Edited version of private advice

Authorisation Number: 1051826825091

Date of advice: 21 April 2021

Ruling

Subject: CGT - main residence exemption

Question 1

Are you eligible to any main residence exemption in relation to the disposal of the Property?

Answer

No.

Question 2

Is the loss made on the sale of the Property deductible under section 8-1 of the Income Tax Assessment Act 1997(ITAA 1997)?

Answer

Yes.

Question 3

Is any capital loss made on the disposal of the Property disregarded under Parts 3-1 and 3-3 of the ITAA 1997?

Answer

No. The capital loss is not disregarded. However, the amount of the capital loss is lessened because the reduced cost base of the Property will be reduced by any amount that has been, or will be, claimed as a deduction under section 8-1 of the ITAA 1997.

This ruling applies for the following period:

Income year ending 30 June 20XX.

The scheme commences on:

1 July 20XX.

Relevant facts and circumstances

You, being Person A and Person B, entered into a contract to jointly purchase the Property for $X,XXX,XXX, with settlement occurring several months later.

The Property was zoned R3 which allows for townhouses to be constructed on it and subdivision.

The Property:

•         is a residential property

•         had a land area of XXX square metres

•         is bound by two streets, at the front and rear of the Property.

•         had a historical house located on it (the House), with garden and trees located on the other portion of the Property.

You had considered subdividing the Property, developing a new dwelling and living in one and selling the other. However, it is stated in the ruling that you purchased the Property with the intention of profiting from the Property by:

•         subdividing it into two lots

•         constructing a house on the vacant lot to sell in the future; and

•         to add further value to the lot on which the House was located and then sell it.

You undertook the following activities in relation to the Property during the month in which the Property was purchased.

•         making enquiries about the Property with the agent and discussing subdivision and sale

•         discussing opportunity to subdivide and develop the Property with your solicitor; and

•         commissioned an aerial photographer to identify potential views visible from potential higher floors to see if you could add value to the Property by building up.

During the following month you undertook the following activities in relation to the Property:

•         engaged the services of Person X from Company X to act as town planner to explore development opportunities

•         had consultations with another party to gain a second opinion on development restraints

•         contacted several heritage consultants

•         engaged the services of Company Y to explore development feasibility, survey development opportunities and constraints

•         engaged the services of an arborist

•         contacted several architects in relation to development opportunities

•         engaged the services of Company Z to prepare a fees and services proposal for the subdivision of the Property, and proposed changes to the Property, such as new vehicle crossover, basement garage and storage, construction of new dwelling

•         obtained past development applications from the local council

•         engaged the services of a surveyor to undertake a boundary survey, which they provided during the same month; and

•         engaged an arborist to assess the trees on the Property to determine which trees could be removed to make way for the development of the Property.

During the following month the following activities were undertaken in relation to the Property:

•         Company Z prepared drawings of options for various land areas of the potential subdivided lots

•         you explored preliminary development plans

•         you engaged with Person X to explore various development plans; and

•         you reviewed feedback from the arborist and heritage consultant.

During the following month Company Z prepared drawings in relation to:

•         the proposed subdivision of the Property into two lots with the House located on one lot and the other proposed lot being vacant land; and

•         a structure to be constructed on the subdivided vacant lot of land (the Building) which included a proposed basement plan, floor plan options for the ground level, first floor and various options for the second floor of the Building.

Company X prepared a fee proposal in relation to town planning services for the preparation of a Development Application for the subdivision of the Property and construction of a dwelling on the new lot.

You considered that Company Y was supportive of the plans to subdivide the Property, but the town planner raised a couple of issues, such as the trees and parking. Based on the advice you received, and the situation involving COVID-19, you decided that the best approach in relation to optimizing the sale price of the Property was to sell it whole and the Property was put on the market.

During the following month you entered into a contract to sell the Property for $X,XXX,XXX, with settlement occurring some time later.

You made a loss on the sale of the Property.

Neither you, nor any related entities/parties, have undertaken any similar activities in the past.

