Edited version of your written advice

Authorisation Number: 1012965066446

Date of advice: 26 February 2016

Ruling

Subject: Taxation treatment of profit on sale of residential apartments.

Question 1

Is the profit from the sale of the residential apartments assessable as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes, the sale of the residential apartments is assessable as ordinary income under section 6-5 of the ITAA 1997.

Question 2

Is the profit from the sale of the residential apartments an assessable capital gain under Part 3-1 of the ITAA 1997?

Answer

Yes, however any capital gain may be exempt or reduced.

Question 3

Are the retained residential apartments held on revenue account and any profits from subsequent sale assessable as ordinary income under section 6-5 of the ITAA 1997?

Answer

Yes.

This ruling applies for the following periods

Year ended 30 June 2015

Year ending 30 June 2016

The scheme commences on

1 July 2015

Relevant facts and circumstances

The ruling request relates to the sale of a proportion of the residential apartments.

Entity structure

A bare trustee purchased the original land on behalf of parties who are beneficiaries subject to a Declaration of Trust and participants in a Joint Venture Agreement.

The bare trust was created by declaration and execution of a Trust Deed in respect of the Land on the same date as the Joint Venture Agreement. The parties to the Declaration of Trust were those specified in the Joint Venture Agreement with the 'participants' in the Joint Venture Agreement being "collectively Beneficiaries" in the Trust Deed.

Under the Declaration of Trust, it was agreed between the parties that the bare trustee purchase the Land defined and hold it on behalf of the specified beneficiary trusts, as tenants in common.

The initial members of the Managing Committee of the joint venture were appointed to represent the specified beneficiaries.

The applicant recognises the joint venture as a taxation law partnership and has registered the joint venture for GST purposes.

The Land

The original purchase of land and property was purchased at auction and involved two blocks A and B.

Block A contained a business, when it was purchased.

Block B contained a separate business when it was purchased. Revenue has been earned from this activity.

The two businesses continued to be operated by the bare trustee.

Initially, architects were engaged to design commercial premises.

At a later date, development approval was sought to demolish the business on block B and to erect a commercial building. This Development Application (DA) was approved.

Due to the Global Financial Crisis and resultant suppressed market and demand, the development scheme and DA for commercial offices was put on hold. Finally it was abandoned as it was not feasible for the entities involved.

A new residential scheme was then developed by an architect firm, involving a residential scheme for two thirds of the site. Agreement was reached within the partnership soon after to proceed on this basis.

A resolution was passed by the directors of the bare trustee company to pursue a residential development partly for sale and partly to retain for rental purposes.

A new (second) Development Application (DA) was lodged and approved to develop Block B.

A further resolution was made by the directors of the bare trustee relating to selling off part of the apartments in the residential development.

A proportion of the land has been redeveloped so far (described as Stage 1), which incorporates the residential Apartments on block B. Stage 1 is the relevant stage on which this ruling is based.

The purchasing parties will retain a proportion of apartments and sell the rest.

Settlements of the residential apartments sold to third parties has occurred.

The remaining land is for Stages 2 and 3. No development activities have commenced on the remaining land held under block A.

A strata plan was registered and individual strata lot leases were granted with respect to the individual residential apartments.

Documents connected to the acquisition and development of the Land has been provided for the ruling application and form part of the facts:

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 10-5

Income Tax Assessment Act 1997 Section 102-5

Income Tax Assessment Act 1997 Section 70-10

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 108-5

Income Tax Assessment Act 1997 Section 118-20

Income Tax Assessment Act 1997 Section 118-25

Reasons for decision

Question 1

Summary

The sale of the residential apartments is assessable as ordinary income under section
6-5 of the ITAA 1997 as a result of and within the ordinary course of carrying on a business of property development for profit making purposes.

Detailed reasoning

In order to determine whether the profit on the disposal of an asset is assessed as ordinary income, it is necessary to consider section 6-5 of the ITAA 1997, which states:

(1) Your assessable income includes income according to ordinary concepts, which is called ordinary income.

(2) If you are an Australian resident, your assessable income includes the ordinary income you derived directly or indirectly from all sources, whether in or out of Australia during the income year.
…

(4) In working out whether you have derived an amount of ordinary income, and (if so) when you derived it, you are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf or as you direct.

