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Edited version of your written advice
Authorisation Number: 1012685480704
Ruling
Subject: Carrying on a business of property development
Question
Will Unit Trust be seen as carrying on a business as defined in subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) by undertaking the proposed development of a commercial office building?
Advice
No.
This advice applies for the following period:
1 July 2014 to 30 June 2015
The scheme commences on:
1 July 2014
Relevant facts and circumstances
A self-managed superannuation fund (SMSF) proposes to establish a Unit Trust.
The SMSF will subscribe to 100% of units in the Unit Trust.
The Unit Trust will use the capital funds to purchase a block of land and carry out the construction of a building.
The block of land will be purchased from a related entity at market value.
A commercial office building will be constructed on the land for leasing purpose.
The Unit Trust will outsource the construction of the building to a third party builder. The builder will hold the licence for the construction and will be the project manager.
The builder will source and manage all subcontractors and carry out all the daily project management tasks.
The Unit Trust will not be involved in any of the daily decision making in relation to the construction process.
Besides the initial signing of contracts, the only role the Unit Trust carries out is the direct payments to subcontractors based on approval of the builder.
The Unit Trust will keep books required as a passive investor but will not deploy systems or record keeping in a business-like manner. This will be carried out by the builder as project manager.
This is the first property development to be undertaken by the SMSF and the Unit Trust and will be a one-off construction. There is no intention for the Unit Trust to continue to develop properties.
The purpose of the development of the building is to produce a continual rental income stream to the Unit Trust and, hence, the SMSF with the eventual sale on a capital appreciation position in the future.
Relevant legislative provisions
Income Tax Assessment Act 1997 subsection 995-1(1)
Reasons for decision
Subsection 995-1(1) of the ITAA 1997 defines 'business' to include 'any profession, trade, employment, vocation or calling, but does not include occupation as an employee'. This definition, however, simply states what activities may be included in a business. It does not provide any guidance for determining whether the nature, extent, and manner of undertaking those activities amount to the carrying on of a business. For this purpose it is necessary to turn to case law and materials published by the Australian Taxation Office (ATO) such as public rulings.
Taxation ruling TR 1997/11 Income Tax: am I carrying on a business of primary production (TR 1997/11) provides guidance on the ordinary meaning of 'business' and the application of relevant factors in determining whether a business exists. The principles expressed in TR 1997/11 are applicable for the purpose of this ruling.
Some indicators of a business being carried out relevant to the purpose of this ruling are set out in paragraph 13 of TR 1997/11:
• whether the taxpayer has more than just an intention to engage in business;
• whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity;
• whether there is repetition and regularity of the activity;
• whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business;
• whether the activity is planned, organised and carried on in a business-like manner such that it is directed at making a profit;
• the size, scale and permanency of the activity.
TR 1997/11 further states, at paragraph 16 that:
The indicators must be considered in combination and as a whole. Whether a business is being carried on depends on the 'large or general impression gained' (Martin v. FC of T (1953) 90 CLR 470 at 474; 5 AITR 548 at 551) from looking at all the indicators, and whether these factors provide the operations with a 'commercial flavour' (Ferguson v. FC of T (1979) 37 FLR 310 at 325; 79 ATC 4261 at 4271; (1979) 9 ATR 873 at 884). However, the weighting to be given to each indicator may vary from case to case.
In Ferguson v Federal Commissioner of Taxation 79 ATC 4261(Ferguson), at 314, Bowen CJ and Franki J said that there are many elements to be considered in determining whether a business is being carried on. Some of the matters referred to in Ferguson were the nature of the activities, whether they have the purpose of profit-making, repetition and regularity of activities, organisation of activities in a business-like manner, and the keeping of books, records and the use of system. It is clear from the judgment that the presence or absence of any particular factor is not necessarily decisive.
Whether a particular activity constitutes a business is a question of fact and degree and all indicators need to be considered as a whole. From the information provided in the application it is concluded that the Unit Trust will not be seen as carrying on a business of property development by undertaking the proposed construction of the building for the following reasons:
• There is no intention to have repetition and regularity for this type of activity in the future business operations of the Unit Trust as the construction will be a one-off project.
• The Unit Trust will not be carrying out the construction in the same way as that of a property developer. The Unit Trust will outsource the management of the project to a builder and will have little involvement in the daily management and decision making of the project. The only role the Unit Trust will carry out is to make payments to subcontractors based on approval of the builder. In addition, the Unit Trust will keep records as required of a passive investor and will not deploy systems for the purpose of the construction in a business-like manner.
• The purpose of the development is to construct a building for commercial leasing and not for resale at a profit even though there is an expectation that a profit will be made at the eventual sale of the building. There is no intention to engage in a business of property development and construction for the purpose of profit making on a continuous and repetitive basis.
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