Neither you, nor any related entities/parties, have any plans to undertake any similar activities in the future.

You resided at a different property during the period from the settlement on the purchase of the Property until settlement on the sale of the Property occurred and had not resided at the Property during any period of your ownership of the Property.

No renovations were undertaken on the House during your ownership period with only some minor landscaping being done.

Assumption:

For the purposes of this ruling you have ended up with a revenue loss from the sale of the Property. The calculation of the size of the loss for revenue purposes will be exactly the same as the size that the capital loss would have been for CGT purposes before the reduced cost base is reduced by the amounts you claim as a deduction.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Subsection 110-55(4)

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

Question 1: Are you eligible to any main residence exemption in relation to the disposal of the Property?

Summary

You never lived in the Property during your ownership period and it has therefore never been your main residence. Accordingly, you are not eligible to any main residence exemption in relation to the disposal of the Property.

Detailed reasoning

Main Residence Exemption

Generally, any capital gain or capital loss that arises from a capital gains tax (CGT) event that happens to a dwelling that is a taxpayer's main residence is disregarded under the main residence exemption under section 118-110 of the ITAA 1997.

However, in order to obtain a full exemption from CGT, the dwelling must have been the taxpayer's main residence for the entire period they owned it and must not have been used to produce assessable income.

If a CGT event happens to a dwelling you acquired on or after 20 September 1985 and that dwelling was not your main residence for the whole time you owned it, you may be entitled to a partial exemption.

If a taxpayer owns more than one dwelling during a particular period, only one dwelling can be their main residence at any one time.

Capital Gains Tax Determination TD 51 Capital Gains: What factors are taken into account in determining whether or not a dwelling is a taxpayer's sole or principal residence? outlines the factors that need to be considered when determining whether a dwelling is a main residence.

Paragraph 3 of TD 51 states:

Mere intention to construct a dwelling or to occupy a dwelling as a sole or principal residence, but without actually doing so, is insufficient to obtain the exemption.

This ruling was withdrawn as the factors listed in the determination are included in the Guide to Capital Gains Tax, and it contains reference to repealed provisions. However, it still has effect for determining whether a dwelling is a main residence for the purposes of the main residence exemption.

Application to your situation

Settlement on the purchase of the Property occurred on one date, and settlement on the sale of the Property occurred some time later. During that period, you had resided at the property located at Breakfast Point.

You had considered moving into the Property but had not done that. As outlined above, a mere intention to move into a property without doing it will not enable you to be eligible for any main residence exemption.

Based on the information provided the Property was not your main residence during any period of your ownership. Therefore, as you never resided in the Property you are not eligible to either a full or partial main residence exemption.

Question 2: Is the loss made on the sale of the Property deductible under section 8-1 of the Income Tax Assessment Act 1997(ITAA 1997)?

Question 3: Is any capital loss made on the disposal of the Property disregarded under Parts 3-1 and 3-3 of the ITAA 1997?

Summary

Based on the information provided your activities in relation to the Property do not display the salient indicator of a business, which are transactions entered on a continuous and repetitive basis, and it is viewed that you are not carrying on a business.

However, the Property was purchased with the intention of making a profit through resale. While the method of sale had changed, the intention to make a profit was not abandoned. Therefore, it is viewed that your activities will be a profit-making undertaking and will be accounted for on revenue account. Accordingly, any loss you make on the sale of the Property will be deductible under section 8-1 of the ITAA 1997.

The capital loss amount used in calculating the reduced cost base of the Property will be reduced by any revenue loss amount that is deductible under section 8-1 of the ITAA 1997 but not actually disregarded.

Detailed reasoning

Property development

Property sales will either be assessed on revenue account if they are viewed as the carrying on of a business or are a profit-making undertaking or will be assessed as being capital in nature if they are viewed as the realisation of a capital asset.

Whether the sale of a property is assessable as being of a revenue or capital nature will be determined on the situation and circumstances of each particular case.