Ordinary income includes profits and gains made in the ordinary course of business.

Profits or gains made in the ordinary course of business

Taxation Ruling TR 92/3: Income tax: whether profits on isolated transactions are income (TR 92/3) sets out the Commissioner's view as to the application of the principles established in Federal Commissioner of Taxation v The Myer Emporium Ltd (1987) 163 CLR 199 ('Myer'). Paragraph 32 of TR 92/3 states that a profit or gain made in the ordinary course of a business includes:

• a profit or gain arising from a transaction which is itself a part of the ordinary business of a taxpayer (judged by reference to the transactions in which the taxpayer usually engages); and

• a profit or gain arising from a transaction which is an ordinary incident of the business activity of the taxpayer, although not a transaction entered into directly as its main business activity.

In determining whether profits or gains made from the disposal of real property are made in the ordinary course of business, one must establish if a taxpayer is carrying on a business and what the nature of the business is.

The definition of 'business' for income tax purposes is wide and includes any profession, trade, employment, vocation or calling, but does not include occupation as an employee (subsection 995-1(1) of the ITAA 1997).

The principles in Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? (TR 97/11) provide guidance on whether a taxpayer is carrying on a business and can be applied in various contexts. Specifically, paragraph 13 of TR 97/11 provides a list of indicators that are relevant in determining whether a taxpayer is carrying on a business. In general, the indicators 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 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; and

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

No one indicator is decisive but rather different indicators must be considered in combination and as a whole. So the question of whether a business is being carried on is determined in an objective manner based on the weighing up of all the relevant facts and circumstances of each case.

Further, in relation to property or land development, Taxation Determination 92/124: Income tax: property development: in what circumstances is land treated as 'trading stock'? (TD 92/124) recognises that repetitive buying and selling of property is not necessary to establish that a business of property acquisition, development and sale is being carried on. If a 'definite and continuous cycle of operations' has been initiated, a business of property development has commenced.

Once it is established that there is a business, it then follows that the profits made in the ordinary course of carrying on that business constitute income. This principle has been discussed in many court cases, generally in the context of distinguishing between income and capital receipts.

Californian Copper Syndicate (Limited & Reduced) v. Harris (1904) 5 TC 159 (Californian Copper Syndicate) has been cited with authority in many Australian court cases as the leading case regarding these principles. In that case, Lord Justice Clerk stated at 165-166 that:

It is quite a well settled principle, in dealings with questions of Income Tax, that where the owner of an ordinary investment chooses to realise it, and obtains a greater price for it than he originally acquired it at, the enhanced price is not profit…But it is equally well established that enhanced values obtained from realisation or conversion of securities may be so assessable where what is done is not merely a realisation or change of investment, but an act done in what is truly the carrying on, or carrying out, of a business.…What is the line which separates the two classes of cases it may be difficult to define, and each case must be considered according to its facts; the question to be determined being - Is the sum of gain that has been made a mere enhancement of values by realising a security, or is it a gain made in an operation of business in carrying out a scheme for profit-making? [Emphasis added]

In London Australia Investment Company Limited v Federal Commissioner of Taxation 77 ATC 4398 (London Australia), Gibbs J, in discussing the above principles, stated at p. 4403:

Their Honours [in Colonial Mutual Life Assurance Society Ltd v Federal Commissioner of Taxation (1946) 73 CLR 604] went on to point out that not all of the proceeds of a business carried on by a taxpayer are income for the purposes of the [Income Tax Assessment] Act; they will be so only if they are income "in accordance with the ordinary usages and concepts of mankind, except in so far as the Act states or indicates an intention that receipts which are not income in ordinary parlance are to be treated as income" (see at p. 615). However it is in my opinion established by this and many other cases in which Californian Copper Syndicate v Harris has been applied that if the sale in question is a business operation, carried out in the course of the business of profit-making, the profit arising on the sale will be of an income character. To apply this criterion it is necessary "to make both a wide survey and an exact scrutiny of the taxpayer's activities": Western Goldmines N.L. v. C. of T. (W.A.) (1938) 59 C.L.R. 729, at p. 740. [Emphasis added]

Gibbs J also noted at p. 4404 that the test in Californian Copper Syndicate is applicable to any business.

