Edited version of private advice

Authorisation Number: 1052380463907

Date of advice: 14 May 2025

Ruling

Subject: Capital vs revenue

Question 1

Will the profit from the sale of the property be assessable as income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) as a result of an isolated profit-making undertaking or scheme?

Answer 1

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You are a unit trust with a corporate trustee. You have an ABN, and you are registered for GST. Your business is property development.

Contract 1

On DD MM 20YY, a purchaser (initial purchaser) entered into a contract (Contract 1) to acquire real property. Settlement date was DD MM 20XX. At the time, the property was owned by a builder (the builder), and it comprises X hectares of residential land.

Contract 1 was for $X million plus GST. A deposit of $Y million was paid to the builder upon signing of the contract, and payments of $Z million were required to be made to the builder each year until settlement. Contract 1 allowed for the initial purchaser to substitute a nominee purchaser.

The initial purchaser acquired the property with the intention to develop it. The property was purchased with a Precinct Structure Plan (PSP) and Stage 1 town planning permit in place for a large number of lots. After entering into the purchase contract, the Stage 1 town planning permit was endorsed and extended for a further X years.

On DD MM 20YY+1, the initial purchaser nominated you as substitute purchaser of the property. No additional consideration or payments were made between you and the initial purchaser for this nomination. You also intended to develop the property to make a profit.

You were required to pay X% annual interest, in quarterly instalments, on the balance of amounts owing to the builder from DD MM 20YY to the settlement date. You made quarterly interest payments of $X million.

Over time, you and the initial purchaser changed your intentions to develop the property. For various reasons, you decided not to develop the property and to sell it instead and realise the value of the property. Rather than substitute another nominee purchaser into Contract 1, you decided to settle Contract 1 and to enter into a new contract to sell the property.

Contract 2

On DD MM 20ZZ, you entered into a contract with a developer (the purchaser) to sell the property for $X million plus GST (Contract 2). The purchaser's business is property development, and it is registered for GST. Contract 2 had a settlement date of DD MM 20XX, coinciding with Contract 1. Contract 2 required settlement of Contract 1 on or before settlement of Contract 2.

Contract 2 contains Particulars of Sale which includes 'Payments' section detailing the contract price of $X million and deposit amount of $Y million, and details of the $Z million balance payable, in accordance with special condition X.

A deed of payment and guarantee (Payment Deed) was entered into between you, the purchaser and the purchaser's related entity (related entity). Under the Payment Deed and clause X of Contract 2, the purchaser agreed to pay you the following non-refundable amounts exclusive of GST:

•                     $X million at settlement of the property (First Payment)

•                     $Y million on DD MM 20XX+1 (Second Payment)

•                     $Y million on DD MM 20XX+2 (Third Payment)

•                     $Y million on DD MM 20XX+3 (Fourth Payment)

•                     $Y million on DD MM 20XX+4 (Fifth Payment)

•                     $Y million on DD MM 20XX+5 (Sixth Payment)

•                     $Z million on DD MM 20XX+6 (Seventh Payment)

On DD MM 20XX, Contracts 1 and 2 settled. The schedule of payments was to allow the purchaser to have the funds available to pay for the acquisition in instalments, and to reflect the increase in the value of the property over that time.

At this time, you had obligations under Contract 1 to pay $X million. You had also incurred various ongoing management, stamp duty, interest, legal and other costs.

Up to DD MM 20XX, payments received by you from the purchaser had not exceeded costs incurred by you.

You reported the GST on the property sale in your MM 20XX monthly business activity statement.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 6-10

Reasons for decision

Income

Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of an Australian resident includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Section 6-10 of the ITAA 1997 provides that your assessable income also includes some amounts that are not ordinary income, which is assessable as statutory income.

Broadly, there are three main ways the proceeds from a property development can be treated for taxation purposes:

•                     as ordinary income under section 6-5 of the ITAA 1997, on revenue account as a result of carrying on a business of property development, involving the sale of land as trading stock

•                     as ordinary income under section 6-5 of the ITAA 1997, on revenue account as a result of an isolated business transaction entered into by a non-business taxpayer, or outside the ordinary course of business of a taxpayer carrying on a business, which is the commercial exploitation of an asset acquired for a profit making purpose

•                     as statutory income under the CGT legislation, from a mere realisation of a capital asset, assessable under Parts 3-1 and 3-3 of the ITAA 1997 in accordance with section 6-10 of the ITAA 1997.

