Edited version of private ruling

Authorisation Number: 1011809181590

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Ruling

Subject: Trading stock and capital assets

Issue 1

Trading stock

Question 1

Is the subject land considered to be trading stock within the meaning of subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936) prior to the 1997-98 income year?

Answer

No

Question 2

If the answer to Question 1 is no, is the subject land considered to be trading stock within the meaning of section 70-10 of the Income Tax Assessment Act 1997 (ITAA 1997) as from the 1997-98 income year?

Answer

No

Issue 2

Capital asset

Question

Is the subject land considered to be a capital asset when it is owned by the taxpayer?

Answer

Yes

This ruling applies for the following period:

The period spans over several income years.

The scheme commences on:

The scheme has already commenced

Relevant facts and circumstances

The rulee is the trustee company for the taxpayer.

The trustee company is owned by two individuals, A and B, with Individual A being the majority shareholder. Individuals A and B also own a related entity, a development trust, in the same proportion. Individual A has in effect total control of the two trusts.

Some years ago the taxpayer contracted to acquire a large parcel of scrub land in the rural region with a vision of developing a planned municipality.

Under a verbal agreement between A and B, one portion of the land, the subject matter of this ruling application, was committed to donation some time in the future to a not-for-profit charity. Individual A is the president of one of its organs.

The taxpayer and the development trust agreed on terms under which the latter would undertake all project activities and assumed all risks. The taxpayer would remain as a passive owner of the land. It would allow third party security over its land to enable the development trust to obtain finance. It would retain an agreed amount on sale of any parcel of its lands whilst the development trust would receive the balance of net proceeds by way of a fee.

A subcontract development agreement was entered into with a builder that would allow the builder rights to develop certain areas. This agreement specifically excluded the subject land, even though the builder had the rights to develop all the land around it. The builder has tried to acquire development rights over it, but has always been rejected because of the need to donate the subject land to the charity.

The land, other than the subject land, has since been developed commercially.

The transfer of the subject land is expected to occur shortly. The transferee will be a body within the charity group and it has to be a deductible gift recipient. Currently, the subject land is still undeveloped.

The subject land

It is an unimproved parcel of land which has been earmarked for donation to the charity since the inception of the project.

The subject land has development approval from the local government. This approval was obtained to facilitate the intended transfer of the land to the charity to carry out its missions and purposes. It also provides certainty around the use by the charity of the subject land as intended by the taxpayer.

The applicant states that the taxpayer has previously donated land to other charities and intends to make similar donations in the future.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 6(1)

Income Tax Assessment Act 1997 section 70-10

Income Tax Assessment Act 1997 Part 3-1

Detailed reasoning

Issue 1

Trading stock

Questions 1 and 2

The term 'trading stock' is defined in section 6-1 of the ITAA 1936 up to 30 June 1997 and section 70-10 of the ITAA 1997 as from 1 July 1997. Section 70-10 defines trading stock to include anything produced, manufactured or acquired that is held for the purposes of manufacture, sale or exchange in the ordinary course of business but specifically excludes a Div 230 financial arrangement.

Land could constitute trading stock if it is held for resale and a business activity that involves dealing in land has commenced. A single acquisition of land for the purpose of development, subdivision and sale by a business commenced for that purposes leads to the land being trading stock.

In order for an item to be classified as trading stock, therefore, it needs to be held by the taxpayer in the course of carrying on a business or directly related to a business activity.

Carrying on a business

Under the definition in section 6(1) of the ITAA 1936, the term 'business' takes its ordinary meaning, but specifically includes (but is not limited to) any profession, trade, employment, vocation or calling; and excludes occupation as an employee. This definition was reiterated in similar terms in section 995 of the ITAA 1997.

In determining whether a taxpayer carries on a business, various courts and tribunals have held that the following factors are the key determinants:

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

2. whether there is repetition and regularity of the activity;

3. whether the taxpayer has more than just an intention to engage in business;

4. whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity;

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;

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

7. the size, scale and permanency of the activity; and

8. the volume of the operations and the amount of capital employed.