Similarly, in Myer, at p. 209 the High Court stated that:

Although it is well settled that a profit or gain made in the ordinary course of carrying on a business constitutes income, it does not follow that a profit or gain made in a transaction entered into otherwise than in the ordinary course of carrying on the taxpayer's business is not income. Because a business is carried on with a view to profit, a gain made in the ordinary course of carrying on the business is invested with the profit-making purpose, thereby stamping the profit with the character of income. [Emphasis added]

Dual purpose

There may be cases where a taxpayer purchases a property for more than one purpose. For example, to hold the property to obtain an income stream (i.e. leasing) and then sell the property at a later date (i.e. to realise the increase in the value of the property). Both of these purposes may fall within the ordinary course of the business of the taxpayer and hence any profits or gains made from the property (through leasing or its disposal) are assessable as ordinary income.

This was discussed in London Australia, where Jacobs J considered the question of whether profit from the acquisition and disposal of shares was income according to ordinary concepts or from the carrying out of a profit-making undertaking or scheme. He stated at p. 4409-4010.

In the circumstances of the present case it is unnecessary to distinguish between these two questions. In each case the profit will only be income if it arose from the carrying on of a business undertaking. The identification and characterisation of the business carried on by the taxpayer is the essential task.

…

If the acquisition and disposal of property is part of a business of so doing, the position is significantly different. There must still be a purpose of resale because resale is part of the description of the relevant business, and, since business has in it the notion of profit making rather than loss making, there must no doubt be a purpose of resale at a profit. But the significant difference is that the purpose of resale need not be the sole purpose or the primary or dominant purpose, as is the case under the first limb of sec. 26(a). It need only be one of the purposes. And in this context the word "purpose" is hardly if at all distinguishable from intention or expectation. The dominant or primary purpose may be to obtain income from the items of property acquired but if there is a purpose or intention or expectation of selling at a profit if and when a suitable occasion arises then one condition of carrying on a business of buying and selling at a profit is satisfied. If a man makes a business of acquiring property with a dual purposes [sic] of enjoying it or its profits and of reselling it eventually at a higher price than he paid for it, then not only the income from the property but also the profit on resale will be income in the ordinary sense of the term, and within the second limb of sec. 26(a). [Emphasis added]

The case also demonstrates that it is not necessary for a taxpayer who carries on a business to acquire an asset with the purpose of selling the asset at a profit in the situation where the asset is acquired in the course of the taxpayer carrying on its business. The fact that the asset was acquired in the course of the taxpayer carrying on its business is enough that the profits or gains made from the sale of that asset are ordinary income.

The Federal Court in R & D Holdings Pty Ltd v Deputy Commissioner of Taxation [2006] FCA 981; 2006 ATC 4472 (R & D Holdings) in determining that a building was trading stock also determined that the unit trust was carrying on a business that included the development of one building for the purpose of sale or lease of subdivided lots in the building as part of its ordinary course of business. That is, the Court held that the trust held the property with the main purpose of strata titling the building for sale, with a 'dual purpose' of leasing the subdivided lots and that the actions of the taxpayer supported this conclusion. Relevantly in R & D Holdings the taxpayer's contentions in this case were outlined as:

24. It is R & D Holdings' contentions that (i) the Bulletin Place property was acquired and constructed as a long term investment and was not "held for purposes of ... sale ... in the ordinary course of business";…

The Court held that the Bulletin Place property was held for the dual purposes of development, strata subdivision and sale of subdivided lots and/or lease of subdivided lots, depending on various circumstances, including interest rates, the economy and tenancy take up. The trust's dominant purpose was for the development, strata subdivision and sale of lots and leasing of the lots was subordinate to this; the strata design was not adopted for the purpose of obtaining finance for the building's construction.

Profits or gains made from an isolated or commercial transaction with a profit making intention

In some instances a profit or gain made from an isolated or commercial transaction could constitute ordinary income if the taxpayer's purpose or intention in entering into the transaction was to make a profit, notwithstanding that the transaction was not part of its daily business activities (see paragraph 12 of TR 92/3).

