Edited version of private ruling

Authorisation Number: 1011423755858

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Ruling

Subject: Issue of Partly Paid Units

Question 1

Will the issue of partly paid units in the unit trust result in the creation of a trust by resettlement?

Advice/Answers

No.

Question 2

Are distributions of trust income including assessable net capital gains to the holders of the partly paid units a valid present entitlement and therefore assessable to them for the purposes of Division 6 of Part III of the Income Tax Assessment Act 1936 (ITAA 1936)?

Advice/Answers

Yes.

Question 3

Would the issue of the partly paid units result in a direct value shift under Division 725 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Advice/Answers

No.

Question 4

Will section 100A of the ITAA 1936 operate under this scheme?

Advice/Answers

No.

Question 5

Would the Commissioner exercise his discretion and apply Part IVA of the ITAA 1936 to the scheme?

Advice/Answers

No.

Question 6

Would the sale proceeds from the sale of property be characterised as being gains on capital account in the hands of the trust?

Advice/Answers

Yes.

This ruling applies for the following period

Financial year ended 30 June 2010 to financial year ended 30 June 2013

The scheme commenced on

1 July 2009

Relevant facts

Trustee Co - Trustee for the Unit Trust

Trustee Co is an Australian resident company.

Trustee Co has acted as trustee for the Unit Trust since its inception. The trust deed of the Unit Trust has never been amended. All of the units issued in the Unit Trust are beneficially owned by BCo.

Unit Trust Property

The Unit Trust acquired real property some time ago, the Property has been held since that time on capital account as a fixed asset.

Valuation of the Property

A professional valuation has been obtained for the Property and from that, the units in the Unit Trust have been valued as per the trust deed.

Development of the Property

It is intended that the Property be developed to improve its value.

The Unit Trust entered into a Joint Venture (JV) with DeveloperCo to complete the Property development.

The JV defines the role of each party. The Unit Trust, as the Owner will only contribute the Property and is not required or entitled to conduct the Project. DeveloperCo, as the Developer, will contribute expertise in development and construction to manage the project and the funds required to operate the project.

The JV describes how profit will be shared between the Unit Trust and DeveloperCo. On sale of any part of the Property, the Unit Trust is the owner of the sales proceeds. Of the sales proceeds, the Unit Trust is entitled to the value of that portion of Property. DeveloperCo is entitled any profit above that value.

The JV states that DeveloperCo is liable for all losses.

The taxpayer advises that all parties associated with the Unit Trust have never engaged in any property development prior to entering into the JV.

Over the years the Property has been held, it was used for short periods of time for primary production.

BCo

BCo is an Australian resident company.

The 2 directors are also the 2 equal shareholders.

The investment status of BCo is and has been as follows:

§ Beneficially holds all of the issued units in the Unit Trust.

§ Beneficially holds a portfolio of listed public company shares.

§ Recipient of income distributions as a discretionary beneficiary from various family trusts controlled by its directors/shareholders.

BCo directors/shareholders - Family background

The shareholders have retired from their businesses and have children.

The shareholders wish to implement an estate plan to distribute their assets to their children.

The Estate Plan

As part of their estate plan, the shareholders want one of their children to receive a significantly larger proportion of their estate than the others.

The shareholders are concerned about the possibility of Testator Family Maintenance (TFM) claims against their estate especially due to their desire for an uneven split of their assets.

TFM claims

The shareholders most valuable assets that are to be unevenly distributed between their children being the Property and their largest listed share portfolio, are indirectly held by them through BCo.

The taxpayers state they have received advice that due to the risk of a TFM claim being made against their estates, which will include their above shares in BCo, the best protection is to minimise the size of their personal estates before death.

They note that a transfer of their BCo shares during their lifetime into a discretionary trust would trigger a large and unfunded Capital Gains Tax (CGT) liability, whereas a transfer of their BCo shares upon death in the ordinary course of events would achieve a deferral of the CGT liability (i.e. nil CGT payable by their estates).