No one indicator is decisive, and all factors must be considered in combination and as a whole (Evans v. FC of T 89 ATC 4540; (1989) 20 ATR 922). Whether a business is being carried on will depend on the 'large or general impression gained' (Martin v. Federal Commissioner of Taxation (1953) 90 CLR 470; (1953) 10 ATD 226; (1953) 5 AITR 548) from looking at all the indicators, and whether those indicators provide the operations with a 'commercial flavour' (Ferguson v. FC of T 79 ATC 4261; (1979) 9 ATR 873). This view is supported by the Commissioner in Taxation Ruling TR 97/11.

The circumstances of the subject land will therefore determine whether it was acquired for the purpose of carrying on a business or, alternatively, for the purpose of carrying out a business or commercial transaction with the intention of making a profit or gain by sale. Under either circumstance, the land will satisfy the definition of 'trading stock' and be on revenue account.

1. Whether the activity has a significant commercial purpose or character

The objective of acquiring the subject land was to donate it to the charity for religious and educational purpose and this intention has remained unchanged. There is no significant commercial purpose or character in this activity.

2. Whether there is repetition and regularity of the activity

The acquisition and reservation of the subject land was a one-off activity.

3. Whether the taxpayer has more than just an intention to engage in business

The parcel of land (other than the subject land which represents less than 10% of the whole land acquisition) was acquired for the purpose of commercial development. The process of acquiring, developing and selling the properties are organised in a business-like manner, as evidenced by the systematic approach taken in planning and managing the commercial project.

The acquisition and ownership of the subject land, in contrast, is devoid of any commercial flavour. It was specifically set aside from the outset for a religious purpose. Although it has had development approval from the local government, the approval was obtained to facilitate the intended transfer to the charity to allow the recipient to conduct its missions and purposes. The approval also provides the charity certainty around the use of the land as intended by the taxpayer.

4. Whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity

By definition, a donation does not involve any consideration. The taxpayer will have no prospect of profit from the acquisition and holding of the land.

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 taxpayer has previously donated land to other charities and intends to make similar donations in the future. The subject land is of the same kind and carried on in a similar manner. However, as donations do not involve any consideration, none of these activities can give rise to a trade.

6. Whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit

The subject land was specifically set aside from the outset to be donated and this commitment has remained unchanged. It was shown on development plans as a hatched area marked out for the charity and it is still undeveloped to date. These facts are indicative of an activity that is not planned, organised and carried on in a businesslike manner. It is also lacking in the essential profit element of a business.

7. The size, scale and permanency of the activity

The acquisition was a one-off activity which was not business-orientated.

8. The volume of the operations and the amount of capital employed

As part of the total land acquisition involving substantial capital outlay, the subject land represents a relatively small portion at less than 10%.

Isolated business transactions

There are instances where an isolated transaction could amount to a business operation or commercial transaction: FC of T v. The Myer Emporium Ltd (1987) 87 ATC 4363; 163 CLR 199; 18 ATR 693. The principles established in this case are set out in Taxation Ruling TR92/3. Paragraph 1 of TR92/3 refers to the term 'isolated transactions' as:

(a) those transactions outside the ordinary course of business of a taxpayer

carrying on business; and

(b) those transactions entered into by non-business taxpayers.

The judicial view and the Commissioner's interpretation of 'business operation' and 'commercial transaction' were formed in the context of profits arising from either type of activity. As the essential element of profit is missing from the acquisition and holding of the subject land, it is considered not necessary to pursue this issue further.

Conclusion

The factors discussed above lead to the conclusion that, in terms of the subject land, the taxpayer is not carrying on a business or, alternatively, carrying out a business or commercial transaction with the intention of making a profit or gain by sale. Accordingly, the subject land does not meet the definition of trading stock in either subsection 6(1) of the ITAA 1936 or section 70-10 of the ITAA 1997 since its acquisition.

Issue 2

Capital assets

CCA capital gains tax asset ('CGT asset) is defined in section 108-5 of the ITAA 1997 as any kind of property, or a legal or equitable right that is not property. Examples of CGT assets include land. Since the subject land is not trading stock under subsection 6(1) of the ITAA 1936 or section 70-10 of the ITAA 1997 and it was acquired after 19 September 1985, it is a CGT asset for the purposes of Part 3-1 of the ITAA 1997.