Paragraph 35 of TR 92/3 states:

35. A profit from an isolated transaction is therefore generally assessable income when both of the following elements are present:

(a) the intention or purpose of the taxpayer in entering into the transaction was to make a profit or gain; and

(b) the transaction was entered into, and the profit was made, in the course of carrying on a business or in carrying out a business operation or commercial transaction.

This was discussed in Myer, where the full bench of the High Court stated at p. 209-213:

But a gain made otherwise than in the ordinary course of carrying on the business which nevertheless arises from a transaction entered into by the taxpayer with the intention or purpose of making a profit or gain may well constitute income. Whether it does depends very much on the circumstances of the case. Generally speaking, however, it may be said that if the circumstances are such as to give rise to the inference that the taxpayer's intention or purpose in entering into the transaction was to make a profit or gain, the profit or gain will be income, notwithstanding that the transaction was extraordinary judged by reference to the ordinary course of the taxpayer's business. Nor does the fact that a profit or gain is made as the result of an isolated venture or a "one-off" transaction preclude it from being properly characterized as income: Federal Commissioner of Taxation v. Whitfords Beach Pty. Ltd. [(1982) 150 C.L.R. 355 at pp. 366-367, 376]. The authorities establish that a profit or gain so made will constitute income if the property generating the profit or gain was acquired in a business operation or commercial transaction for the purpose of profit-making by the means giving rise to the profit. [Emphasis added] (at p.209-210)

…

The important proposition to be derived from Californian Copper and Ducker [Ducker v. Rees Roturbo Development Syndicate Ltd (1928) A.C. 132] is that a receipt may constitute income, if it arises from an isolated business operation or commercial transaction entered into otherwise than in the ordinary course of the carrying on of the taxpayer's business, so long as the taxpayer entered into the transaction with the intention or purpose of making a relevant profit or gain from the transaction. (at p. 211)

…

The proposition that a mere realization or change of investment is not income requires some elaboration. First, the emphasis is on the adjective "mere": Whitfords Beach [at [(1982) 150 C.L.R. at p. 383]. Secondly, profits made on a realization or change of investments may constitute income if the investments were initially acquired as part of a business with the intention or purpose that they be realized subsequently in order to capture the profit arising from their expected increase in value: see the discussion by Gibbs J. in London Australia [(1977) C.L.R. at pp. 116-118]. It is one thing if the decision to sell an asset is taken after its acquisition, there having been no intention or purpose at the time of acquisition of acquiring for the purpose of profit-making by sale. Then, if the asset be not a revenue asset on other grounds, the profit made is capital because it proceeds from a mere realization. But it is quite another thing if the decision to sell is taken by way of implementation of an intention or purpose, existing at the time of acquisition, of profit-making by sale, at least in the context of carrying on a business or carrying out a business operation or commercial transaction. (at p. 213)

In contrast, in Westfield Ltd v FC of T 91 ATC 4234 (Westfield), the company was in the business of designing, constructing, letting and managing shopping centres. The company acquired land in the early 1970s and further land via an option which it subsequently sold and realised at a substantial gain. The Full Federal Court held that the disposal of land was on capital account as the necessary intention or purpose of making a profit on the sale of the land was absent. This was because the main aim of the company was to secure contracts to design, develop and operate/manage a shopping centre on the land. The disposal of the land was incidental to these purposes. The fact that the transaction was commercial or a business transaction was, of itself, insufficient.

The Full Federal Court in Westfield, at p. 4241, in reaching its decision considered the judgement in Myer and stated that Myer 'emphasises that where a transaction occurs outside the scope of ordinary business activities, it will be necessary to find, not merely that the transaction is "commercial" but also that there was, at the time it was entered into, the intention or purposes of making a relevant profit'.

Other aspects of the judgement in Westfield discussed when profits from transactions outside the ordinary course of business of an entity constituted ordinary income. At p. 4243 it was stated:

Once it is clear that the activity of buying and selling, which generated the profit, was not an activity in the ordinary course of business, or, for that matter, an ordinary incident of some other business activity, the profit in question will only form part of the assessable income of the appellant, by virtue of its being income in accordance with the ordinary concepts of mankind, if the appellant had a purpose of profit-making at the time of acquisition.

