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Ruling

Subject: Sale of property to a developer

Question 1

Will the proceeds from the disposal of your interest in the property be assessable as ordinary or statutory income?

Answer

No.

Question 2

Will there be any income tax implications in relation to transferring title to part of the property to the purchaser ahead of final settlement?

Answer

No.

Question 3

Will there be any income tax implications in relation to transferring parts of the property to statutory authorities?

Answer

No.

Question 4

Will the proceeds from disposal of your interest in the property be subject to capital gains tax (CGT)?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 2012

Year ended 30 June 2013

Year ended 30 June 2014

Year ended 30 June 2015

The scheme commences on:

1 July 2011

Relevant facts and circumstances

You have an interest in a property which was acquired before 20 September 1985. The property has been used as your primary place of residence.

The property has recently been zoned residential.

You do not conduct any business from the property and are not registered for GST.

You have a developer interested in the property all at his own cost. He intends to pay you a fixed price plus one block from the future subdivided land. The price does not vary with his gains or losses if any.

The sale contract is over a period with a deposit at signing, an initial payment and a final payment.

For his development and financing processes, the developer wants to do the development on your site in stages. During the sale contract period, the developer wants to be able to carry out planning and civil works to a portion of the property.

You will be on the property while some of the works are being carried out, and you expect to reside at the property for a short time from the signing of the contract.

Any contract signed with the developer will not be conditional on subdivision occurring.

Part of your land has been designated by statutory authorities for certain purposes. You may be directed into selling this portion of the land to the authorities prior to your settlement with the developer. The compensation provided for the land from the statutory authorities will become a deduction from the developer's fixed price, and paid to you.

Once the developer has made the initial payment, which would account for half of the value of your property, he wants you to transfer that section of the property to him. This is to enable the developer to finance the project.

Once you have transferred the title of that section of the property to the developer, all further activity and subdivision is carried out and is the responsibility of the developer. There is no involvement or interest by you.

The balance of the land would be transferred to the developer at final payment.

You have forwarded a copy of the contract of sale for the property.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 15-15

Income Tax Assessment Act 1997 Subsection 104-10(5)

Income Tax Assessment Act 1997 Paragraph 108-5(2)(a)

Income Tax Assessment Act 1997 Section 995-1

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 (ITAA 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 of the ITAA 1936 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 of the ITAA 1936 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

Question 1

Profits from the sale of property can be assessable as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) in the following ways:

(a) As ordinary income under section 6-5 of the ITAA 1997 as a result of carrying on a business of property development and involving the sale of property as trading stock.

(b) As ordinary income under section 6-5 of the ITAA 1997 as a result of an isolated business transaction which, although outside the ordinary course of business of a taxpayer, is entered into for the commercial exploitation of an asset acquired for a profit making purpose, that is, the profit is derived in the course of carrying out a business operation or commercial transaction.

Profit arising from the carrying on or carrying out of a profit-making undertaking or plan can also be assessable as statutory income under section 15-15 of the ITAA 1997. This section does not apply to a profit that:

(a) is assessable as ordinary income under section 6-5 of the ITAA 1997 or

(b) arises in respect of the sale of property acquired on or after 20 September 1985.

Carrying on a business

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

The question of whether a business is being carried on is a question of fact and degree, The courts have developed a series of indicators that are applied to determine the matter on the particular facts.

Taxation Ruling TR 97/11 provides the Commissioner's view of the factors used to determine if you are in business for tax purposes.

In your case, you intend to sell the property with residence to the developer. The developer intends to subdivide the property during the contract period. You will have no involvement in the further subdivision and sale of the land contained in these lots.

We consider that you are not carrying on a business of property development or sales as an individual, as there is no indication in your case that you intend to carry on such a business activity, you will have no involvement in the development of the land or the sale of the subdivided blocks, there will be no repetition and regularity of the activity and there is no corporate structure involved in the transaction.

An individual may, however, also carry on a business in partnership.

Taxation Ruling TR 94/8 provides guidelines in relation to whether a business is carried on in partnership. Paragraph 12 of TR 94/8 states that mutual assent and intention to act as partners is the essential element in demonstrating the existence of a partnership between two or more persons. Paragraph 4 of TR 94/8 provides factors which are used in deciding whether persons are carrying on a business in partnership in a given year of income.

Applying the guidelines in TR 94/8, we consider that you are not carrying on a business in partnership with the developer in relation to the subdivision of the property. The contract forwarded by you is solely a contract for the sale of the property and there is no indication that there is any mutual assent and intention in this case indicating the existence of a partnership between you and developer. There is also no joint ownership of business assets, registration of a business name for you and the developer, a joint business account, joint business records, trading in joint names or any involvement by you in the subdivision.

