Edited version of your written advice

Authorisation Number: 1012917697446

Date of advice: 26 November 2015

Ruling

Subject: Property Development

Question 1

Will the Property be treated as trading stock of the Taxpayer within the meaning of Division 70 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

Will the Sale Lots be treated as trading stock of the Taxpayer within the meaning of Division 70 of the ITAA 1997?

Answer

Yes

Question 3

Will the anticipated gains from the sale of the Sale Lots be assessable under section 6-5 of the ITAA 1997?

Answer

Yes

Question 4

Will any gains from the sale of the Sale Lots be assessable under the capital gains tax (CGT) provision under Part 3-1 of the ITAA 1997?

Answer

No

This ruling applies for the following periods:

Year ending 30 June 20WW

Year ending 30 June 20XX

Year ending 30 June 20YY

Year ending 30 June 20ZZ

The scheme commences on:

1 July 20VV

Relevant facts and circumstances

1. A Unit Trust was established. Company A is the corporate trustee of the Unit Trust. All the issued units in the Unit Trust are held by Trust A, a discretionary Trust.

2. The Unit Trust (Taxpayer) proposes to undertake a development activity - known as the Development.

3. Company B is a privately owned property investment and development company.

4. Company B is the registered proprietor of a parcel of land (the Property). The Property is currently leased to a related entity for its use to operate a commercial business pursuant to an existing lease.

5. The director and shareholder of Company B identified the Property as an appropriate property for the Development.

6. In order to segregate the risks and liabilities entailed in the Development from those arising from Company B's operation (and vice versa), it is proposed that the Unit Trust will acquire (on arm's length terms) the Property from Company B (subject to the existing lease) and to undertake the Development on it on the expiration or termination of the Existing Lease.

7. An independent valuation was obtained in relation to a part of the land subject to the development, for the purposes of litigation that ensued with the Council. A notice of valuation for the land subject to the development was issued. The purchase price for the transfer of the land to the Unit Trust would exceed the land value as determined by the Valuer, having regard to the development costs incurred to the day of sale and any other relevant factors.

8. The acquisition of the Property may be financed by external borrowing from an external financial institution to the Unit Trust if required (this will be from one of the big four banks).

9. No related party's loan is currently contemplated to be obtained by the Unit Trust to finance the development. However, if there is any such related party loan, it would be on normal commercial terms.

10. It is anticipated that the sale and transfer of the Property from Company B to the Unit Trust will give rise to an assessable gain.

11. The Development activity will comprise the subdivision of the Property, construction of separate strata titled commercial premises, residential premises and car parks. The Development will be undertaken in three stages.

12. Stage 1, the undertaking of preliminary and excavation work.

13. Stage 2, the construction of a building to house short term public car spaces and secured private car parks for residences, commercial spaces and serviced apartments.

14. Stages 3 and 4, the third and fourth stages are to build separate strata titled commercial and residential premises across 3 separate areas as follows:

• "A" consisting of:

• serviced apartments

• Commercial areas for use as restaurants, cafe, bars and grocery outlets; and

• 1 penthouse.

• "B" consisting of:

• Commercial areas for use as health and professional offices; and

• Residential premises consisting of townhouses and apartments of varying sizes.

• "C" consisting of:

i. Commercial areas for use as health and professional offices;

ii. apartments of varying sizes; and

iii. penthouse apartments.

15. Stage 3 will consist of the "A" and "B" areas and is anticipated to be completed in 3 years.

16. Stage 4 will consist of the "C" area and is anticipated to be completed in 4 years.

17. It is the intention of the Unit Trust to:

b. Sell:

i. All or a majority of the residential lots and associated private car parks; and

ii. All or a majority of the professional suites and associated car parks

iii. Part of the commercial areas in the "C" area

iv. All or part of the commercial areas in the "A" area and associated car parks.

All of the above are collectively referred to as the 'Sale Lots'.

c. Retain for long term investment:

i. The remaining residential lots, professional suites and associated car parks;

ii. The commercial premises and public car parks

All of the above are collectively referred to as the 'Investment Lots'.

18. The commercial areas of "C" and associated car parks (referred to in paragraph 15(c)(i) above) will be sold to the director's self-managed superannuation fund on arm's length terms.

19. The self-managed superannuation fund is obliged under the SIS Act to deal with the Unit Trust on an arm's length basis. If any part of the "C" premises is to be transferred to the self-managed superannuation fund, an independent valuation would be obtained so as to ensure that the self-managed superannuation fund complies with its obligations under the SIS Act (including, the arm's length rule).