…

While a profit-making scheme may lack specificity of detail, the mode of achieving that profit must be one contemplated by the taxpayer as at least one of the alternatives by which the profit could be realised. Such was the case in Steinberg [Steinberg v Federal Commissioner of Taxation 73 ATC 4030; 75 ATC 4221; (1972-5) 134 CLR 640]. But, even if that goes too far, it is difficult to conceive of a case where a taxpayer would be said to have made a profit from the carrying on, or carrying out, of a profit-making scheme, where, in the case of a scheme involving the acquisition and resale of land, there was, at the time of acquisition, no purpose of resale of land, but only the possibility (present, one may observe, in the case of every acquisition of land) that the land may be resold. The same may be said to be the case where s. 25(1) of the Act is involved. As the court observed in Myer, in the passage already set out, the property, which generates the gain, must be acquired in an operation of business or commercial transaction: "…for the purpose of profit-making by the means giving rise to the profit." [Emphasis added]

At paragraph 38 of TR 92/3 it is stated that the relevant intention or purpose of the taxpayer (of making a profit or gain) is the taxpayer's intention or purpose discerned from an objective consideration of the facts and circumstances of the case. Generally, in cases where a person's subjective purpose or intention is a relevant issue, the person's evidence as to their subjective purpose or intention can be considered but it must be tested closely (see Pascoe v FCT (1956) 30 ALJR 402 at 403)(Pascoe).

Paragraph 40 of TR 92/3 states that it is not necessary that the intention or purpose of profit-making be the sole or dominant intention or purpose for entering into the transaction. It is sufficient if profit-making is a significant purpose. In transactions or operations that involve the sale of property, it is usually, but not always, necessary that the taxpayer has the purpose of profit-making at the time of acquisition (see paragraph 9 of TR 92/3).

At paragraphs 47-49 of TR 92/3, the Commissioner considers that for a transaction to be characterised as a business operation or a commercial transaction, it is sufficient if the transaction is business or commercial in character. In general, a transaction has the character of a business operation or commercial transaction if the transaction or operation would constitute the carrying on of a business in its own right.

In summary, where an entity acquires a property and the acquisition is not in the entity's ordinary course of business, but the property was acquired with the intention of making a profit from the property, the profits or gains made from the disposal of the property are assessed as ordinary income under section 6-5 of the ITAA 1997.

Applying the Law to the facts in this case

To determine whether any profit or gain made on the sale of the residential apartments is assessable as ordinary income, the first matter to consider as discussed in TR 92/3 is to determine if a profit or gain arising from the transaction is a part of the ordinary business of the parties judged by reference to the transactions in which the parties usually engage. Case law, in particular the principles set out in Californian Copper Syndicate and discussed in London Australia, indicate both a wide survey and an exact scrutiny must be made of the parties' activities in determining this factor.

The participating parties in this arrangement opted to obtain and develop the land through a bare trust. The Trust Declaration provides that the trustee is acting as bare trustee for the trust beneficiaries whose interests are governed in the Trust Deed. Furthermore, the purpose, intention and obligations of each party were specified in the Joint Venture Agreement which would govern the arrangement.

The bare trustee, as indicated by the Trust Deed and the Joint Venture Agreement (as amended), is treated as an agent or a nominee to act on behalf of the parties involved, to hold, deal, develop and dispose of or transfer the property to the beneficiaries as they direct. Although the manner in which the participating beneficiaries acquired, developed, disposed of, or kept part of the development, was made through the bare trustee, such actions and functions are not independent of the beneficiaries.

The controlling minds relating to the ownership structure and the arrangement including the property development via the joint venture were a group of individuals. We consider these persons are the controlling minds of the arrangement as they are the initial members of the Managing Committee of the joint venture as per the Joint Venture Agreement, each appointed by the trustee of the relevant beneficiary trust party to the arrangement. These persons comprising the controlling minds of this arrangement are individually and collectively through associated entities, actively involved in the property industry.

The bare trustee acting on behalf of the three trusts in the joint venture acquired the land and property identified as blocks A and B. Funding for the purchase was made through related entity loans. The Joint Venture Agreement was entered into to put in place the structure to purchase and develop the property.