We have considered each of these in relation to your situation as follows:

Carrying on a business

Section 995-1 of the ITAA 1997 states the term 'business' includes any profession, trade, employment, vocation or calling, but does not include occupation as an employee.

The Commissioner's view on whether a taxpayer is carrying on a business is found in Taxation Ruling TR 97/11 (TR 97/11) which uses the following indicators to determine whether a taxpayer is carrying on a business:

•         whether the activity has a significant commercial purpose or character;

•         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.

In determining whether a taxpayer is carrying on a business, no one indicator will be decisive. The indicators must be considered in combination and as a whole. 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 provide the operations with a commercial flavour.

Application to your situation

You purchased the Property for the purpose of developing it and then reselling it. Neither you, nor any related parties/entities have undertaken any similar activities in relation to property in the past and there are no plans for either you or any related parties/entities to undertake any similar activities in the future.

After reviewing the information and documentation provided there is nothing to support that you have, or will, undertake similar activities on a continuous and/or repetitive basis.

Therefore, we do not consider that you are carrying on a business of buying, developing and selling property, or that the purchase and sale of the Property is the commencement of you carrying on a business of that nature.

Profit-making undertaking

Where a taxpayer enters into an isolated business transaction with an intention to make a profit or gain, the profit or gain will be ordinary income under section 6-5 of the ITAA 1997. Similarly, if the taxpayer's intention or purpose was to make a profit or gain but a loss was made, the loss is deductible under section 8-1 of the ITAA 1997 if the loss was incurred in carrying on a business or in a business operation or commercial transaction.

Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income provides guidance in determining whether profits from isolated transactions are assessable under section 6-5 of the ITAA 1997 as ordinary income.

Paragraph 1 of TR 92/3 outlines that isolated transactions are:

(a)  those transactions outside the ordinary course of business of a taxpayer carrying on a business; and

(b)  those transactions entered into by non-business taxpayers.

The ruling outlines at paragraph 6 that whether a profit from an isolated transaction will be ordinary income will depend on the circumstances of the case, however a profit from an isolated transaction will be ordinary income when:

(a)  the intention or purpose of a 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 operation or commercial transaction.

Paragraph 13 of TR 92/3 outlines the following factors which may be relevant when considering whether an isolated transaction amounts to a business operation or commercial transaction. In addition to those factors, for the purposes of determining whether the activities undertaken in relation to real property and development equate to a profit-making undertaking or scheme, Miscellaneous Taxation Ruling MT 2006/1 aligns itself with TR 92/3 and provides a list of factors which, if present may be an indication that a business or profit-making undertaking or scheme is being carried on.

In determining whether activities relating to isolated transactions are a profit-making undertaking or are the mere realisation of a capital asset, it is necessary to examine the facts and circumstances of each case. This may require consideration of the factors provided in TR 92/3 and/or MT 2006/1. However, there may also be other relevant factors that need to be weighed up as part of the process of reaching an overall conclusion. No single factor will be determinative; rather it will be a combination of factors that will lead to a conclusion as to the character of the activities.

The direction provided within TR 92/3 indicates that profits in this context are more likely to be considered ordinary income if they are made in the ordinary course of carrying on a business. Further, ordinary income may be derived from an isolated transaction which becomes commercial in nature, or as a result of profits on a transaction in which the initial intention was to make a profit on sale.

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 for entering into the transaction, although it must be a significant purpose. Paragraph 41 of that ruling also states that if the transaction or operation involves the sale of property, it is usually necessary that the taxpayer has the profit-making intention or purpose at the time of acquiring the property.

Paragraph 14 of TR 92/3 outlines that it doesn't matter if the way you ultimately obtain a profit by a means specifically contemplated, either on its own or as one of several possible means, when you enter into the transaction. It is sufficient that you entered into the transaction with the purpose of making a profit by one means but made a profit by another means.

It is outlined at paragraph 49 of TR 92/3 that a transaction or operation will generally have the character of a business operation or commercial transaction if the transaction or operation would constitute the carrying on of a business except that it does not occur as part of repetitious or recurring transactions or operations.

