Edited version of private advice

Authorisation Number: 1051966924884

Date of advice: 13 July 2022

Ruling

Subject: Sale of farmland - revenue or capital

Question 1

Will the profit made by the Owners on the sale of the Land, constitute assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) as a result of an isolated commercial transaction?

Answer

No

The Owners have not acquired the Land with an intention to profit from its subsequent sale, therefore their activities in selling the Land are not considered to be an isolated commercial transaction. Further information can be found in Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income.

Question 2

Is the Land trading stock of the Owners such that the proceeds of sale derived by the Owners from the sale of the Land will be assessable to the Owners under section 6-5 of the ITAA 1997?

Answer

No

The Land will not be trading stock as the Owners have not and will not engage in activities to subdivide or develop the Land, or more generally engaged in other activities that are related to the carrying on of a business of buying and selling land.

Question 3

Will the gain from the sale of the Land be assessable to the Owners as the mere realisation of a capital asset under the capital gains tax provisions in Chapter 3 of the ITAA 1997?

Answer

Yes

This ruling applies for the following periods:

Financial year ending 30 June 20XX

Financial year ending 30 June 20XX

Financial year ending 30 June 20XX

Financial year ending 30 June 20XX

Financial year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The land subject to the ruling comprises rural land over five lots originally purchased by Family member A more than 50 years ago.

The Land passed to Family member B prior to 20 September 1985, whose ownership interest was subsequently passed to members of the family and related entities upon their death around XX years ago.

The Land is currently held by three separate entities (the Owners) as follows:

Table 1: Land ownership

Lot 2 contains a residential dwelling (3-bedroom 1-bathroom) which has been periodically rented out to an unrelated third party for a number of years. The rent and costs of Lot 3 are split between Entity A and Entity C on the basis of their respective ownership interest.

The Land has at all times throughout its ownership period been used for the purpose of running a primary production business. The primary production business is operated by Entity C. Prior to the establishment of Entity C, members of the family operated the primary production business.

A reference to the Land being used for the purposes of the primary production business, excludes the part of Lot 2 containing the residential dwelling.

The Land interests held by the Entity A and Entity B are made available to Entity C to operate the primary production business. There is no written agreement and no fee payable by Entity C to Entity A and Entity B or previous Owners.

Apart from Entity A and Entity B making their interests in the Land available to Entity C and the sale of the Land, no other activities are undertaken by any combination of the Owners jointly.

After the recent death of Family member C whose interest in the Land is now held by Entity A, the sale of the Land is once again being pursued by the Owners. A term in the will of Family member C requires the Land be sold. This is consistent with the intention of the other Owners of the Land.

In respect of any sale of the Land:

(i)    The Land will continue to be used by the Entity C to operate the primary production business until the Land is sold and also post the sale of the Land.

(ii)   To date, no works have been undertaken to prepare the Land for an en-globo sale or for subdivision. The personal involvement of the Owners has been minimal.

(iii)  No subdivision or development works of the Land will be undertaken by the Owners or other parties prior to settlement.

(iv)  The Owners are committed to sell the Land. At the time the current private ruling application was lodged, the Owners were very close to executing a sale agreement with a potential purchaser. However, these negotiations subsequently ceased. The Owners are now commencing a process of going to market in order to sell the Land. As at the current date, the Owners do not have an executed sale contract in relation to the sale of the Land.

(v)   The Owners have not and will not market the Land for sale directly and have engaged a real estate agency to be responsible for all matters related to the sale of the Land.

(vi)  Whilst the Owners will not agree to a sale price (or part of the sale price) for the Land that is contingent on or calculated by reference to the profits or proceeds derived from, the subsequent sale of the Land (or subsequent subdivision and sale of the Land) by the purchaser of the Land, it is possible (although not necessarily the preference of the Owners) that the sale price agreed to by the Owners may have a deferred payment component. Any deferred payment component agreed to by the Owners would be payable in regular instalments and would not be contingent on the subsequent sale of the Land (or subdivision and sale of the Land) by the purchaser of the Land.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 995-1

Income Tax Assessment Act 1997 Part 3-1 and Part 3-3

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).