After purchase, significant time and money was spent in developing the properties which became the residential apartments. The bare trustee, acting through the controlling minds, adopted an active role in the development. The trustee company made several development applications to modify the property. The leases were varied and new leases issued. Individual strata titles were granted in respect of residential apartments.

The involvement of the beneficiary parties in the purchase of the land, where their interests were represented by their trusts (the parties to the joint venture), and subsequent action taken, including to:

• obtain planning and building permits,

• make alterations and amendments to suit their business plan,

• initiate relevant and suitable amendments to the original Lease for permits to allow for a wider proposal to develop Blocks A and B,

• commence development plan action in stages,

• engage experts,

• incur large expenditure,

• arrange large scale short term finance, and

• adopt and follow different resolutions and action plans,

are considered similar to the actions of other entities in the business of buying, selling, managing, developing and construction of property, for the furtherance, facilitation and promotion of commercial interests.

The bare trustee, on behalf of the parties to the joint venture, undertook these actions in a systematic and commercial or businesslike manner, including keeping the relevant financial records as required by the Joint Venture Agreement. It is considered that the level of organisation and level of work in the development was greater than that of a person who was merely realising a capital asset. The activities undertaken are considered to be of considerable size and scale, and typical of the activities of persons involved in the building and development industry. At all relevant times, the representative controlling persons (ie controlling minds) were in a position to influence, directly and indirectly, the business activities of this arrangement.

It is considered that the principal business activities of the participating families (parties), family members and their related entities, comprises of buying, managing, developing, constructing, selling and renting properties including commercial property; and deriving their business income by way of rentals, property management fees, and profit on sale of properties where economically viable.

Together with the abovementioned history of the controlling minds and related entities, and the systematic commercial type activities undertaken by the bare trustee on behalf of the parties, the Joint Venture Agreement made at the initial point of acquisition is a vital document which can be relied upon to assist in determining the intention of the parties at the time of acquisition and the nature of the business operations of the parties.

The initial Joint Venture Agreement which was signed and executed by the above mentioned persons in their capacity as Directors and controlling minds of the structures in place (all participant trusts and trustee companies), specifies the participants agreed to form the joint venture for the purpose of the development of the Land in accordance with the Joint Venture Agreement.

The Joint Venture Agreement contains various clauses which expressly define terms, purposes, obligations, entitlements, the term of the joint venture and other matters contemplated by the agreement.

The resolution by the directors of the trustee company which coincides with the timing of the property acquisition and the formation of the Joint Venture Agreement should clearly and equivalently reflect the intention as stated and defined under the Joint Venture Agreement. However, in this case, the resolution is different to what is stated in the Joint Venture Agreement. Whereas the Joint Venture Agreement states there will be the 'sale of the developed land' the resolution states there is a 'purpose of deriving long term rental income'.

In light of the judge's comments in Pascoe, a person's evidence as to their subjective purpose can be considered but it must be tested closely. Thus, despite the resolution, due to the other evidence presented including the Joint Venture Agreement, the actions and steps taken to develop and complete the development, together with the involvement of the controlling minds in developing property through associated entities, it is concluded, that the three trusts subject to this Ruling, as partners in the joint venture, had a significant profit making intention at the time of entering into the acquisition of the land subject to this Ruling.

Whilst it is accepted that this intention may have included a purpose to also derive rental income (as per R & D Holdings), it is considered that the business of the joint venture includes property development and this transaction has the necessary characteristics of carrying out a business or commercial operation of property development.

Based upon the discussion outlined above, and from an objective view of the facts of this arrangement considered in light of the indicators of carrying on a business or commercial undertaking outlined in TR 97/11, TR 92/3 and case law, it is the Commissioner's view that the parties, as partners in the Joint Venture, are carrying on a business which involved a series of activities of acquisition, development, strata titling and sale or lease of the residential apartments for a profit. We believe the intention to sell was present at acquisition. It is held that the partnership is carrying on a business of property development and the sale of the relevant assets was in the ordinary course of that business. This activity is also consistent with similar activities conducted by other entities in the property development business.

Alternatively, if we viewed that the taxpayer was not in the business of property development involving sale, we consider the profits from sale of the residential apartments would be assessed as ordinary income as the elements required for an isolated transaction, as specified in TR 92/3, to be assessed as income are present in the facts of this case. That is, the intent or purpose of the taxpayer was to make a profit or gain when entering into the transaction, and for the transaction to have a commercial and business sense.