20. It is not expected that any lots, other than the identified portion of the "C" premises will be sold to any entities connected with the development Group.

21. It has not currently been identified with certainty which of the commercial premises, residential lots professional suites and associated car parks will be held for sale or for long term investment.

22. However, the Unit Trust will identify all areas as being either a Sale Lot or Investment Lot after the final plan of subdivision has been drawn up, but before registration of the lots. In determining which lots will be held for investment purposes the director will have regard to the economic and market situation, the costs and risks of retaining such Lots and any other matters that he considers relevant at the time.

23. As at the date of the private ruling application, the Unit Trust has not carried on any other property development or investment activity and is not in a business of building or developing land.

24. The Unit Trust will engage a third party builder or developer to develop and sub-divide the Property.

25. The Unit Trust will seek finance from a related entity or entities and third party financiers to finance the Development.

26. The Unit Trust may engage a third party agent to market the Sale Lots for sale and the Investment Lots for leasing, together with managing the Investment Lots following completion of the Development. Alternatively the Unit Trust may elect to undertake these activities itself.

27. Reference made to 'third party builder' and 'third party agent' will be entities unrelated to the Development Group of entities as a whole.

28. As at the date of the private ruling application, the Unit Trust does not own any assets (other than cash on hand or at bank) or undertake any business, trading or investment activity.

29. As at the date of the private ruling application, the Unit Trust has no intention to purchase further land for development purposes.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 70-10

Income Tax Assessment Act 1997 Section 70-110

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Part 3-1.

Reasons for decision

Question 1

Will the Property be treated as trading stock of the Taxpayer within the meaning of Division 70 of the Income Tax Assessment Act 1997 (ITAA 1997)?

The Property will be treated as trading stock of the Taxpayer within the meaning of Division 70 of the Income Tax Assessment Act 1997 (ITAA 1997).

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

The Commissioner's view on what circumstances land will be treated as 'trading stock' is contained in Taxation Determination TD 92/124 Income tax: property development: in what circumstances is land treated as 'trading stock'?. TD 92/124 states that land will be 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.

TD 92/124 also states that a 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 (paragraph 2). Further, at paragraph 3 the Commissioner comments that a single acquisition of land for the purpose of development, subdivision and sale by a business commenced for that purpose would lead to the land being treated as trading stock.

For the reasons outlined in your ruling application, the Commissioner accepts that the Unit Trust is carrying on a business of property development.

Question 2

Will the Sale Lots be treated as trading stock of the Taxpayer within the meaning of Division 70 of the ITAA 1997)?

The Sale Lots will be treated as trading stock of the Taxpayer within the meaning of Division 70 of the Income Tax Assessment Act 1997 (ITAA 1997).

As outlined in answering question 1, Section 70-10 of the ITAA 1997 provides that trading stock includes anything produced, manufactures or acquired that is held for the purposes of manufacture, sale or exchange in the ordinary course of a business.

The Commissioner's view on whether a taxpayer is carrying on a business is found in Taxation Ruling TR 97/11. TR 97/11 provides a list of indicators that determine whether a taxpayer is carrying on a business. Whether a business is being carried on depends on the large or general impressions gained from looking at all the indicators and whether these indicators infuse the operations with a commercial flavour.

In your case, the scale of the development is significant with the intention to make a profit. The Development is planned and is undertaken in a systemic and business manner. You will engage in repeated acts of selling the Sale Lots during and/or immediately after completion of the Development. You have made the submission (in particular, Paragraphs 4.1.25.4 to Paragraph 4.1.25.6 of your ruling application) that you will engage in a business of trading in land (that is, the sale of the Sale Lots)

For the reasons outlined in your ruling application, the Commissioner accepts that the Sale Lots will be treated as trading stock.

Question 3

Will the anticipated gains from the sale of the Sale Lots be assessable under section 6-5 of the ITAA 1997?

You are carrying on a business of property development. The Sale Lots are considered to be trading stock. Therefore the anticipated gains from the sale of these Lots will be assessable income under section 6-5 of the ITAA 1997.

Question 4

Will the gains from the Sale of the Lots be assessable under the CGT provisions under Part 3-1 of the ITAA 1997?

Any gains from the disposal of the Sale Lots will be assessable under Section 6-5 of the ITAA 1997 (as outlined in question 3) any capital gain you make from the disposal of the Sale Lots will be reduced to zero pursuant to Section 118-20 of the ITAA 1997.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).