Edited version of private advice

Authorisation Number: 1051897958289

Date of advice: 10 September 2021

Ruling

Subject: Sale of property - capital vs revenue

Question

Will the gain made on the disposal of the property be assessable as a capital gain under section 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997) and will not constitute income according to ordinary concepts for the purposes of section 6-5 of the ITAA 1997?

Answer

No

The sale of the property will be assessable on revenue account.

This ruling applies for the following period periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The partnership owns and operates a construction company.

One of the partners is the manager for the construction company and designs and constructs the homes.

It is usual for the intent to sell or lease the property to be made on completion of the construction. Market and other factors contribute to determining whether to sell or lease the properties.

The partners purchased a block of land several years ago with the intention of subdividing and building two houses on the property with the intent to sell them.

Building commenced and was completed in 20XX and the titles for both subdivided properties were issued.

You expect to make a significant profit on the sale of the property.

On completion, the intent to sell both properties changed and it was decided to sell one property and retain the other as a long-term investment.

The intention was to sell the second property 12 months after practical completion in line with the partnerships intention to retain a long-term investment.

A long-term tenant was secured on a lengthy lease.

Property 1 was sold with the buyer entering into an Option to Buy agreement for property 2. The agreement is due to elapse in the near future.

No capital gains were reported in prior tax returns as the sale of the first property was on revenue account.

It is expected the right to take up the option to purchase property 2 will proceed prior to the agreement elapsing.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 section 118-20

Income Tax Assessment Act 1936 Part IVA

Reasons for decision

Detailed reasoning

In general, proceeds from the sale of land will be taxed for income tax purposes in one of the following ways:

•         as ordinary income, where the land is held as trading stock and sold as part of carrying on a business of property development;

•         as ordinary income, where land is not trading stock and is sold as part of an isolated commercial transaction entered into with a profit-making intention;

•         as statutory income under the CGT provisions, where the land is neither trading stock nor the subject of an isolated profit-making scheme or undertaking and the proceeds of sale are the mere realisation of a capital asset.

Where the land is sold as part of carrying on a business of property development or as part of an isolated profit-making scheme, the proceeds will be included in your assessable income in accordance with subsection 6-5(1) of the Income Tax Assessment Act (ITAA 1997).

Where the sale of the land is considered to be the mere realisation of a capital asset, the net capital gain will be included in your assessable income in accordance with subsection 6-10(1) of the ITAA 1997.

Profit-making intention

If the transaction 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.

However, as the High Court decision in FC of T v. Whitfords Beach Pty Ltd (1982) 150 CLR 355; [1982] HCA 8; 82 ATC 4031; 12 ATR 692 (Whitfords Beach) demonstrates, that is not always the case. For example, if a taxpayer acquires an asset with an intention of using it for personal enjoyment but later decides to venture or commit the asset either as the capital of a business or into a profit-making undertaking or scheme with the characteristics of a business operation or commercial transaction, the profit is income even though the taxpayer did not have the purpose of profit-making at the time of acquisition.

Business operation or commercial transaction

Factors listed in paragraph 13 of Taxation Ruling 92/3 (TR 92/3), which may be relevant in considering whether an isolated transaction amounts to a business operation or commercial transaction include:

•         the nature of the entity undertaking the operation or transaction;

•         the nature and scale of other activities undertaken by the taxpayer;

•         the amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained;

•         the nature, scale and complexity of the operation or transaction;

•         the manner in which the operation or transaction was entered into or carried out;

•         the nature of any connection between the relevant taxpayer and any other party to the operation or transaction;

•         if the transaction involves the acquisition and disposal of property, the nature of that property; and

•         the timing of the transaction or the various steps in the transaction.

In determining whether activities relating to isolated transactions are a profit-making undertaking or are the realisation of a capital asset, it is necessary to examine the facts and circumstances of each particular case. 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.

If an income asset is converted into a capital asset for the purposes of claiming the CGT discount, the discount may be denied (under Part IVA of the Income Tax Assessment Act 1936).

Application to circumstances

Although the property has been used as an investment this intention is not definitive alone.

There has been a change in purpose for which the property is held and is now held primarily for the purpose of resale. An Option to Buy agreement has been drafted clearly outlining the plan for the property with a sale to the purchaser of the other property.

We have taken into account the following when considering the factors in TR 92/3:

•         the building and construction business develops properties to either rent or sell

•         you designed and constructed the houses yourself

•         the money was borrowed by the partnership

•         the property was purchased by the partners

•         the sale of the first property was treated as being on revenue account.

Even if it could be said that the sale of this property is any different from the sale of other properties by the business, based on the facts it can be concluded that the development and subsequent sale of the property, occurs with the intention of profit as a commercial transaction. The sale of the property will be assessable on revenue account.

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