Whether the proceeds are treated as income or capital depends on the situation and circumstances of each particular case.

Profits from isolated transaction

Profits arising from an isolated commercial transaction will be ordinary income if the 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 (FC of T v Myer Emporium Ltd 1987 163 CLR 199; 87 ATC 4363; 18 ATR 693).

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

The term isolated transaction refers to:

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

•                     those transactions entered into by non-business taxpayers.

Paragraph 35 of TR 92/3 provides that a profit from an isolated transaction will be ordinary income where:

•                     the intention or purpose of a taxpayer in entering into the transaction was to make a profit or gain, and

•                     the transaction was entered into and the profit was made in the course of carrying on a business operation or commercial transaction.

Profit-making does not need to be the sole or dominant purpose for entering into the transaction. A profit-making purpose must exist at the time the transaction or operation was entered into. Whether an isolated transaction is business or commercial in character will depend on the circumstances of each case. Paragraph 13 of TR 92/3 lists the following factors:

•                     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

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

No single factor is determinative; rather it will be a combination of factors that will lead to a conclusion as to the character of the activities.

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 prove 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.

Paragraph 57 of TR 92/3 states that the Commissioner also considers that an assessable profit arises if 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. Thus, a taxpayer may contemplate making a profit by sale but may ultimately obtain it by other means (such as compulsory acquisition, through a company liquidation or a distribution in specie) that were not originally contemplated.

In very general terms, a transaction or operation has 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.

Paragraph 42 of TR 92/3 explains that when a taxpayer's intended use of an asset changes, and they decide to venture into a profit-making scheme with the characteristics of a business operation or commercial transaction, the activity of the taxpayer will constitute the carrying out of a profit-making scheme, although the taxpayer did not have the purpose of profit-making at the time of acquiring the asset.

However, paragraph 44 of TR 92/3 explains when a taxpayer derives a profit from a transaction outside the ordinary course of carrying on its business and the taxpayer did not enter that transaction with the purpose of making a profit, the profit is not assessable income.

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 (MT 2006/1) aligns 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. Relevant factors include:

•                     there is a change of purpose for which the land is held;

•                     additional land is acquired to be added to the original parcel of land;

•                     the parcel of land is brought into account as a business asset;

•                     there is a coherent plan for the subdivision of the land;

•                     borrowed funds financed the acquisition or subdivision;

•                     there is a level of development of the land beyond that necessary to secure council approval for the subdivision.

It is emphasised at paragraph 266 of MT 2006/1 that no single factor is determinative; rather it will be a combination of factors that will lead to a conclusion as to the character of the activities.

Timing of derivation of income

Taxation Ruling TR 98/1 Income tax: determination of income; receipts versus earnings (TR 98/1) is about timing of derivation of income. It states that under the receipts method, income is derived when it is received, either actually or constructively, under subsection 6-5(4) of the ITAA 1997. The effect of that subsection is that income is taken to have been derived by a person although it is not actually paid over, but is dealt with on their behalf or as they direct.

Under the earnings method, income is derived when it is earned. The point of derivation occurs when a 'recoverable debt' is created. The term 'recoverable debt' is used to describe the point of time at which a taxpayer is legally entitled to an ascertainable amount as the result of having performed an agreed task. Whether there is, in law, a recoverable debt is a question to be determined by reference to the contractual agreements that give rise to the legal entitlement to payment, the general law and any relevant statutory provisions.

Rather than setting down hard and fast rules, the approach of the courts, when deciding whether one or another method of accounting for income was appropriate, has been to weigh the total circumstances of a taxpayer and the income to determine whether the accounting method produces the correct reflex of income for the year.

In Gasparin v. Federal Commissioner of Taxation (1994) 50 FCR 73; 94 ATC 4280; (1194) 28 ATR 130 (Gasparin), where contracts for the sale of land were executed in one income year but settled in another, it was held that the income was not derived until settlement.

In Gasparin, von Doussa J noted that the element of contingency is an important one. In Barratt & Ors v FC of T 92 ATC 4275 at 4281-4282; (1992) 107 ALR 385 at 393-394; (1992) 23 ATR 339 at 346, Gummow J, with whom the other members of the court agreed, said:

No doubt a debt that is presently recoverable by action generally will be an amount 'derived' in the relevant sense by the creditor. The creditor will have a present right to receive the amount in question, something both earned and quantified, without the presence of any element of contingency or defeasibility. At the other end of the scale, where the right of the taxpayer is contingent, there will be no derivation before the contingency is satisfied: see Parsons, 'Income Taxation in Australia', paragraph 11.49. Nor will there be derivation if the debt is yet to be quantified: Farnsworth v FC of T (1949) 9 A.T.D. 33 at 37; (1949) 78 C.L.R. 504 at 513 per Latham C.J..

