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Edited version of your written advice
Authorisation Number: 1051367199063
Date of advice: 1 May 2018
Ruling
Subject: Capital gains tax
Question 1
Will the gain or loss made on the disposal of Unit 3 be subject to the CGT provisions in Part 3-1 of the ITAA 1997?
Answer
No.
Question 2
Will the proceeds received Unit 3 be assessable pursuant to section 6-5 of the ITAA 1997 as an isolated profit making transaction?
Answer
Yes.
Question 3
Will the gain or loss made on the disposal of Unit 1 be subject to the CGT provisions in Part 3-1 of the ITAA 1997?
Answer
Yes.
This ruling applies for the following periods:
Year ended 30 June 20XX
Year ending 30 June 20XX
Year ending 30 June 20XX
The scheme commences on:
1 July 20XX
Relevant facts and circumstances
You purchased vacant land (the property) in 20XX.
Your ABN & GST registration has been cancelled prior to the purchase.
You provided that there were no set plans had been put into place at time of purchase. It was more likely that you planned to construct a principal residence for yourself and your relative rather than purely build units on the whole block for the purpose of resale.
Your intention, planned and actual use in relation to the property have not changed since your original acquisition.
It was purchased as a vacant block.
You had no set plans when you purchased the block and thought that you may later construct your main residence for yourself and your relative.
You have now decided to build three units on the land.
When the units are completed they will be strata titled.
The first unit (Unit 1) which includes land and residential premises will be your relative’s main residence when it is finished.
The building of the Unit 1 commenced in 2017 and was completed in 2018.
It was occupied by your relative when it was completed.
You have not charged rent for Unit 1 occupied by your relative before transfer of ownership via strata title.
Your relative funded the entire building of Unit 1.
Upon completion of all of the units you will hand transfer the title of Unit 1 to your relative for nil consideration.
The building of Unit 2 will commence shortly after the completion of unit one.
Unit 2 will be your main residence once it is completed.
The building of Unit 3 will commence when Unit 2 is completed.
You have an estimated completion date of the third unit as 2019.
The building of Unit 2 and Unit 3 will be funded from a home loan/line of credit facility.
Upon completion of Unit 3 you will engage a real estate agent to sell it.
This is the only project of this nature you have undertaken to date.
Your normal occupation is not as a property developer.
Relevant legislative provisions
Income Tax Assessment Act 1997 – section 6-5
Income Tax Assessment Act 1997 – section 104-10
Reasons for decision
Summary
The proceeds received from the sale of Unit 3, while not derived in the course of carrying on a business, will assessable as ordinary income from an isolated profit making transaction. The transfer of Unit 1 to your mother will be assessable as a CGT event.
Detailed reasoning
Proceeds from the sale of property for tax purposes are treated as either:
● income according to ordinary concepts under section 6-5 derived:
1. in the course of carrying on a business, or
2. from an isolated transaction for the purpose of profit making, or
● subject to capital gains tax.
Whether the proceeds are treated as income or capital depends on the situation and circumstances of each particular case.
Carrying on a business
You have stated that this is the only project of this nature that you have done to date. Your current occupation is not as a property developer. Therefore, it is considered that the proceeds received from the sale of the both of the Unit’s will not be derived in the course of carrying on a business.
Isolated profit making transaction
Profits arising from an isolated business or commercial transaction 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.
TR 92/3 defines the term ‘isolated transactions’ as:
● transactions outside the ordinary course of business of a taxpayer carrying on a business, and
● transactions entered into by non business taxpayers.
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.
If a taxpayer makes a profit from a transaction or operation, that profit is income if the transaction or operation is not in the course of the taxpayers business but:
● the intention or purpose of the taxpayer in entering into the profit-making transaction or operation was to make a profit or gain, and
● the transaction or operation was entered into, and the profit was made, in carrying out a business operation or commercial transaction.
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 necessary that the taxpayer has the purpose of profit-making at the time of acquiring the property.
Whether an isolated transaction is business or commercial in character will depend on the circumstances of each case. Where a taxpayer's activities have become a separate business operation or commercial transaction, the profits on the asset can be assessed as ordinary income within section 6-5 of the ITAA 1997.
In your case, you purchased a parcel of land for the initial purpose of building a residence for a private purpose. Your intention then changed and you decided to build three units, two to be used for a private purpose and one to sell upon completion. Your intent is to make a profit on the sale of Unit 3 and transfer Unit 2 to your relative for her personal use.
As stated above, it is not necessary that the sole or dominant intention or purpose for entering into the transaction is to make a profit, providing it is a significant purpose. A significant purpose of what you have undertaken for Unit 3 was to sell it at a profit. Therefore, the proceeds from the sale of Unit 3 will assessable under section 6-5 of the ITAA 1997 as ordinary income from an isolated profit making transaction.
However, the significant purpose undertaken for the building of Unit 1 is to provide a private dwelling for your relative. In this case the transfer of the strata title of Unit 1 to your relative will trigger a CGT event. It will not be assessable under section 6-5 of the ITAA 1997 but under section 104-10 of the ITAA 1997.
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