Edited version of private ruling

Authorisation Number: 1011712660286

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Ruling

Subject: Capital gains tax

Question 1

Are the proceeds from the sale of the investment property assessable under section 6-5 or 15-15 of the Income Tax Assessment Act 1997?

Answer

No. 

Question 2

Are the proceeds from the sale of the investment a capital gain under section 102-5 of the ITAA 1997?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts

You purchased a block of land after 1985.

Your intention was to build a house on the land and rent the house out.

You retained a builder to construct the rental property.

You decided to sell the property after it was built.

You sold the house.

You have one other rental property.

You may or may not continue to build and sell in the future.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5.

Income Tax Assessment Act 1997 section 15-15

Income Tax Assessment Act 1997 Section 102-20.

Income Tax Assessment Act 1997 Section 108-5.

Income Tax Assessment Act 1997 Section 104-10.

Income tax Assessment Act 1997 section 955-1

Reasons for decision  

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.

Subsection 15-15(1) of the ITAA 1997 states that your assessable income includes profit arising from the carrying on or carrying out of a profit-making undertaking or plan. Whether profits from isolated transactions are taxable depends on whether there was a profit-making intention and that the transaction was entered into in carrying out a business operation or commercial transaction (FCT v Myer Emporium Ltd (1987) 163 CLR 199).

Taxation Ruling TR 92/3 discusses the implications of Myers case. 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.

To determine if the proceeds of the sale of your house will be ordinary income we need to establish if you are carrying on the business of property development.

Carrying on a business

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

 Paragraph 13 of taxation Ruling TR 97/11 provides a list of indicators as to what will be considered in determining whether a taxpayer is carrying on a business. 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 larger or general impressions gained from looking at all the indicators and whether these indicators provide the operations with a commercial flavour. The courts have held that the following indicators are relevant:

· Whether the activity has a significant commercial purpose or character

· whether the taxpayer has more than just an intention to engage in business

· whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity

· whether there is repetition and regularity of the activity

· 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

· whether the activity is planned, organised and carried on in a business like manner such that it is directed at making a profit

· the size, scale and permanency of the activity, and

· whether the activity is better described as a hobby, form of recreation or sporting activity.

Isolated transaction amounting to a business operation or commercial transaction

There are a number of factors which must be considered in determining whether an isolated transaction amounts to a business operation or commercial transaction. They include:

· 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 the 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.

Sub section 15-15(2) (b) does not apply to a profit that arises in respect of the sale of property acquired on or after 20 September 1985.

In your case as the land was purchased after 20 September 1985 section 15-15 (2) does not apply to any profit made after 1985.

Consequently section 15-15 (2) (b) does not apply to your situation.

Capital Gaines Tax  

Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a capital gain or capital loss arises if a capital gains tax event (CGT event) happens to a capital gains tax asset (CGT asset).

A CGT asset is any kind of property, or a legal or equitable right that is not property, real estate is a CGT asset (section 108-5 of the ITAA 1997).

The most common CGT event happens if you dispose of an asset to someone else, the disposal of a CGT asset causes a CGT event A1 to happen. You dispose of an asset when a change of ownership occurs from you to another entity. The time of the event is when you enter into the contract for the disposal or if there is no contract when the change of ownership occurs (section 104-10 of the ITAA 1997).

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

In your circumstance the house as a CGT asset and the sale of the house will cause a CGT event A1 to happen.

Therefore, any proceeds received from the sale of the house would be treated as capital proceeds.