Taxation Ruling TR 97/9 Income tax: sale of wool (TR 97/9), while dealing with the sale of wool, discusses the impact of Gasparin in relation to the sale of real property. It states at paragraph 89:

The derivation of income from the sale of goods should be contrasted with the derivation of income from the sale of real property. It was held in Gasparin that income from the sale of land was not derived until settlement had taken place. We do not think that von Doussa J's decision was based on the fact that legal ownership in the land would not be transferred until settlement. The explanation for the judgement rather lies in the realisation that a vendor in a real property transaction will not have performed all that is needed to become entitled to a payment prior to settlement. At settlement, transfers are effected which put the purchaser in a position to become registered as owner. As such, the vendor does not earn the income from the sale until settlement.

The Gasparin case, amongst others, established these principles:

•                    Where a sale of real property results in income, the income arises at the time of settlement, not when the contract is entered into, nor when all conditions other than transfer of the property are satisfied. A mere loss of dispositive power over property, without delivery of the property by the seller to the purchaser on settlement of the sale, does not result in the derivation of assessable income.

•                     Dispositive power is lost at settlement. This is the case even though the time between when the taxpayer enters into the contract and settlement occurring is a lengthy period, such as 25 years. Income is derived by a seller when the sale price becomes a presently existing debt.

•                     A debt is created when the sale proceeds are due, even though they may only become payable at some future date.

•                     In establishing if a recoverable debt has been created, it is necessary to determine whether there are further steps (or conditions precedent) to be taken (or met) before the taxpayer becomes entitled to payment.

•                     Where a debt is presently recoverable by action, generally, there will be a present right to receive an amount in question. That amount will be quantifiable and not subject to any contingency or defeasibility.

•                     The taxpayer has a right without contingency to a quantifiable amount that is recoverable by action at that time and is not obligated to take any further steps to be entitled to payment.

Application to your circumstances

Income and profits from isolated transaction

With consideration to the above authorities and relevant factors in determining whether the sale of the property would be viewed as isolated transaction with a view to a profit-making of commercial character, the following general observations have been made in this case.

•                     You are a unit trust in the business of property development.

•                     On DD MM 20YY, the initial purchaser entered into a contract to acquire property from the builder.

•                     On DD MM 20YY+1, you were nominated by the initial purchaser to be a substitute purchaser of the property.

•                     You acquired the property with the intention to develop it to make a profit.

•                     You were the one carrying out this scheme, which is not in the ordinary course of your business, as your main business activity is land development.

•                     The development of this property in this instance was undertaken by other parties, which is not in your ordinary course of business, as you held this property for a period rather than develop it as intended when purchased.

•                     Over time, you and the initial purchaser changed your intentions to develop the property. For various reasons, you decided not to develop the property and to sell it instead and realise the value of the property. Rather than substitute another nominee purchaser into Contract 1, you decided to settle Contract 1 and to enter into a new contract to sell the property.

•                     Professional services were engaged to assist with the property contracts.

•                     You acquired the property from an unrelated party and sold the property to an unrelated party in the public market.

•                     Contract 1 dated DD MM 20YY and settlement was DD MM 20XX. Contract 1 contained clauses prescribing deposit, annual instalment, and interest amounts to be paid.

•                     Contract 2 dated DD MM 20ZZ and settlement was DD MM 20XX. Contract 2 contained clauses prescribing deposit, annual and final instalment, and interest amounts to be paid, reflecting the Payment Deed.

•                     Both Contract 1 and Contract 2 settled on DD MM 20XX. You held the property only for a moment in time.

•                     The activities involved in undertaking the intended development of the property are considered to be commercial in character given the various entities involved, professionals engaged to effect the isolated profit-making scheme, funding arrangements and related risks exposed, and various works required by various professionals including period to undertake and up to completion of this venture.

Based on the above, it is the Commissioner's view that the sale of the property is more than a mere realisation of a capital asset or investment. The purpose in undertaking these activities was to sell at a profit. Although the property was intended to be developed, the subsequent engagement with other parties, risk exposure and intention to realise profit, disposal of the property was considered the most profitable course of action, and therefore would be considered an isolated transaction on revenue account as ordinary income, rather than on capital account. Any profit made on the transaction is assessable income under section 6-5 of the ITAA 1997.

