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Authorisation Number: 1012734470309

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Ruling

Subject: Business

Question 1

Would the profit from the sale of land be treated as ordinary income under section 6 -5 of the Income Tax Assessment Act 1997 (ITAA 1997) as a result of the taxpayer carrying on a business of property development?

Answer

Yes.

Question 2

Would the profit from the sale of land be treated as ordinary income under section 6-5 ITAA 1997 as a result of an "isolated transaction" carried out for profit and commercial in character?

Answer

No.

Question 3

Would the profit from the sale of land be treated as statutory income under the Capital Gains Tax legislation?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2014

The scheme commenced on

1 July 2013

Relevant facts and circumstances

You jointly purchased land. The land was purchased with a short term profit making intention. You sourced your own finance prior to settlement. The purchase of the land followed on from you purchasing and selling other properties over the years.

You continue to source property for short term gain. Prior to settlement you engaged a surveying firm to among other things lodge a 'Land Division' application. You then engaged a contractor to demolish the existing building on the land. You were the directors of the transaction from start to finish. You determined the disposal of the subdivided land suited your profit intentions.

A real estate agent was then engaged to market and sell the now sub-divided land. All the way through the process you had utilised your extensive experience and knowledge and team (conveyances'/surveyor/finance broker/real estate agent etc.) that you had used before.

The first of the sub-divided lots was settled in late 20XX.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 995-1

Income Tax Assessment Act 1997 section 118-20

Reasons for decision

Business

Section 995-1 of the ITAA 1997 defines a business as including any profession, trade, employment, vocation or calling, but does not include occupation as an employee.

The question of whether you are carrying on a business is a question of fact and degree. There are no rigid rules for determining whether the activity amounts to the carrying on of a business. The facts of each case must be examined. In Martin v FC of T (1953) 90 CLR 470 at 474; 5 AITR 548 at 551, Webb J said:

The test is both subjective and objective; it is made by regarding the nature and extent of the activities under review, as well as the purpose of the individual engaging in them, and, as counsel for the taxpayer put it, the determination is eventually based on the large or general impression gained.

However, the courts have developed a series of indicators that can be applied to your circumstances to determine whether you are carrying on a business.

Taxation Ruling TR 97/11 outlines the factors that need to be considered to determine if someone is carrying on a business. These are as follows:

• whether the activity has a significant commercial purpose or character;

• 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 businesslike manner such that it is directed at making a profit;

• the size, scale and permanency of the activity.

In your circumstances;

• the amount paid for purchase of the property and the intended subdivision show that the activity has a significant commercial purpose or character;

• you purchased the property, demolished a dwelling, engaged a team of conveyances/surveyors/finance brokers/real estate agent and others that you have used to purchase previous properties;

• the sale of the land to unrelated entities at market value shows you have a purpose of profit as well as a prospect of profit from the activity;

• your repetition and regularity of the activity is evident in the previous activities having managed the purchase of other properties and your intention to engage in further property developments in the future;

• you have planned, organised and carried out the purchase, demolition of an existing dwelling in a businesslike manner such that it is directed at making a profit.

The large and general impression gained after examining the activity in the light of all of the business indicators is that your activity amounts to the carrying on of a business of property development.

Isolated transaction

Taxation Ruling TR 92/3 is about whether profits on isolated transactions are of a commercial nature that fall on revenue account. Here, in relation to the disposal of property, paragraphs 9 and 49(g) state:

The taxpayer must have the requisite purpose at the time of entering into the relevant transaction or operation. If a transaction or operation involves the sale of property, it is usually, but not always, necessary that the taxpayer has the purpose of profit-making at the time of acquiring the property.

…

In very general terms, a transaction or operation has the character of a business operation or commercial transaction if the transaction or operation would constitute the carrying on of a business except that it does not occur as part of repetitious or recurring transactions or operations. Some factors which may be relevant in considering whether an isolated transaction amounts to a business operation or commercial transaction are the following:

…

(g) if the transaction involves the acquisition and disposal of property, the nature of that property (Edwards v. Bairstow ; Hobart Bridge 82 CLR at 383). For example, if the property has no use other than as the subject of trade, the conclusion that the property was acquired for the purpose of trade and, therefore, that the transaction was commercial in nature, would be readily drawn…

In your situation your activity has the character of a business operation or commercial transaction however, unlike an isolated transaction it has the necessary repetitious or recurring transactions that show the characteristics of a business.

Capital Gains

Section 118-20 of the ITAA 1997 primarily exists to ensure that amounts which are assessable income outside of the CGT provisions are not also taxed as capital gains. In the absence of such a provision, it is conceivable that a receipt properly characterised as ordinary income and which has also been derived as a result of a CGT event could result in the receipt being taxed twice.

Therefore, whilst a CGT event A1 occurs when the property is sold, any capital gain will be disregarded to the extent of any amount already included as ordinary assessable income under section 6-5 of the ITAA 1997.

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