According to the Wills of the shareholders, on the death of the first spouse, his or her half of BCo shares shall be gifted to a discretionary trust, or to a Holdings Co (with shares held by a discretionary trust established for each of the children). The taxpayer states that this is intended to mitigate the TFM claim risk when the estate plan is compulsorily revealed to the other children after death of the first spouse.

As DeveloperCo is preparing to develop and sell the Property to third parties, the shareholders have decided to restructure their assets during their lifetime. They advise that they believe this will reduce the risk of a TFM claim against their estate because any CGT that would have arisen on a transfer of their shares during their lives can be funded from the sale of the underlying assets.

Purpose of purchase

The shareholders advise that at the time the Property was acquired, they thought it would provide them with a steady capital hedge against inflation for their retirement, and a legacy for their children.

Trustee Co commenced a primary production business shortly after purchasing the Property, however it ceased that business because of losses.

The Property experienced a significant increase in value in recent years.

With this increase in value, the taxpayer advises that higher council valuations made it expensive and uneconomic to continue to own and simply hold the Property.

The shareholders decided to cause the Unit Trust to enter into the JV with DeveloperCo to develop the Property for sale as they advise they have had no experience in property development. .

The proposed scheme

Trusts have been established for each child.

The Unit Trust will issue partly paid units at the market value at the time of issue under its trust deed.

It is proposed that the partly paid units in the Unit Trust be issued to the children's trusts in the proportion desired under the estate plan. The issued partly paid units will be in addition to the ordinary units currently held by BCo.

The partly paid units will be issued on the following payment terms:

§ the issue price per unit will be the same as the current market value of an ordinary unit;

§ the units will be partly paid up to a small percentage of the total value;

§ the balance of the subscription price must be paid by the earlier of:

o 3 ½ years following the issue date of the units; or

o at the Trustee's call, subject to the requirement that the shareholders must both be alive at the time of the call; and

§ if the balance of the subscription price is not paid in full within thirty days of their due date, the units are automatically redeemed and only the paid up amount of capital is returned to the unit holder.

The shareholders advise that the reason for requiring both be alive if the Trustee wishes to call for the balance of the subscription before 3 ½ years, is to avoid the called sum being called immediately on their death. If it was called up, its value would indirectly form part of their deceased estate. This would arise if BCo redeemed its units, or if the partly paid units were redeemed because the call cannot be met - both of which would result in an outcome that defeats the purpose of the estate/succession planning arrangement. However the shareholders wish to retain the discretion to make the calls within 3 ½ years while they are alive.

Upon payment of the balance of the subscription price, the partly paid units are converted to ordinary units and thereafter have exactly the same rights in all respects as ordinary units, that is, full voting rights, fixed entitlements to income and capital, and surplus capital on winding up of the trust.

Until they become fully paid, the partly paid units will have the following rights and entitlements:

a) fixed entitlements to income and capital distributions from the Unit Trust in proportion to the number of units held, ranking equally with ordinary units;

b) no entitlement to any surplus capital on the winding up of the Unit Trust; and

c) full voting rights as holders of partly paid units, but since they are not ordinary units their votes will count only towards the passing of Ordinary Resolutions and not Special Resolutions.

The Trustee will be empowered to invest all funds received at its discretion.

Relevant legislative provisions

Division 6 of Part III of Income Tax Assessment Act 1936

Section 95A of the Income Tax Assessment Act 1936

Section 100A of the Income Tax Assessment Act 1936

Section 177D of the Income Tax Assessment Act 1936

Part IVA of the Income Tax Assessment Act 1936

Section 104-75 of the Income Tax Assessment Act 1997

Section 701-1 of the Income Tax Assessment Act 1997

Division 725 of the Income Tax Assessment Act 1997

Section 725-150 of the Income Tax Assessment Act 1997

Reasons for decision

Question 1

Summary

On the facts of the proposed scheme, a resettlement of the Unit Trust does not occur.

