Edited version of your written advice

Authorisation Number: 1012841433465

Date of advice: 17 July 2015

Ruling

Subject: Capital gains tax

Question 1

Does the concerned land constitute trading stock for the purposes of subsection 70-10(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

Did the sale of the concerned land constitutes disposal of a capital gains tax (CGT) asset, and constitutes a CGT event A1?

Answer

Yes.

Question 3

Is the sale of the concerned land a capital gain that is a discount capital gain and eligible for the 50% discount pursuant to section 115-25 of the ITAA 1997?

Answer

Yes.

Question 4

Are the gross proceeds from the sale of the concerned land ordinary income under section 6-5 of the ITAA 1997 on the basis that the Trust is carrying on a business of property development?

Answer

No.

Question 5

Are the net profits from the sale of the concerned land ordinary income under section 6-5 of the ITAA 1997 on the basis that, although the Trust is not carrying on a business of property development, it is nevertheless involved in a profit making undertaking?

Answer

No.

This ruling applies for the following period

Year ended 30 June 20XX

The scheme commences on

1 July 20XX

Relevant facts and circumstances

The Trust was established with the intention to acquire and retain certain strategic land on which to build (and subsequently lease out) for investment purposes.

In 20XX the Trust acquired a parcel of land with the above stated intention. The parent title comprised X square metres of land in total, zoned for commercial purposes.

The parent title acquired including pre-existing subdivided lots, with attached (pre-determined) development permits. That is, certain sections of the parent titled were allocated for different purposes.

After securing funding, the Trust commenced construction of a building. An initial lease term of 12 years was secured, with further options to renew for five years.

Construction of another building began in the relevant year on Lot A, and completed in the subsequent year. The building has also since been leased, from which the Trust is now receiving rent. An initial lease term of ten years was secured, with a further option to renew for ten years.

The Trust intended that following completion of that building, construction would commence on the concerned land. In early 20XX, the Trust was personally approached by an entity, with whom there was a pre-existing personal relationship, regarding the possible sale of the land.

Based on that personal relationship, as well as to mitigate its existing debt position, the Trust agreed to sell the concerned land, with settlement completed in the subsequent financial year.

At no stage have professional agents been engaged to market the sale of any lots acquired with the parent title. Further to this, the Trust has not itself conducted any marketing or advertising regarding the sale of lots held within the parent title.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 subsection 70-10

Income Tax Assessment Act 1997 subsection 104-10(1)

Income Tax Assessment Act 1997 subsection 104-10(3)

Income Tax Assessment Act 1997 Division 115

Income Tax Assessment Act 1997 section 115-100

Reasons for decision

Carrying on a business

Section 70-10 of the ITAA 1997 provides that trading stock includes anything produced, manufactured or acquired that is held for purposes of manufacture, sale or exchange in the ordinary course of a business.

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

The question of whether a business is being carried on is a question of fact and degree. The courts have developed a series of indicators that are applied to determine the matter on the particular facts.

Taxation Ruling TR 97/11 provides the Commissioner's view of the factors used to determine if you are in business for tax purposes. In the Commissioner's view, the factors that are considered important in determining the question of business activity are:

• 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 regularity and repetition of the activity

• whether the activity is of the same kind and carried on in a similar manner to that of ordinary trade in that line of business

• whether the activity is planned, organised and carried on in a businesslike manner such that it is described as making a profit

• the size, scale and permanency of the activity, and

• whether the activity is better described as a hobby, a form of recreation or sporting activity.

No one factor is decisive. The indicator must be considered in combination and as a whole. Whether a 'business' is carried on depends on the large or general impression.

Having regards to your circumstances and the factors outlined above, we do not consider the Trust is carrying on a business. Therefore, the sale of the concerned land will not be considered a disposal of trading stock.

Profits from an isolated transaction

Profits arising from an isolated business or commercial transactions will be ordinary income if the taxpayer's purpose or intention in entering into the transaction is to make a profit, even though the transaction may not be part of the ordinary activities of the taxpayer's business (FC of T v. Myer Emporium Ltd 1987 163 CLR 199; 87 ATC 4363; 18 ATR 693) (Myer Emporium). 

Taxation Ruling TR 92/3 considers the principles outlined in the Myer Emporium case and provides guidance in determining whether profits from isolated transactions are assessable under section 6-5 of the ITAA 1997 as ordinary income.

Having regards to your circumstances and the factors outlined in TR 92/3, we do not consider that the proceeds from the sale of the concerned land will be assessable under section 6-5 of the ITAA 1997. We consider that the disposal of the property will be a mere realisation of a capital asset.

Capital gains tax

Under subsection 104-10(1) of the Income Tax Assessment Act 1997 (ITAA 1997) capital gains tax (CGT) event A1 happens if you dispose of a CGT asset. An entity disposes of a CGT asset if a change of ownership occurs from one entity to another, whether because of some act or event or by operation of law. Under subsection 104-10(3) of the ITAA 1997, the time of an event is when the entity enters into the contract for the disposal.

Division 115 contains the provisions for a discount capital gain. A capital gain from a CGT asset is a discount capital gain only if the entity making the gain acquired the asset at least a year before the CGT event. The discount percentage for an amount of a discount capital is 50% if the gain is made by a trust under section 115-100 of the ITAA 1997.

CGT event A1 occurred when you entered into the contract to dispose of the concerned land. As the trust has held the land for more than 12 months, they are entitled to apply the general discount.

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