Edited version of private advice

Authorisation Number: 1051538984572

Date of advice: 3 July 2019

Ruling

Subject: Income tax treatment of the sale of land held by the taxpayer and subsequent impact of revising earlier claimed input taxed credits for GST purposes

Issues

Question 1

Will the profit or gain derived from the sale of the Land be ordinary income for the purposes of section 6-5 of the Income Tax Assessment Act 1997?

Answer

No - sale of the Land is a mere realisation of an asset that is subject to capital gains tax provisions.

Question 2

If the answer to question 1 is 'no', will the Commissioner exercise his discretion to exercise remit to nil any administrative penalty that arises from the Taxpayer's lodgement of an amended GST return reflecting that the entity should not be have been claiming an input tax credit on the original purchase of the land?.

Answer

As the Commissioner is of a view that reasonable care was taken in claiming the input tax credit on the original purchase of the land - no administrative penalty exists for the Commissioner to exercise his discretion to remit.

Question 3

If the answer to question 1 is 'no', will the Commissioner exercise his discretion to remit to nil any General Interest Charge (GIC) imposed on the shortfall resulting from the amended GST return?

Answer

As the Commissioner is of the view that this is an unusual transaction, it would be considered fair and reasonable under the circumstances to remit to nil any GIC that would be imposed on the shortfall resulting from the amended GST return.

This ruling applies for the following period:

1 January 20XX to 30 June 20XX

Relevant facts and circumstances

Trustee of the ABC Trust (the Taxpayer), which is a unit trust in which the units are equally held by four discretionary trusts, each of which is controlled by a single Current Director of the corporate trustee and his family. There are 4 Current Directors and "Current Director" means one of them singly.

Previously related taxpayer, XYZ acquired interest in land situated in a possible residential

Corridor:

The Land is located approximately over XX kms from the CBD, the general location has become a developing area in recent times with land development and subdivision activities being carried on by large developers on adjacent/adjoining lots. The Land has subdivision approval for X residential lots. However, at the time of the original acquisitions of the original interests, this area was very much rural land.

When it acquired its original interest in the Land, the shares in XYZ were held by related family interests.

The Land has been used for agistment of horses - mostly horses owned by ABC Trust family members, and sometimes for other people. XYZ derived small amounts of income from the agistment.

XYZ derived passive income from its shareholding (in subsidiaries) and derived rental income from the commercial property it owned. The wholly owned subsidiaries carried on a separate business.

Sporadically, at various times between 20XX and (around) March 20XX, XYZ was approached by various unrelated parties, who wished to either purchase the Land from the Taxpayer, or induce the Taxpayer to enter into some form of joint arrangement under which the Land would be developed and sold. Each approach:

(a) was entirely unsolicited;

(b) was inconclusive, with the counterparties sometimes offering different options for XYZ to consider, and negotiations effectively not proceeding past that initial stage; and

(c) ended without there being an agreement, provisionally or otherwise.

Some of the proposals involved development opportunities, as the counterparties were often in the development business.

Sometime later, XYZ 's shareholders entered into discussions with an overseas investor to sell all of the shares in XYZ

The purchasers of XYZ had no desire to include the Land in the deal for the purchase of XYZ, and the existing family shareholders had a strong desire was to retain the Land, given their attachment to it and the length of time it had been in the family. The parties agreed that the Land would not form part of the deal, and that prior to settlement, the Land would be sold by XYZ to another entity that the family shareholders would establish for this purpose.

The Taxpayer was established prior to the sale of XYZ. XX months later, the Taxpayer contracted to acquire the Land. Settlement took place on XX/mth/20XX. XYZ remitted GST of $Xm on the supply occasioned by the sale. The Taxpayer, who was registered at the time of the sale, claimed (and received) an ITC of $Xm.

In claiming the ITC of 1M the taxpayer had sought advice from a reputable accounting firm that they were in fact an enterprise and able to claim the GST paid to XYZ who then remitted GST to the Commissioner.

Pursuant to the internal sale, the Taxpayer acquired a XY% interest in the Land.

I4 months later, an unsolicited offer to purchase the land was made which neither the Current Directors nor any family member, had any knowledge of the purchaser's desire to acquire the land when the internal sale occurred - which, took place approximately X.X years earlier.

The purchase price is the land is significantly more than the price of the internal transfer - the Taxpayer then agreed to sell its interest.

6 months later, the Taxpayer entered into the Contract, under which the Land will be sold to unrelated third party.

The Taxpayer has not used the Land to derive any income since it acquired it. The Taxpayer has not made any attempts to subdivide, develop or market the Land either on its own or in conjunction with related entities. No unsolicited offers had been received from any party between the date of the internal transfer and the date of the initial unsolicited offer received from the unrelated third party.

The Taxpayer had treated the acquisition of its interest in Land as being on revenue account.

The Taxpayer was established solely for the purpose of holding the interest in the land - and has done and does nothing else.

