT asset in, another entity (the transferee ). Any gain or loss is deferred until another CGT event happens in relation to the asset (in the hands of the transferee).

Section 112-150 of the ITAA 1997 sets out a table of same-asset roll-overs, which includes a transfer under section 126-5. However, there is no provision for roll-over where a spouse sells an asset to another party. In your situation, you have sold an investment property to another party and distributed funds from the sale to your former spouse. You are therefore unable to use the roll over provisions when calculating your capital gain or loss. You are not entitled to the 50% discount as you did not hold the property for 12 months at the time of sale.

Question 3

If the gain on sale is not permissible as a capital gain, is the sale required to be treated as subject to GST?

Answer

As discussed in question one, the town houses are considered to be capital assets, and proceeds from the sale of the town houses will be subject to the CGT provisions. As such the question is not applicable.

Further issues for you to consider

You have advised that although the development was carried out in the taxpayers own right the development was inadvertently recorded in the trusts books, the GST was claimed on the development cost via the trust activity statements and GST was remitted on the sale of the townhouse via the trust activity statements.

As stated in the Goods and Services Tax Ruling 2009/4 An entity is entitled to input tax credits for any creditable acquisition that it makes. An entity makes a creditable acquisition if:

· the entity acquires anything solely or partly for a creditable purpose;

· the supply of the thing to the entity is a taxable supply;

· the entity provides, or is liable to provide, consideration for the supply; and

· the entity is registered or required to be registered.

The development was carried out in the taxpayer's own right; the taxpayer in his own right is not registered for GST. The taxpayer is not entitled to claim GST if he is not registered. The trust activity statements will need to be amended to reflect the correct figures; the taxpayer should refer to www.ato.gov.au and follow the links to "correcting GST mistakes before 10 May 2013".

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