Timing of derivation of income

With reference to the various contracts you entered in respect of the property development, and in particular the relevant clauses stipulating completion of work, the following clause references have been considered.

Contract 2 stipulates various clauses and in particular, reference to the following:

•                     You must deliver the property at settlement in the same condition it was in on the day of sale, except for fair wear and tear - reference to clause X.

•                     The purchaser is satisfied with the condition, quality, and state of repair of the property and accepts the property in its condition at settlement - reference to clause Y.

•                     A $X million deposit is payable to you on settlement, and the $Y million balance is payable to you in accordance with timing of instalments specified in the Payment Deed - reference to Particulars of Sale.

•                     Each payment is non-refundable - reference to clause Z.

Contract 2 at clause X states as follows:

Payments means the following payments (which are GST exclusive), which must be paid by the purchaser to the Vendor on the following dates pursuant to special condition Y:

•                    $X million at Settlement (First Payment)

•                    $Y million on DD MM 20XX+1 (Second Payment)

•                    $Y million on DD MM 20XX+2 (Third Payment)

•                    $Y million on DD MM 20XX+3 (Fourth Payment)

•                    $Y million on DD MM 20XX+4 (Fifth Payment)

•                    $Y million on DD MM 20XX+5 (Sixth Payment)

•                    $Z million on DD MM 20XX+6 (Seventh Payment)

Contract 2 at clause Y states as follows:

Timing of Payments

The Purchaser must pay the Payments to the Vendor by electronic funds transfer on the due dates for payment described in special condition X.

The Vendor and the Purchaser acknowledge that:

(i)            the timing of the payment of the Deposit and the First Payment are to allow the Purchaser to reimburse the Vendor for costs already incurred by the Vendor under Contract 1, including the deposit under Contract 1 and the Instalments; and

(ii)           the timing of the Second, Third, Fourth, Fifth, Sixth and Seventh Payments are to coincide with the realisation by the Purchaser of the value of the property over that period under the terms and conditions of this Contract.

As discussed above, TR 98/1 explains that income is derived when a 'recoverable debt' is created, which is the point of time at which a taxpayer is legally entitled to an ascertainable amount as the result of having performed an agreed task. A taxpayer may have a recoverable debt even though, at the time, they cannot legally enforce recovery of the debt.

You entered contracts detailing total contract amounts, deposit amount and balance amount on settlement including instalment payments falling after settlement date to realise the value of the property at the time, and at which time funds would be available. The contract at settlement date did not contain conditional requirements for work or tasks to be completed before these amounts would be due and payable.

The title to the property was transferred on settlement date of DD MM 20XX, allowing you rights to recover the debt, which became recoverable at that point.

Your facts and circumstances in comparison to case authority Gasparin in relation to contract works and instalments over a number of years are vastly different. In Gasparin's case, the timing of payments required completion of particular work to be completed before payments of settlement amounts could occur. In your matter, all works were completed at settlement and there were no contingent tasks to be performed at the time each instalment falls due. Instead, the instalment payments agreement entered into between the parties were to accommodate and facilitate funding arrangements to allow the purchaser to have the benefit of realising the value of the property over time, and to fund the balance.

At settlement, you transferred the property titles and at that point, per the contracts, all tasks required to be completed to derive the payments in respect of the sale of the property had been done. Therefore, the total amount of the contract will need to be accounted for at the time of settlement, which occurred on DD MM 20XX, to calculate profit from the sale of the property.

Summary

Based on the facts and circumstances, you entered into a profit-making scheme, being more than a mere realisation of an asset or investment, which involved considerable risk and exposure with intent of making a profit.

You entered into various legal contracts for those undertaking the works on the project, with specific clauses detailing but not limited to completion date, settlement amounts, instalment payments agreement that accommodated and facilitated funding arrangements to allow the purchaser the benefit of realising the value of the property over time, and to fund the balance. The instalment payments are not conditional for works to be completed before payments can occur. Therefore, the total amount of the contract upon when the project was completed is on DD MM 20XX. It is also considered that at this date the debt become irrecoverable.

The profit from the scheme will be assessable on revenue account under section 6-5 of the ITAA 1997 as a result of an isolated profit-making undertaking or scheme, and is assessable to you in the financial year ended 30 June 20XX.

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