Detailed reasoning

Trust resettlement

The Commissioner of Taxation has published Creation of a new trust -Statement of Principles (Statement of Principles) to provide guidance on when the Commissioner will treat changes made to a trust deed as giving rise to a new trust estate/s. The Statement of Principles was released on 9 June 1999 and updated on 29 August 2001.

The Statement of Principles uses the term resettlement to describe when changes to a trust deed are such that, for income tax purposes, one trust estate comes to an end and is replaced by another trust. For convenience these situations are sometimes referred to as resettlements, although resettlements in the technical sense may be only one way in which such terminations occur. The consequences of terminating the trust can include:

§ realisation at trustee level of the trust property, and the loss of carried forward tax benefits; and

§ disposal by beneficiaries of their interests in the terminating trust and acquisition of interests in the new trust.

In other situations, although the original trust estate may continue, changes may lead to the creation of one or more new and separate trust estates for tax purposes.

The Statement of Principles advises that it is a change in the essential nature and character of the original trust relationship which creates a new trust.

The Statement of Principles outlines some changes which may result in the creation of a new trust, being:

§ any change in beneficial interests in trust property;

§ a new class of beneficial interest (whether introduced or altered);

§ a possible redefinition of the beneficiary class;

§ changes in the terms of the trust or the rights or obligations of the trustee;

§ additions of property which could amount to a new and separate settlement;

§ depletion of trust property;

§ a change in termination date of the trust;

§ a change in the trust that is not contemplated by the terms in the original trust;

§ a change in the essential nature and purpose of the trust; and

§ a merger of two or more trusts or a splitting of a trust into two or more trusts.

Depending on their nature and extent, and their combination with other indicators, these may amount to a mere variation of a continuing trust, or alternatively to a fundamental change in the essential nature and character of the trust relationship. A fundamental change in the essential nature and character of the trust relationship means that the original trust is brought to an end and/or a new trust is created.

The Statement of Principles provides:

Whether a new trust is created will depend, among other things, on the terms of the original trust, and on the power of the trustee. The original intentions of the settler must be considered in determining a new trust has been created.

Capital gains tax implications from a Trust resettlement

Section 104-55 of the ITAA 1997 provides that CGT event E1 occurs when a trust is created over the CGT asset.

Application to the taxpayer's circumstances

The creation and issue of a new class of partly paid units in the Unit Trust is allowable under a clause of the Unit Trust trust deed which provides that the trustee may issue partly paid units with payment terms determined by the trustee.

Considering the facts and referring to the Statement of Principles, resettlement of the Unit Trust does not occur as:

§ the issue of partly paid units in the Unit Trust does not require amendment to the trust deed;

§ income and capital distributions will be distributed to all partly paid and ordinary unit holders in proportion to the number of units held;

§ the beneficiary class has not changed;

§ there are no changes to the terms of the trust or the rights or obligations of the trustee;

§ there is no change to trust property;

§ there is no change in the termination date of the trust;

§ the possibility of issuance of partly paid units was contemplated by the terms of the original trust; and

§ there is no change in the essential nature and purpose of the trust.

The issue of the partly paid units therefore does not constitute a resettlement of the Unit Trust.

Question 2

Summary

As the partly paid units rank equally with ordinary units for distributions, any distributions are assessable to the unit holder under Division 6 of Part III of the ITAA 1936.

Detailed reasoning

The partly paid units rank equally with the ordinary units for income and capital distributions. When distributions of income and/or capital are made to the unit holders of the Unit Trust, holders of the partly paid units are presently entitled under section 95A of the ITAA 1936 because on the distribution resolution, the unit holders have a vested and indefeasible interest in the distribution.

Therefore these distributions are assessable to the unit holder under Division 6 of Part III of the ITAA 1936.

Question 3

Summary

The partly paid units are not issued at a discount within the meaning of section 725-150 of the ITAA 1997 and receive market value for those units therefore there is not a direct value shift under Division 725.