Therefore, the profit on sale of residential apartments is assessable income as ordinary income under section 6-5 of the ITAA 1997.

Whether the land held is treated as Trading Stock.

Section 70-10 of the ITAA 1997 defines trading stock to include:

(a) Anything produced, manufactured or acquired that is held for the purposes of manufacture, sale, or exchange in the ordinary course of a 'business', and

(b) live stock,

but does not include a Division 230 financial arrangement.

In accordance with paragraph 1 of Taxation Determination TD 92/124:

1. Land is treated as trading stock for income come producing purposes if:

• it is held for the purpose of resale; and

• A business activity which involves dealing in land has commenced.

The purchase of land and property located and described on the lease and contract as Block B; was acquired and held for the purpose of development and resale, and as the business activity involving the land has commenced, the land is trading stock.

The sale of any portion of the land at any stage of development is part of the normal business operations of the parties to the Joint Venture Agreement. Therefore the sale of the residential apartments is assessable as ordinary income under section 6-5 of the ITAA 1997, involving the sale of trading stock on revenue account, as a result of and within the ordinary course of carrying on a business of property development for profit making purposes.

Question 2

Summary

Any capital gain that arises on each disposal will be exempt from capital gains under section
118-25 of the ITAA 1997 or be reduced to the extent that the amount is included in assessable income under section 118-20 of the ITAA 1997.

Detailed reasoning

The capital gains tax provisions apply when a CGT event happens to a CGT asset. Land, or an interest in land and property, is a CGT asset (section 108-5 of the ITAA 1997). The disposal of a CGT asset such as land and property is a CGT event A1 under section 104-10 of the ITAA 1997.

When the bare trust disposes of its CGT assets, being the residential apartments, CGT event A1 occurs (section 104-10 of the ITAA 1997). The time of the event is when the trust enters into each contract for disposal. If there is no contract, the CGT event A1 happens when the change of ownership in the asset occurs. The beneficiaries of the trust make a capital gain if the capital proceeds (that is, the amount received) from the disposal of the CGT asset is more than its cost base.

Subsection 118-25(1) of the ITAA 1997 applies to disregard any capital gain or loss made from a CGT asset which is considered to be trading stock. It states:

A *capital gain or *capital loss you make from a *CGT asset is disregarded if, at the time of the *CGT event, the asset is:

(a) your *trading stock; or

(b) if you are a partner, trading stock of the partnership; or

(c) if you are absolutely entitled to the asset as against the trustee of a trust (disregarding any legal disability), trading stock of the trustee.

Therefore, even though CGT event A1 will occur on sale of the residential apartments, subsection 118-25(1) of the ITAA 1997 applies to disregard any capital gain or loss where the asset is held as trading stock.

Alternatively, if the CGT asset was not your trading stock, but nevertheless the profit from sale of the residential apartments are considered to be an isolated transaction and assessable as ordinary income under section 6-5 of the ITAA 1997, then section 118-20 of ITAA 1997 would apply to reduce any capital gain by the amount otherwise included in assessable income under another provision.

Conclusion

The proceeds received from the sale of the residential apartments should be treated as income according to ordinary concepts and therefore included in assessable income under section 6-5 of the ITAA 1997. Any capital gain that arises on each disposal will be exempt from capital gains under section 118-25 of the ITAA 1997 or be reduced to the extent that the amount is included in assessable income under section 118-20 of the ITAA 1997.

Question 3

Summary

Income from the sale of retained residential apartments is assessable as ordinary income under section 6-5 of the ITAA 1997.

Detailed reasoning

As stated in our reasons for decision for Question 1, it is considered as the Land is held for the purpose of development and resale, and business activity involving the land has commenced, therefore the land is trading stock as defined in section 70-10 of the ITAA 1997 and as provided for in TD 92/124.

The sale of any portion of the land at any stage of development, is part of the normal business operations of the parties and sale of the residential apartments is assessable as ordinary income under section 6-5 of the ITAA 1997, involving the sale of trading stock on revenue account, as a result of and within the ordinary course of carrying on a business of property development for profit making purposes.

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