Edited version of private ruling

Authorisation Number: 1011495264939

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Ruling

Subject: Land subdivision and development

Questions and answers:

1. Are you in the business of property development for income tax purposes?

No.

2. Will the capital gains tax (CGT) provisions of the Income Tax Assessment Act 1997 (ITAA 1997) apply when you sell one of your rental properties?

Yes.

This ruling applies for the following period:

Year ending 30 June 2011

The scheme commenced on:

1 July 2010

Relevant facts and circumstances

You purchased a block of land.

The land was subdivided and a number of residential properties were built on it.

The rental properties are now being rented out.

You were not directly involved in the subdivision of the land, or the construction of the properties, it was dealt with by your builders.

Prior to this, you had never been involved with any subdivision or building developments.

You financed the project with a mortgage from the bank.

You intend to sell one of the properties during the financial year ending 30 June 2011 because of financial difficulties.

You intended this project to be an investment, you did not wish to be a property developer.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5.

Income Tax Assessment Act 1997 Section 102-20.

Income Tax Assessment Act 1997 Section 104-10.

Reasons for decision

Ordinary income

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that assessable income includes income according to ordinary concepts. This is called ordinary income.

According to Taxation Ruling TR 92/3, profits from isolated transactions will be assessable under section 6-5 of the ITAA 1997 as ordinary income where the intention or purpose 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 out a business operation or commercial transaction.

Paragraph 9 of TR 92/3 provides that the requisite intention or purpose to make a profit or gain should usually, but not always, be present at the time the property was acquired.

In determining whether an isolated transaction amounts to a business operation or commercial transaction, paragraph 13 of TR 92/3 outlines a number of factors which may be relevant. They are as follows:

- 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.

All factors are considered in combination when determining whether a 'business' is being carried on. The assessment depends on the large or general impression of the transaction.

If a taxpayer is carrying on a business, then the profits from the isolated transactions will be assessable as ordinary income under section 6-5 of the ITAA 1997.

In your case:

- you are an individual with no prior property development experience,

- you purchased one property,

- you were not directly involved in the development,

- you intended the development to be an investment rather than a business, and

- you are only selling one of the properties due to financial difficulties.

Based on these facts, we consider that this development can be more closely aligned to a "one-off" isolated transaction rather than part of a property development business. Therefore, you are not carrying on a business of property development.

As you are not carrying on a business, any profit you make from the sale of the residential properties are isolated transactions, are not ordinary income. However, such profits may still be assessable under the capital gains tax provisions of the ITAA 1997.

Capital gains tax (CGT)

Section 102-20 of the ITAA 1997 states that you make a capital gain or capital loss if and only if a CGT event happens. CGT events are the different types of transactions or happenings which may result in a capital gain or a capital loss.

The disposal of a CGT asset is the most common CGT event and is referred to as CGT event A1 (section 104-10 of the ITAA 1997). A taxpayer disposes of a CGT asset if a change of ownership occurs from the taxpayer to another entity.

CGT assets include real estate.

Subsection 104-10(3) of the ITAA 1997 describes when the event happens. The time of the event is either when the taxpayer enters into a contract for the 'disposal', or if there is no contract - when the change of ownership occurs.

A taxpayer makes a capital gain if the capital proceeds from the disposal are more than the asset's cost base. A taxpayer makes a capital loss if those capital proceeds are less than the asset's reduced cost base.

In your case, CGT event A1 will happen when you sell the rental property. The time of the event will be when you enter into a contract for the sale of the property. You will make a capital gain if the capital proceeds from the disposal are more than the property's cost base.