Relevant legislative provisions

Section 102-5 of the ITAA 1997

Section 284-75 of Schedule 1 of the TAA

Section 298-20 of Schedule 1 of the TAA

Section 8AAG of the TAA

Law Administration Practice Statement: PSLA 2012/5: Administration of the false or misleading statement penalty - where there is a shortfall amount

Law Administration Practice Statement PS LA 2008/9: GST 'revenue neutral' corrections

Law Administration Practice Statement PS LA 2006/8: Remission of shortfall interest charge and general interest charge for shortfall periods

Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production?, Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income, and Miscellaneous Taxation Ruling MT 2006/1 The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number.

Reasons for decision

Whether the sale of land is a 'mere realisation', or whether is it a disposal either in the course of business, isolated business or commercial transaction, or as part of a profit making undertaking or plan is determined by examining and weighing all the relevant facts and circumstances taken as a whole.

Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production?, Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income, and Miscellaneous Taxation Ruling MT 2006/1 The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number set out the Commissioner's views on the matters to be taken into account in the determining whether an activity amounts to carrying on a business or whether there is a concern that does not amount to a business but which has the characteristics of a business operation - which in turn provides explicit and implicit guidance to determine whether there is mere realisation of an asset, albeit in an enterprising way.

The relevant considerations include:

·         Whether the landowner has held the land for a considerable period prior to the development and sale.

·         Whether the landowner has conducted farming, or other non-development business activities, on the land prior to beginning the process of developing and selling the land.

·         Whether the landowner originally acquired the property as a private residence or for recreational purposes.

·         Whether the landowner originally acquired the property as an investment, such as for long term capital appreciation or to derive rental income.

·         Whether the land has been acquired near the urban fringe of a major city or town.

·         Where the property has recently been rezoned, whether the landowner actively sought rezoning.

·         A potential buyer of the property made an offer to the landowner before the landowner entered into a development arrangement.

·         The landowner was unable to find a buyer for the land without subdivision.

·         The landowner applies for rezoning and planning approvals around the time or sometime after acquisition of the property, but before undertaking further steps that might lead to a profitable sale or entering into development arrangements.

·         The landowner has registered for GST on the basis that they are carrying on an enterprise in relation to developing the land.

·         The landowner has registered a related entity for GST that will participate in (or undertake) the development of the land.

·         The landowner has a history of buying and profitably selling developed land or land for development.

·         The operations are planned, organised and carried on in a businesslike manner.

·         The landowner has changed its use of the land from one activity to another (e.g. farming to property development).

·         The scope, scale, duration and degree of complexity of any development.

·         Who initiated the proposal to develop the land for resale.

·         The sophistication of any development or other pre-sale arrangements.

·         The level of active involvement of the landowner in any development activities.

·         The level of legal and financial control maintained by the landowner in a development arrangement.

·         The level of financial risk borne by the landowner in acquiring, holding and/or developing the land.

·         The value of the development or other preparatory costs relative to the value of the land.

Application in these circumstances

The Taxpayer did not acquire the Land in the course of carrying on a business or for a profit-making intention. The Land was acquired as an investment - i.e. it was a capital acquisition. The Taxpayer has merely held its interest in the Land.

The Taxpayer has not undertaken any measures to subdivide, develop or market etc. the Land unilaterally or with any other entity. The principle of separate legal entities and issues stemming from entities being controlled directly or indirectly by the same persons has little or no bearing in this case - as whatever knowledge may have been acquired by the controlling minds from their roles in XYZ has not been used in relation to the Taxpayer's dealings with the Land.

It is difficult to give weight to the development potential of rural land situated over 20 kilometres from the city.

For these reasons, it is considered that it is reasonable to conclude the sale of the Land was the mere realisation of an asset. That the family trust member may have on other occasions acquired and held land as long term capital investment, or constructed buildings on their land to derive rental income does not affect the nature of the Taxpayer's dealings with the Land in this context.

Consequently, any gain from the disposal of the Land will be a capital gain that is included in your assessable income under section 102-5 of the ITAA 1997. A net capital gain is worked out in accordance with the method statement set out in subsection 102-5(1).

Issue 2

The Commissioner agrees with your contention that no administrative penalty should apply to the shortfall of the over claimed input tax credit. The Commissioner agrees that as the taxpayer, before claiming the ITC, made reasonable inquiries and took detailed advice from skilled, reputable accountants and acted in accordance with their advice. Therefore, in accordance with paragraphs 10 to 10F of PS LA 2012/5 - reasonable care was taken by the taxpayer.

Question 3

If the answer to question 1 is 'no', will the Commissioner exercise his discretion to remit to nil any General Interest Charge (GIC) imposed on the shortfall resulting from the amended GST return?

Answer

As the Commissioner is of the view that this is an unusual transaction for which a shortfall will arise it is considered fair and reasonable under the circumstances to remit the GIC in full.

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