Edited version of private advice

Authorisation Number: 1051676078964

Date of advice: 13 May 2020

Ruling

Subject: Subdivision of land

Question 1

Are the profits received on the sale of a property assessable as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer 1

No

Question 2

Is the sale of the property assessable as statutory income under section 6-10 of the ITAA 1997, including the CGT provisions?

Answer 2

No

This ruling applies for the following period:

30 June 20XX

The scheme commences on:

1 July 19XX

Relevant facts and circumstances

The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of, and are to be read with this description. The relevant documents are:

·         XXXX Trust financial statement dated XXXX

·         XXXX Trust Notes to financial statement dated XXXX

·         XXXX Trust Compilation Report dated XXXX

·         XXXX Trust transfer of trustee notice dated XXXX

·         XXXX Trust memorandum guidance notes

·         XXXX Trust Deed

On XXXX, A and B entered a contract to purchase property known as Portions 1 and 2.

The XXXX Trust was established on XXXX (the Trust).

The Trust lists B as the trustee of the Trust.

After August 1976 and before settlement, A and B transferred their contracted interest of Portions 1 and 2 to the Trust.

Deferred settlement of the Trust occurred in XXXX.

In XXXX the Property known as Portions 1 and 2 was divided into X blocks of X acres or more.

In 19XX and 19XX, X of the X blocks created were disposed of by A and B on behalf of the Trust.

After disposal, X block with the address of XXXX remained unsold (the Property). You provided evidence that as of XXXX the Property is listed as a trust asset.

After the death of A in 19XX, the Property remained registered to B as the sole surviving joint tenant on the title RPXXXXXX.

On 19XX B resigned as trustee and X Private Co Pty Ltd was appointed as the new trustee.

The beneficiaries of the Trust have not changed throughout of the Trust.

The Property was sold as a single parcel of undeveloped vacant land for $XXX,000. The contract date was XXXX and settlement occurred on or before XXXX.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 15-15

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 995-1

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 Part 3-3

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Your activities in relation to the sale of your Property are not indicative of a business of buying and selling properties. They will not be the same, nor carried on in a manner similar to those engaging in the trade of buying and selling property or a profit-making undertaking. Accordingly, the gain made on the sale of the Property will not be assessable under section 6-5 of the ITAA 1997.

Detailed reasoning

Section 6-5 of the ITAA 1997 provides that your assessable income includes income according to ordinary concepts. The legislation does not provide any guidance on what is meant by income according to ordinary concepts. However, a substantial body of case law has evolved over time that identifies various factors that are taken into account in determining when an amount is 'income according to ordinary concepts.

Ordinary income includes income that arises in the normal scope of a taxpayer's business. In addition, in limited circumstances, gains not within the ordinary scope of the taxpayer's business may form part of ordinary income.

TR 97/11 incorporates the general factors that are considered important in determining the question of whether a business activity is being carried on:

·         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 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.

In this case, the Commissioner is satisfied you are not carrying on a business activity. The repetition, scale and volume of your activity are not of the same nature of someone conducting a business of buying and selling property.

However, whilst you are not carrying on a business, the proceeds from the sale of your property may still be assessable as ordinary income, if those proceeds are considered to be from an isolated business 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 a taxpayer's business.

TR92/3 considers various taxation principles and provides guidance in determining whether profits from isolated transactions are assessable under section 6-4 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

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 sale of subdivided land can be assessed as ordinary income within section 6-5 of the ITAA 1997. TR 92/3 lists the following factors to be considered:

a)    the nature of the entity undertaking the operation or transaction

b)    the nature and scale of other activities undertaken by the taxpayer

c)    the amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained

d)    the nature, scale and complexity of the operation or transaction

e)    the manner in which the operation or transaction was entered into or carried out

f)     the nature of any connection between the relevant taxpayer and any other party to the operation or transaction

g)    if the transaction involves the acquisition and disposal of property, the nature of that property, and

h)    the timing of the transaction or the various steps in the transaction.

In this case, the Property has been held in the family trust since in its acquisition in 19XX. The Property has been land locked since a subdivision in 19XX and will be sold as a single parcel of undeveloped land.

The Commissioner is satisfied the proceeds from the sale of your property will not be those from an isolated business transaction and will not be assessable as ordinary income under section 6-5 of the ITAA 1997.

Question 2

Summary

As you acquired your ownership interest in the Property before 20 September 1985, the Property is a pre-capital gains asset. Therefore any capital gain made on the sale of the Property is disregarded.

Detailed reasoning

The capital gains tax (CGT) provisions are contained in Part 3-1 of the ITAA 1997. Broadly, the provisionsinclude in your assessable income any assessable gain or loss made when a CGT event happens to a CGT asset that you own.

CGT event A1 happens if you dispose of a CGT asset. A CGT asset is any kind of property or a legal or equitable right that is not property. However, any capital gain or capital loss made on the disposal of a CGT asset will be disregarded if the asset was acquired before 20 September 1985 under subsection 104-10(5) of the ITAA 1997.

In this case, the Property was acquired before 20 September 1985. Therefore, the Property is a pre-CGT asset. While CGT event A1 occurred when the sale contract of the Property was entered into, as the Property is a pre-CGT asset, any capital gain made on the disposal of the Property is disregarded under Part 3-1 of the ITAA 1997.

Conclusion

The sale of the Property is not taxable as ordinary or statutory income under the Income Tax Assessment Act 1997.

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