Edited version of your private ruling

Authorisation Number: 1012612238241

Ruling

Subject: CGT - acquisition - property development - mere realisation - disposal

Question:

Will the funds that you receive from the sale of the properties be capital receipts?

Answer:

Yes.

Question:

Will a capital gains tax (CGT) event occur when each individual property is sold?

Answer:

Yes.

This ruling applies for the following period:

Year ended 30 June 2014

The scheme commenced on:

1 July 2013

Relevant facts:

You and another party entered into a partnership agreement in 200X with the aim to build a number of units and then to sell the units at a profit.

The partners are not property developers and have not developed any other properties prior to this project.

The properties were constructed and were sold in the 20XX income year.

The partnership has incurred interest expenses.

The partnership has also incurred various other expenses in relation to the development.

The development is on capital account.

The sale of the properties has resulted in a capital gain.

Relevant legislative provisions:

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 102-5

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Subsection 104-10(5)

Income Tax Assessment Act 1997 Subsection 108-5(1)

Income or capital

As a general principle, profits from property sales will either be assessable as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) or statutory income under the CGT provisions of the ITAA 1997.

Where the profit has been made as a result of a taxpayer carrying on a business of property development or as a result of a taxpayer entering into an isolated business transaction, the profit will be assessable as ordinary income. However, where the profit is a mere realisation of a capital asset, the profit will be assessable under the CGT provision of the ITAA 1997.

There have been several cases in which the courts have addressed the question of whether the proceeds received for the sale of an asset are revenue or capital in nature. The decision in each case depended on its own facts, and very often will be a matter of degree.

The extent of the personal involvement of the taxpayer in much of the planning, organisation and management of the activities has been held to be significant factors in the determination of whether or not a business was being carried out. For example:

• In Stevenson v FC of T (1991) 91 ATC 4476; (1991) 22 ATR 56; (1991) 29 FCR 282 (Stevenson) the degree of the taxpayer's involvement was seen as an indicator of a business being conducted; and

• The lack of personal taxpayer involvement was seen as a relevant to the finding that a business was not being conducted in the cases of Stratham V FCT 89 ATC 4070, McCorkell v FCT 98 ATC 2199 (McCorkell) and Casimaty v FCT 97 ATC 5 (Casimaty).

Taxation Ruling TR 92/3 considers whether profits made as a result of an isolated business transaction are income. A profit from an isolated transaction is generally assessable income when both of the following elements are present:

(a) the intention or purpose of the taxpayer in entering into the transaction was to make a profit or gain

(b) the transaction was entered into, and the profit was made, in the course of carrying on a business or in carrying out a business operation or commercial transaction.

In determining whether an isolated transaction amounts to a business operation or commercial transaction the following factors are relevant:

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.

Application to your circumstances

You are not in the business of property development and have not previously been involved in the subdivision and sale of land.

You have held the land since 200X and sold the properties in 20XX.

The amounts of money involved in the transaction are not significant and the magnitude of profit was not substantial.

Based on these factors we have concluded that the project is the mere realisation of a capital asset and any profits made will be assessable under the CGT provisions.

CGT event on disposal

CGT event A1 in section 104-10 of the ITAA 1997, relating to the disposal of a CGT asset, will happen when you dispose of each subdivided block.

Subsection 104-10(4) of the ITAA 1997 provides that a capital gain will arise if the capital proceeds from the disposal are more than the asset's cost base and a capital loss will arise if the capital proceeds are less than the asset's reduced cost base.

Cost base of CGT assets - general

Generally, when a person acquires a CGT asset the cost base/reduced cost base of the asset includes the cost of acquiring it, as well as certain other costs associated with acquiring, holding and disposing of the asset.

There are five elements that make up the cost base of a CGT asset. These are:

• The first element: money or property given for the asset.

• The second element: incidental costs of acquiring the asset or that relate to the CGT event.

• The third element: costs of owning the asset.

• The fourth element: capital costs to increase or preserve the value of your asset or to install or move it.

• The fifth element: capital costs of preserving or defending your ownership of or rights to the asset.

Unless a cost can be categorised as one of the above elements, the costs cannot be included in an asset's cost base.

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