Detailed reasoning

The scheme would not give rise to a direct value shift under Division 725. The partly paid units are not issued at a discount within the meaning of section 725-150. The payment the issuing entity receives for these units is no less than their market value at that time.

The market value of the units is the price that a willing buyer would be prepared to pay to a willing, but not anxious, seller if they were dealing at arm's length with one another. In this case, an arm's length buyer would have no reason to pay more than the initial issue payment for the units, because they would enjoy no protection from the right of the controllers of the Trust to call immediately for the full outstanding price of the units before any of the trust property has been sold and the capital proceeds distributed to the partly paid unit holders. In other words, paying more for the units buys nothing more than a right to have exactly the same amount refunded to the owner on redemption.

Therefore, as the partly paid units are not discounted and are sold at market value, there is no direct value shift.

Question 4

Summary

Section 100A of the ITAA 1936 will not operate under this scheme.

Detailed reasoning

Section 100A seeks to catch the diversion of trust income to beneficiaries who are liable to pay little or no tax, and who themselves divert the income in some tax-free form to a third party who was intended to take the benefit of the trust income. An arrangement of this kind is defined as a reimbursement agreement (Practice Statement PS LA 1998/5).

In this case:

a) The directors of BCo do not pay little or no tax;

b) If a present entitlement was paid instead to recipients of the partly paid units in the specified proportions, they would have paid no more in tax;

c) The directors of BCo do actually benefit from the sale proceeds. There will be actual payment of the income/capital comprising the proceeds from the sale of trust property, which will discharge the present entitlement to them.

Therefore the scheme will not attract application of Section 100A.

Question 5

Summary

The Commissioner will not make a determination under Part IVA.

Detailed reasoning

For the general anti-avoidance provisions of Part IVA to apply, there needs to be:

a) a scheme;

b) a tax benefit arising under that scheme; and

c) the scheme was entered for the dominant purpose of obtaining the tax benefit.

'Scheme' is defined broadly and as such, the issue of partly paid units in the Unit trust is a scheme for the purpose of Part IVA.

Is there a tax benefit?

Part IVA cannot apply unless a taxpayer has obtained, or would, but for section 177F of the ITAA 1936 obtain a tax benefit in connection with a scheme. Subsection 177C(1) of the ITAA 1936 defines four kinds of tax benefit, the relevant one being in this case, an amount not being included in the assessable income of the taxpayer of a year of income.

In the present case, the relevant taxpayer is BCo. Under the scheme, BCo does not include an amount of assessable income in its return, being a trust distribution from it owning all the ordinary units in the Unit Trust when it sells all or part of the Property. The Commissioner considers that paragraph 177C(1)(a) of the ITAA 1936 focuses on what has been left out of assessable income by the scheme (that is, in this case left out BCo's assessable income) - not on what has been included (that is, the assessable capital gain to the shareholders/directors of BCo).

The identification of a tax benefit however requires consideration of the income tax consequences of an alternative hypothesis (that is, the 'counterfactual'), that is, what the shareholders/directors might reasonably be expected to have done, but for undertaking this scheme.

The first counterfactual would be that the shareholders dispose of their shares in BCo to the trusts of their children in the split they wish for estate planning purposes. If the shareholders disposed of their shares in BCo or indeed the units in the Unit Trust, there would be a capital gain realised on the disposal contract date. Under the proposed scheme, the capital gain realised is deferred until the Property is sold and therefore there is an amount of assessable income that would be included if not for the proposed scheme. However the land rich provisions of the Victorian Duties Act would apply to this transaction creating a significant liability for the Unit Trust.