Paragraphs 56 and 57 of TR 92/3 explains that a profit is income where it is made in any of the following situations:

•         a taxpayer acquires property with a purpose of making a profit by whichever means proves most suitable and a profit is later obtained by any means which implements the initial profit-making purpose; or

•         a taxpayer acquires property contemplating a number of different methods of making a profit and uses one of those methods in making a profit; or

•         a taxpayer enters into a transaction or operation with a purpose of making a profit by one particular means but actually obtains the profit by a different means.

Taxation Ruling TR 92/4 Income tax: whether losses on isolated transactions are deductible discusses the tax treatment of losses from isolated transactions and when they are deductible under section 8-1 of the ITAA 1997.

TR 92/4 should be read in conjunction with TR 92/3 with TR 92/4 outlining that the factors contained in TR 92/3 to profits apply equally to losses from isolated transactions.

TR 92/4 outlines that a loss from a project is generally deductible under section 8-1 of the ITAA 1997 where, when the taxpayer began the project they intended to make a profit and the loss was made in the course of carrying out the project.

Application to your situation

In the context of considering the above authorities and factors when determining whether your activities would be viewed as a profit-making undertaking, the following general observations of your situation can be made:

•         Your stated intention in relation to purchasing the Property was to subdivide, develop and resell the property

•         You had approached your activities in relation to the subdivision and development of the Property in a businesslike way, having sought expert advice, and engaging the services of professionals in relation to the proposed subdivision and development activities from the month in which the contract of purchase of the Property had been entered; and

•         You had decided not to proceed with the proposed subdivision and development of the Property and had sold it as a whole.

As outlined above, to be considered a profit-making scheme, the intention of the taxpayer to make a profit does not need to be the sole intention or even the dominant intention on entering into the transaction, merely a significant intention.

In this case, your intention in purchasing the Property was to subdivide, develop and resell at a profit. Even though your intentions changed, and you sold the Property as a whole rather than proceeding with the subdivision and development, your intention did not change in relation to reselling the Property.

While you had considered subdividing the Property, developing a new dwelling and living in one and selling the other that had not occurred, and if it had occurred you still had the intention to purchase the Property and sell part of it in that scenario.

As outlined TR 92/3, it does not matter whether you sold the Property in the same manner in which you had originally intended when the Property was purchased. Where your intention was and remains to purchase and resell the Property for the purpose of making a profit it will remain on revenue account.

Therefore, based on the information provided, the facts of your situation, and your stated intentions in relation to the Property, it is viewed that your activities in relation to the Property was a profit-making undertaking.

Accordingly, the sale of the Property is revenue in nature and the loss that you have made in relation to the disposal of your ownership interest in the Property will be deductible under section 8-1 of the ITAA 1997.

Capital gains tax

The capital gains tax (CGT) provisions are contained in Parts 3-1 and 3-3 of the ITAA 1997. Broadly, the provisions include 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 under section 104-10 happens if you dispose a CGT asset. A CGT asset is any kind of property or a legal or equitable right that is not property.

A CGT event will still occur, and the capital loss amount will need to be calculated, if the loss made on the sale of the asset is assessable on revenue account and is deductible under section 8-1 of the ITAA 1997.

However, subsection 110-55(4) of the ITAA 1997 outlines that the reduced cost base of an asset does not include an amount to the extent that you have deducted or can deduct it under section 8-1 of the ITAA 1997. In many cases this will reduce any capital loss arising from an isolated transaction to nil.

Application to your situation

Making an overall assessment on the factors set out in TR 92/3, it has been determined that the sale of the Property will not be a realisation of a capital asset. Therefore, any loss made on its sale can be deducted under section 8-1 of the ITAA 1997.

CGT event A1 still occurred when the Property was sold. Therefore, as the disposal of the Property is viewed as a profit-making undertaking, any capital loss arising from the CGT event will be reduced to the extent that the loss made on the sale of the Property will be deductible under section 8-1 of the ITAA 1997 but not actually disregarded.

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