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Edited version of your written advice
Authorisation Number: 1012778828952
Ruling
Subject: Income v Capital
Question 1
Should the proceeds on the sale of investment properties by a family owned business be treated on capital account under Division 104 of the Income Tax Assessment Act 1997 (ITAA 1997) or income account under either Section 6-5 of ITAA 1997 or Section 25 of the Income Tax Assessment Act 1936 (ITAA 1936)?
Answer
The proceeds on the sale of the investment properties should be treated on capital account under Division 104 of the ITAA 1997.
This ruling applies for the following periods:
Year ended 30 June 2014
The scheme commences on:
1 July 2013
Relevant facts and circumstances
Company A and Company B act as joint trustee for a Family Trust. Since incorporation, the Family Trust operates as a wholesale farm. This operation is still ongoing to the present day.
The Family Trust purchased a number of investment properties which were outside the ordinary course of business.
The buildings existed at the time of purchase (i.e. they were not built or developed by the Family Trust). The buildings had tenants at the time of purchase. At no time during the periods of ownership were the properties vacant.
The primary purpose of holding these assets was to collect rental income which was declared in rental property schedules on respective income tax returns for the Family Trust.
The buildings were sold in the 2014 financial year at gains. The Family Trust wishes to treat these gains on capital account and be able to apply the 12 month CGT discount accordingly.
Relevant legislative provisions
Section 6-5 of the Income Tax Assessment Act 1997
Section 70-10 of the Income Tax Assessment Act 1997
Division 104 of the Income Tax Assessment Act 1997
Division 115 of the Income Tax Assessment Act 1997
Section 25 of the Income Tax Assessment Act 1936
Reasons for decision
Summary
The proceeds on the sale of the investment properties should be treated on capital account under Division 104 of the Income Tax Assessment Act 1997 (ITAA1997).
Detailed reasoning
As stated in Taxation Ruling TR 92/3 Income tax: whether profits on isolated transaction are income
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:
(a) is in the ordinary course of the taxpayer's business (see paragraph 32 for an explanation of 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
(b) is in the course of the taxpayer's business, although not within the ordinary course of that business, and the taxpayer entered that transaction or operation with the intention or purpose of making a profit; or
(c) is not in the course of the taxpayer's business, but
i. the intention or purpose of the taxpayer in entering into the transaction or operation was to make a profit or gain; and
ii. the transaction or operation as 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:
(a) the intention or purpose of the taxpayer in entering into the profit-making transaction or operation was to make a profit or gain; and
(b) the transaction or operation was entered into, and the profit was made, in carrying out a business operation or commercial transaction.
The intention of the Family Trust when purchasing the the commercial properties was to receive an income stream in the form of rent. It was the Family Trust's strategy to accumulate and hold investments rather than purchase and then sell in a short period to quickly recognise a gain. The properties have been held for periods of 14 and 15 years respectively.
The process of purchasing the the investment properties and then selling later at a profit is not one that the Family Trust engages in repeatedly. The properties were sold within the last financial year due to the taxpayer's desire to exit the property market altogether. The sale of the properties did not occur within the Family Trust's ordinary course of business. The Family Trust engages in a farming enterprise and had used the proceeds from this business to purchase the two commercial properties as investments.
Taxation Determination TD 92/124 Income Tax: property development: in what circumstances is land treated as 'trading stock'? provides the Commissioner's view of land considered to be trading stock when it states:
1. Land is treated as trading stock for income tax purposes if:
• It is held for the purpose of resale; and
• A business activity which involves dealing in land has commenced.
2. Both the required purpose and the business activity must be present before land is treated as trading stock. The business activity is taken to have commenced when a taxpayer embarks on a definite and continuous cycle of operations designed to lead to the sale of the land.
The properties were not held for the purpose of resale but the stated purpose of deriving rental income. As stated above, the properties were held long term and the eventual sale of the properties did not occur within the Family Trust's ordinary course of business. As such, we conclude that the commercial properties do not constitute trading stock for the purposes of section 70-10 of the ITAA 1997.
There is no evidence advanced by the Family Trust to indicate that they acquired the commercial properties to make a profit or as part of a business where the property would be trading stock. Therefore, the proceeds from the sale of the properties 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 contained in Division 104 of the ITAA 1997.
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