The second counterfactual which would allow the directors to achieve their objective of a disproportionate split of the Property is to transfer the shares to a holdings company, the shares of which issued to the children in the desired proportions. The holdings company would then consolidate with BCo and the Unit Trust and reset the tax values of the underlying assets, including the Property. The holdings company (as the relevant taxpayer replacing BCo under the single entity rule in section 701-1 of ITAA 1997), would not have assessable income. This is because when the tax value of the Property is reset, the holdings company will not make a taxable gain. However the land rich provisions of the Victorian Duties Act would apply to this transaction creating a significant liability for the Unit Trust.

The third counterfactual would be if no scheme to dispose of their personal interest in the Unit Trust was entered into and both shareholders/directors died leaving their Will and Testament to allocate assets. Here, the shares in BCo could be bequeathed to the trusts of their children and a CGT rollover would apply to defer any capital gain realised until the trustee for the trusts triggers another CGT event. This would provide an arguably greater tax benefit than the proposed scheme but does not achieve estate planning objectives as there is a vulnerability to TFM claims on the deceased estate.

On the basis of counterfactual 1, there is a tax benefit in that the scheme enables a deferral of capital gains realisation. Also there may be a further benefit in accessibility of the CGT 50% discount. While the Victorian Duties Act would create a stamp duty liability for the Unit Trust, the amount of this liability would still be a lower amount than the tax benefit.

Dominant purpose

On the facts, there is a dominant purpose of estate planning however there may be an equally dominant purpose of obtaining a tax benefit. Effectively, the scheme is designed to divide the Property and pass beneficial ownership to the children to ensure safety from TFM claims but also to defer the realising of a capital gain until the Property is developed and sold. Understandably, the rulee does not wish to realise a CGT liability until the value of the Property is realised as until that point, that liability would be unfunded.

To determine whether the dominant purpose is in fact to obtain a tax benefit, we looked at the counterfactuals and attempted to find one that would achieve the estate planning goals but not also gain the same tax advantage.

§ Retain the existing structure, sell the real estate progressively as planned, declare dividends from BCo to the shareholders, and then give the cash to the children's trusts in the relevant proportions; or

§ Transfer some of the existing, ordinary units in the Unit Trust; or

§ Create new ordinary units in the Unit Trust and transfer these to the children's trusts in the relevant proportions; or

§ Transfer some of the existing shares in BCo to the children's trusts in the relevant proportions; or

§ Create new shares in BCo and transfer these to the children's trusts in the relevant proportions; or

§ Create partly paid units in the Unit Trust as planned under the actual scheme, but issue them at a substantial discount to the children's trusts in the relevant proportions, and have no time limit within which the units must be either fully paid up or redeemed.

Of these, number 1, while attractively simple, is not realistic because it does not achieve the aim of immediately creating in the children's trusts rights to future capital distributions from the unit trust. So, if the parents were to die during the process of disposing of the Property, any capital proceeds from further sales would be vulnerable to TFM claims, contrary to the genuine intention of the scheme.

Numbers 2 through 5 will all trigger the land-rich provisions in the Victorian Duties Act. This will lead to an immediate impost of 5.5% of the unencumbered value of the land in the trust. That would be an impost of similar magnitude to the income tax benefit in question, so it is difficult to say that the scheme has the dominant purpose of obtaining an income tax benefit (that is, it may be said to have at least a roughly equal purpose of obtaining a stamp duty benefit). Also, transferring shares in BCo is different from the actual scheme proposed because BCo holds some assets that are separate from the units in the Unit Trust. The current estate plans do not include subjecting these separate assets to the split contemplated. There are also corporate law problems with such a scheme.

Number 6 also presents difficulties for the argument that Part IVA should apply. First, the circumstances of the creation of the units might not meet the definition of 'discount' in section 725-150 of the ITAA 1997. That is, if the units carry no right to a distribution of capital on a winding up of the trust, it is not clear that any arm's length purchaser would be prepared to pay more than nil or a nominal price for them, given the risk that the trust would be immediately wound up rather than let some of its wealth flow into the hands of the arm's length purchaser. Secondly, this possible counterfactual does not quite reflect the actual estate plan, for once any of the children pays the whole of the (discounted) price, the parents would have no means of removing them from participating in further capital distributions (short of winding up the whole trust). This contrasts with the ability the parents will enjoy under the proposed scheme of effectively terminating the arrangement at any time while they remain alive by calling for full payment on the partly paid units (which full amount was determined by reference to the market value of the assets in the Trust).

