Edited version of private ruling

Authorisation Number: 1011810785159

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Ruling

Subject: Capital gains tax - disposal of residence

Issue 1

Disposal of residential property

Question 1

Will the disposal of a property be subject to a partial main residence exemption?

Answer

Yes.

Issue 2

Intention to derive income

Question 1

Would enquiries made to the relevant local authority regarding the disposal and subdivision of land constitute carrying on a business of land development?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 2013

The scheme commences on:

October 2010

Relevant facts and circumstances

You own over 2 hectares of land which was acquired after 20 September 1985.

You previously resided in another property (dwelling 2)

A contract was signed to commence construction of a dwelling (dwelling 1). Construction was completed and residence was taken up.

No capital gain was included in the taxpayers income tax return for the disposal of another property (dwelling 2).

An absence choice was made by the taxpayer for a period. The taxpayer has chosen to treat their dwelling 2 as their main residence under Section 118-145 of the Income Tax Assessment Act 1997(ITAA 1997).

Dwelling 1 will be disposed of as a single property of over 2 hectares in size.

For the purpose of this ruling, the land will be sold in year ended 30 June 2013.

The taxpayer wishes to make a choice for the main residence exemption under Section 118-150 of the ITAA 1997 to apply to the dwelling 1.This election will come into effect from the disposal date of dwelling 2.

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,

Income Tax Assessment Act 1997 Section 118-110

Income Tax Assessment Act 1997 Section 118-120,

Income Tax Assessment Act 1997 Section 118-145,

Income Tax Assessment Act 1997 Section 118-150 and

Income Tax Assessment Act 1997 Section 118-185.

Issue 1

Question 1

Detailed reasoning

Subdivision 118-B of the Income tax Assessment Act 1997 (ITAA 1997) sets out the rules for the exemption of the whole or part of the capital gain or capital loss that otherwise would have accrued or been incurred where a capital gains tax (CGT) event happens to a taxpayer's main residence. The availability of the exemption is subject to satisfying a range of conditions.

The main condition that underlies the operation of the CGT exemption in subdivision 118-B of the ITAA 1997 is that a dwelling will be entitled to a CGT exemption if it has qualified as the taxpayer's "main residence" throughout their period of ownership and if it has not been used to produce assessable income during that period. A partial exemption will also apply in certain circumstances.

Adjacent Land

Section 118-120 of the ITAA 1997 allows land adjacent to a dwelling to qualify for the exemption, this is provided that the land is "used primarily for private or domestic purposes in association with the dwelling". The land must not exceed two hectares.

Absences from the dwelling

Once a dwelling has qualified as the taxpayer's main residence, it can continue to be treated as such during a subsequent period of absence under section 118-145 of the ITAA 1997. If the concession is used, no other dwelling can be treated as the taxpayer's main residence during the period that it applies. In your case, you have chosen to apply this provision to treat dwelling 2 as your main residence for a period until the sale of the dwelling.

Building a dwelling

Section 118-150 of the ITAA 1997 allows land on which a dwelling is being built, renovated or repaired to be treated as the taxpayer's main residence for a maximum period of four years even though the taxpayer is not occupying it as their main residence. If a choice is made to apply the concession, no other dwelling can be treated as the taxpayer's main residence during the period to which the concession applies. You have elected to apply this provision to treat dwelling 1 as your main residence while a new dwelling is completed and the taxpayers have commenced residing there.

Due to the application of the absence rule under section 118-145 of the ITAA 1997 dwelling 1 will be considered to be the taxpayers main residence from the date of disposal of dwelling 2.

Partial Exemption

Under section 118-185 of the ITAA 1997, a partial main residence exemption applies when a CGT event happens to a dwelling where the dwelling was the taxpayer's main residence for only part of their ownership period. This can occur in circumstances in which the dwelling failed to qualify as a main residence throughout the ownership period such as when a taxpayer chooses another dwelling as their main residence.

A partial exemption is calculated using the formula in section 118-185 of the ITAA 1997, this requires the otherwise exempt capital gain or loss to be pro-rated by reference to that part of the ownership period in which the dwelling was not the taxpayer's main residence. A capital gain calculated under the partial exemption rules is entitled to the CGT discount where the relevant conditions are met.

In your case, a partial main residence exemption applies to the disposal of dwelling 1 as it has only been your main residence for part of your ownership period. Due to the application of the absence choice to another property, dwelling 1 will be considered your main residence from the disposal date of the dwelling 2 and you will receive a partial exemption upon its disposal based on how long you have held the property and how long it has been your main residence.

As the property to be disposed of is greater than 2 hectares in size, under section 118-120 of the ITAA 1997, 2 hectares of the property will be partially exempt from capital gains tax.

Issue 2

Question 1

Summary

Enquiries made to the relevant local authority regarding the disposal and development/subdivision of land will not constitute carrying on a business of land development.

Detailed reasoning

Taxation Ruling 92/3 (TR 92/3) discusses whether profits on isolated transactions such as the disposal and development/subdivision of dwelling 1 would be considered income. Paragraph 6 of the ruling states "Whether a profit from an isolated transaction is income according to the ordinary concepts and usages of mankind depends very much on the circumstances of the case. However, a profit from an isolated transaction is generally 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; and

(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.

Making the enquiries would not be considered carrying on a business of land development. However, TR 92/3 discusses factors to be considered in assessing whether the disposal and development or subdivision of land will be considered carrying on a profit making undertaking or plan. Enquiries to the relevant local authority may be used in assessing your intention in relation to the land purchase and disposal.

According to paragraph 7 of TR 92/3, your relevant intention or purpose is not your subjective intention or purpose. Rather, it is your intention or purpose discerned from an objective consideration of the facts and circumstances of the case. A profit making purpose need not be the sole or dominant intention or purpose for entering the transaction. It is sufficient if profit making is a significant purpose.

Paragraph 9 of TR 92/3 indicates that if the transaction or operation involves the sale of property, it is usually necessary that you have the purpose of profit making at the time of acquiring the property.

Paragraph 13 of TR 92/3 outlines a number of factors which must be considered in determining whether a transaction is commercial and whether or not it constitutes the operation of a business. The factors considered to be relevant 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, and the timing of the transaction or the various steps in the transaction.

· the timing of the transaction and the various steps in the transaction.

These issues must be considered in assessing whether the disposal will be considered a commercial transaction or whether it will constitute the operation of a business.