Edited version of private ruling

Authorisation Number: 1011706533169

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Ruling

Subject: Am I in Business

Question 1

Will building the house for reward result in assessable income under section 6-5 of the Income Tax Assessment 1997 (ITAA 1997) for the Trust?

Answer

Yes.

Question 2

Will the Trust be considered to be carrying on a business?

Answer

Yes.

Question 3

Can the Trust be recipient of the individual's salary from employment?

Answer

Withdrawn by individual.

This ruling applies for the following periods

Year ended 30 June 2007

Year ended 30 June 2008

Year ended 30 June 2009

Year ended 30 June 2010

Year ended 30 June 2011

The scheme commences on:

1 July 2006

Relevant facts and circumstances

The Trust purchased the land with the intention of developing the property for sale.

The Trust engaged a builder to construct a house on the land.

On completion of the development of the residential house on the property, the Trust marketed the property for sale but no offers were received.

The property was subsequently let.

The estimated costs for the development are over $400,000.

The estimated value of the house and land is over $500,000.

The intent remains for the Trust to sell the property as soon as possible and commence another development.

Relevant legislative provisions

Income Tax Assessment Act 1936, Section 97(1).

Income Tax Assessment Act 1997, Section 6-5.

Income Tax Assessment Act 1997, Section 995-1.

Income Tax Assessment Act 1997, Section 70.

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

Carrying on a Business

Section 995-1 of the ITAA 1997 defines a business as including any profession, trade, employment, vocation or calling, but does not include occupation as an employee.

Taxation ruling TR 97/11 outlines the factors that need to be considered to determine if someone is carrying on a business. These are as follows:

(1) whether the activity has a significant commercial purpose or character;

The land was purchased by the Trust with the intent of building a residential house for sale on completion with a view to making a profit. The estimated costs are over $400,000 and the estimated sale value of the house and land is over $500,000, indicating a significant commercial purpose.

(2) whether the taxpayer has more than just an intention to engage in business;

Significant amounts were outlayed by the Trust on both the purchase of the land and development costs. There has also significant amount of time and effort expended on the project, indicating the Trust had more that just an intention to engage in business.

(3) whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity;

The Trust have advised their original intent was to buy, develop and sell property for profit. The estimated costs to date are over $400,000 with the estimated sale value over $500,000, indicating both a purpose and prospect of profit.

(4) whether there is repetition and regularity of the activity;

Although this is the Trust first development, your intention is to continue buying, developing and selling properties on a regular basis.

(5) whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business;

The property was purchased by the Trust and development of the house was completed within 12 months and the property placed on the market for resale immediately on completion. This appears to be in line with activity in the property development business, although on a smaller scale.

(6) whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit;

A Trust was set up to conduct the business. The property was purchased by the Trust, the business plan to develop the property via building a house and upon completion sell the property with a view to making a profit on the sale. The Trust obtained a builder and followed their business plan by placing the property on the market for sale immediately after completion of the building of the house.

(7) the size, scale and permanency of the activity;

Whilst the size and scale of the activity is relatively small with only one property being developed at a time, the amount outlayed on the development estimated at over $400,000 is substantial and the intention to continue buying, developing and selling property indicates permanency of the activity.

Conclusion

In your case the purchase of the land and the development of the house is a commercial transaction. This is because it is a significant undertaking with the intention of further land development with the proceeds from the sale of the house and land. The intention is to continue this activity on an ongoing basis.

The profit from any future sale of the house and land is assessable under section 6-5 of ITAA 1997 as ordinary income.

As it is considered that you are in business, the house and land is trading stock under section 70 of ITAA 1997.