So in summary, there is not a convincing counterfactual here for the Commissioner to rely on. This, coupled with the relatively modest scale of the tax benefit (instead of an immediate unfunded CGT liability in the company taxed at the rate of 30% with no CGT discount, the result is a funded CGT liability for the beneficiaries of the children's trusts, taxable on realisation over the next 3 years or so at presumably the top marginal rate but with the 50% CGT discount), and the general family context of this dealing, weighs fairly strongly against a conclusion that the dominant purpose of the scheme is to get a tax benefit.

Therefore the Commissioner will not make a determination under Part IVA. It is important to note that Part IVA is always sensitive to the facts of the case, our conclusion is based on a careful weighing of the factors in section 177D of the ITAA 1936 against the peculiar circumstances of this case, and that it should not be assumed that the particular devices employed here would in all factual circumstances necessarily be an effective device for avoiding Division 725 and Part IVA.

Question 6

Summary

The proceeds from the sale of property will be characterised as being gains on capital account in the hands of the Unit Trust.

Detailed reasoning

Taxation Ruling TR 97/11 entitled 'Income tax: am I carrying on a business of primary production?' provides the Commissioners interpretation and guidance on whether a taxpayer is carrying on a business of primary production. However, the principles set out in TR 97/11 are equally applicable to the question of whether a business is being carried on in another context.

Paragraph 13 of TR 97/11 provides a list of indicators as to what will be considered in determining whether a taxpayer is carrying on a business:

(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.

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.

The Property was purchased some time ago by Trustee Co as trustee for the Unit Trust. In that considerable time, the Property remained undeveloped vacant land until the LDA was signed recently with works now being undertaken by DeveloperCo. The directors of BCo, Trustee Co and all associated entities have never engaged in property development. The Unit Trust used the land for primary production in the first few income years but ceased as the business proved to be unsuccessful. Considering this short term use of the property in a relatively long period of ownership and the nature, scale and complexity of the transactions, it is accepted that the Unit Trust was not carrying on a business.

Isolated business transaction

In some instances, the profit arising from an isolated business or commercial transaction will be ordinary income if the taxpayer's purpose or intention in entering into the transaction was to make a profit, despite the fact that the transaction is not part of the taxpayer's daily business activities. That is, if the transaction is outside the ordinary course of business, but the intention was to make a profit in entering into the transaction, the profits will be on revenue account.

Myer Emporium case

In FC of T v. The Myer Emporium Limited 85 ATC 4601 (Myer), it was held that in some instances, the profit arising from an isolated business or commercial transaction will be ordinary income if the taxpayer's purpose or intention in entering into the transaction was to make a profit, despite the fact that the transaction is not part of the taxpayer's daily business activities. (See also Glennan v FC of T 99 ATC 4467). That is, if the transaction is outside the ordinary course of business, but the intention was to make a profit in entering into the transaction, the profits will be on revenue account.

In considering this issue, the courts have considered the following factors:

§ Subject matter of realisation

The nature of the property itself may suggest either that it has been acquired for business purposes, or for investment purposes. For example, where land was originally purchased and used for either farming or rental purposes, or occupied as a main residence, and then subdivided, there is a presumption against the existence of a business or enterprise.

§ Length of period of ownership

A taxpayer who holds an asset for many years before disposing of it, is more likely to be realising an investment asset. However, a sale arranged at the moment of acquisition is more likely to constitute a business activity (or enterprise).

§ Frequency or number of similar transactions by the same person

Repeated transactions of the same kind are more likely to suggest the taxpayer is engaging in a business (or enterprise) rather than a single isolated transaction.

