Edited version of private ruling

Authorisation Number: 1011809664574

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: Capital gain or profit making purpose

Question 1

Will the profit on the sale of the subdivided lots be assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer: No.

Question 2

Will the profit on the sale of the subdivided lots be assessable under section 102-5 of the ITAA 1997 as a capital gain?

Answer: Yes.

This ruling applies for the following period:

The 2010-11 income year

The scheme commences on:

1 July 2010

Relevant facts and circumstances

The Trust is a discretionary trust. The trust is not in the business of subdivision and has no plans to do so in the future.

The property was purchased a few years ago intending to be used for personal reasons. The property has been deriving rental income which assists in offsetting expenses.

Due to a change in circumstances, the property is no longer intended for the same use.

It was decided to subdivide the property.

It is intended that the subdivision and works will completed and the lots realised quickly.

No other activities are undertaken by the trust.

The property is to be subdivided into lots. The minimum requirements will be undertaken as required by council.

Some lots are to be sold and one lot will be retained by the trust.

All costs of the subdivision will be funded by the trustees of the trust. No borrowings in relation to the activity will be required.

It is anticipated that there will be profit, after costs.

The personal involvement of the trustees will be minimal and predominately outsourced as the level of works required are minor.

All services are to be outsourced to third parties. The contracted parties will have no connection to the taxpayer.

There is no formal business plan, no business organisation, no manager, no office and no letterhead.

The trustee's intention on disposal is to clear debt and retain one lot for future investment purposes.

There is no intended involvement of the taxpayer in selling the lots; they will engage a real estate agent.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5,

Income Tax Assessment Act 1997 Section 102-5,

Income Tax Assessment Act 1997 Section 102-20,

Income Tax Assessment Act 1997 Section 104-10 and

Income Tax Assessment Act 1997 Subsection 104-10(3).

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 www.ato.gov.au 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

Summary

You acquired the property a few years ago. You decided to subdivide the property to reduce debt when circumstances changed. Your intention was to realise an asset. The transaction was not entered into in the course of carrying on a business or in carrying out a business operation or commercial transaction.

Therefore, this is mere realisation of an asset and not assessable under section 6-5 of the ITAA 1997. Capital gains tax will apply instead.

Detailed reasoning

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.

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.

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.

As you have acquired your interest in the dwelling after 20 September 1985, the dwelling is subject to CGT upon its disposal.

However, any gain upon the sale of the subdivided lots may also be assessable under section 6-5 of the ITAA 1997.

Taxation Ruling TR 92/3 discusses whether profits on isolated transactions are income. TR 92/3 states at paragraphs 35 and 36:

A profit from an isolated transaction is therefore generally assessable income when both of the following elements are present:

(a) The intention or purpose of the taxpayer in entering into the transaction was to make a profit or gain.

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

The courts have often said that a profit on the mere realisation of an investment is not income, even if the taxpayer goes about the realisation in an enterprising way. The expression 'mere realisation' is used to contradistinguish a business operation or a commercial transaction carrying out a profit-making scheme.

This highlights that there must be both an intention to make a profit or gain and the transaction was made in the course of carrying out a business operation or a commercial enterprise.

Intention or purpose

The taxpayer's intention or purpose is discerned from an objective consideration of the facts and circumstances of the case. Profit making does not need to be the sole or dominant intention or purpose. It is sufficient if profit making is a significant purpose. The taxpayer must have the requisite purpose at the time of entering into the relevant transaction or operation. If the transaction or operation involves the sale of property, it is usually necessary that the taxpayer has the purpose of profit making at the time of acquiring the property.

In the course of carrying out a business operation or a commercial enterprise

Taxation Ruling TR 92/3 discusses whether profits on isolated transactions are income. TR 92/3 at paragraph 49 lists some factors which may be relevant in considering whether an isolated transaction amounts to a business operation or a commercial transaction. These are:

· 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

· the timing of the transaction, or the various steps in the transaction.

This is further discussed in Miscellaneous Taxation Ruling MT 2006/1 which discusses the meaning of an entity carrying on an enterprise. Example 34 in MT 2006/1 provides further clarification:

A number of years ago Elsie and Karin purchased some acreage on which to keep their horses, which they rode on weekends. Karin now accepts a job overseas and they decide to sell the land.

They put the land on the market with little success. The local real estate agent then advises that it would be easier to sell the land if it was subdivided into smaller lots. They arrange for a development application to be lodged with the local council and obtain approval to subdivide the land into nine lots. Elsie and Karin arrange for the land to be surveyed. The land has a road running along its boundary and has some existing services such as electricity. Only minimal activity is required to subdivide the land.

The sale is not considered to be an enterprise and is the mere realisation of a capital asset.

The property was acquired for personal use. When circumstances changed, it was decided to dispose of the property to reduce debts. There was no intention to make a profit or gain.

Considering the factors in paragraph 49 of TR 92/3 it is determined that the transaction or operation was not entered into in the course of carrying out a business operation or commercial transaction.

Accordingly, the activity is considered to be the mere realisation of an asset that will be assessed under the capital gains tax provisions rather than the profits being assessable under section 6-5 of the ITAA 1997.