§ Supplementary work on or in connection with the property realised

As a general guide, the more work is performed on land during its period of ownership, the more likely it will be that the taxpayer is engaged in an isolated business venture. For example, substantial construction of access roads and connection to mains services is more consistent with a business activity (or enterprise).

§ Circumstances that were responsible for the realisation

This factor is usually used to negate the assumption that the taxpayer is engaged in business or an isolated business venture. For example, if the reason land is traded shortly after its acquisition is because of a shortage of money, then this does not necessarily lead to the conclusion that the vendor is engaged in a business (or enterprise).

§ Motive

A profit-seeking motive at the time of acquisition of the property is evidence of an isolated business venture. However, the test of whether an isolated business venture exists is an objective test.

§ Method of acquisition

Where the land is acquired by either gift or inheritance it is presumed that the land is held for investment purposes.

Taxation Ruling TR 97/11 states that where a taxpayer not carrying on a business makes a profit, that profit is income if (paragraph 16):

(a) the intention or purpose of the taxpayer in entering into the profit-making transaction or operation was to make a profit or gain; and

(b) the transaction or operation was entered into, and the profit was made, in carrying out a business operation or commercial transaction.

The relevant matters that the ATO considers in determining whether an isolated transaction is a business operation or commercial transaction are (paragraph 13):

(a) the nature of the entity undertaking the operation or transaction (e.g. is it a company or trust buying an asset, or an individual);

(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 (e.g. is it a family dealing);

(g) if the transaction involves the acquisition and disposal of property, the nature of that property (i.e. is it a residential property or purely a commercial property); and

(h) the timing of the transaction or the various steps in the transaction (i.e. has the property been held for many years or bought recently).

A critical issue is the timing of the relevant purpose of profit making by sale. Taxation Ruling TR 92/3 entitled 'Income tax: whether profits on isolated transactions are income' states that the relevant purpose usually (but not always) must be at the time of entering into the transaction (paragraph 9). Further it is the taxpayer's purpose from an objective consideration of the facts and circumstances, not the subjective purpose, and the purpose only needs to be the dominant purpose, not the sole purpose (paragraphs 7-8).

TR 92/3 states with respect to purpose (paragraphs 33-34):

33. The views expressed in Whitfords Beach and Myer that profits from isolated transactions can be assessable income must be looked at in the context of the facts involved in those cases. In Myer, the taxpayer was carrying on a large business at the time it entered into the transactions and, in Whitfords Beach, the taxpayer company embarked on a substantial business venture.

34. Nevertheless, there is a strong line of reasoning through the judgments in Whitfords Beach and Myer that suggests that profits made by a taxpayer who enters into an isolated transaction with a profit-making purpose can be assessable income. In Myer, at 163 CLR 213; 87 ATC 4369; 18 ATR 699-700, the Full High Court had this to say about the nature of profits from isolated transactions:

'It is one thing if the decision to sell an asset is taken after its acquisition, there having been no intention or purpose at the time of acquisition of acquiring for the purpose of profit-making by sale. Then, if the asset be not a revenue asset on other grounds, the profit made is capital because it proceeds from a mere realisation. But it is quite another thing if the decision to sell is taken by way of implementation of an intention or purpose, existing at the time of acquisition, of profit-making by sale, at least in the context of carrying on a business or carrying out a business operation or commercial transaction.'

In Myer, the High Court clearly stated that if an asset was acquired without any intention or purpose of selling it or exploiting it for profit, it will not be on revenue account. It will be a mere realisation of a capital asset, even if the realisation is done in an enterprising manner

In this case, on balance, factors such as the time the asset has been held, that a primary production business was established soon after purchase albeit unsuccessful, that profit from the development itself will not be received by the Unit Trust and that TrusteeCo's directors have advised that they have never engaged in property development; the Property was acquired without the intention or purpose of selling it or exploiting it for profit and therefore the proceeds from the sale of property will be on capital account in the hands of the Unit Trust.