Isolated transactions and profit-making undertaking or plan

Taxation Ruling TR 92/3 discusses profits on isolated transactions and the application of the principles outlined in the decision of the Full High Court of Australia in FCT v. Myer Emporium Ltd (1987) 163 CLR 199; 87 ATC 4363; (1987) 18 ATR 693. This ruling states that profits on isolated transactions may be income.

Profit from an isolated transaction will be ordinary income where:

· the intention or purpose of a taxpayer in entering into the transaction was to make a profit or gain and

· the transaction was entered into, and the profit was made, in the course of carrying out a business operation or commercial transaction.

If a transaction or operation involves the sale of property, it is usually, but not always, necessary that the taxpayer has the purpose of profit-making at the time of acquiring the property.

Some factors to consider when looking at whether an isolated transaction amounts to a business operation or commercial transaction are listed at paragraph 13 of TR 92/3. They are:

(a) the nature of the entity undertaking the operation or transaction

(b) the nature and scale of other activities undertaken by the taxpayer

(c) the amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained

(d) the nature, scale and complexity of the operation or transaction

(e) the manner in which the operation or transaction was entered into or carried out

(f) the nature of any connection between the relevant taxpayer and any other party to the operation or transaction

(g) if the transaction involves the acquisition and disposal of property, the nature of that property and

(h) the timing of the transaction or the various steps in the transaction.

Profits on the sale of subdivided land can therefore be income according to ordinary concepts within section 6-5 of the ITAA 1997 if the taxpayer's subdivisional activities have become a separate business operation or commercial transaction, or an isolated profit making venture.

We will consider the above guidelines to determine whether there will be a profit from an isolated transaction, or as a result of a profit-making undertaking or plan, either as the result of a possible joint venture with the developer due to the fact that you will be receiving one block from the future subdivided land, or by you as an individual.

Joint venture

The term 'joint venture' is not defined in the income tax legislation. The term is defined in the Butterworths Concise Australian Legal Dictionary (Second Edition) as:

An association of persons for particular trading, commercial, mining, or other financial undertakings or endeavours with a view to mutual profit. It is not a technical legal term with a settled common law meaning: United Dominions Corp Limited v. Brian Pty Ltd (1985) 157 CLR 1; 60 ALR 741. The association is usually for the participation in a single project, rather than a continuing business. A joint venture may be carried out by way of a partnership, company, trust, agency, joint ownership, or other arrangement. It may include an activity carried on by a body corporate which was formed to carry on the activity by means of joint control or ownership or shares in the body corporate: (Cth) Trade Practices Act 1974 s4J(a).

· Goods and Services Tax Ruling GSTR 2004/2 discusses joint ventures in the context of the GST Act, and also provides some information about joint ventures in general. GSTR 2004/2 considers the following to be features of a joint venture:

· Contractual agreement - joint venture participants enter into an agreement, which establishes the operation, management and joint control of the joint venture. Usually the terms of the arrangement are governed by a written agreement entered into by the participants.

· Sharing of product or output - joint ventures result in the generation of a product or output to be shared among the participants.

· Joint control - joint control by the participants is a feature of joint ventures. The joint venture agreement will specify the nature and extent of the joint control, for example, unanimous consent of the participants.

· Specific economic project - commonly a joint venture is for a specific project, which will ordinarily have a finite life, and when the project is completed, the joint venture ends.

· Cost sharing - costs associated with the undertaking of a joint venture are met by the participants individually, commonly in accordance with the joint venture interests stipulated in the joint venture agreement. Each participant incurs its own expenses and liabilities and raises its own finance. Each participant is liable only for its own debts.

· Well-defined separation of interests, rather than a joint undivided interest, in assets contributed to the venture.

An application of the above guidelines to your circumstances leads to the following conclusions:

(a) A contractual agreement titled contract of sale is being entered into. No specific joint venture agreement has been entered into by you with the developer.

(b) The agreement entered into results in the generation of a product to be shared, that is, you are to receive one of the subdivided blocks.

(c) The agreement contains no provisions relating to joint control.

(d) The agreement relates to a specific project.

(e) The agreement contains provisions relating to which costs are to be met by you and the developer.

(f) There is a well-defined separation of interests in assets contributed. You are the legal owner of the property, however instead of contributing the property to a joint venture, the agreement provides that the property is to be sold to the developer.

A consideration of the above factors leads to the overall impression that there is not a joint venture in this case. Although you are to receive one of the subdivided blocks, this is common with developments of this nature where the original owner wishes to retain some ownership and/or continue residing in the locality. There is no indication that there was any intention to enter into a joint venture with the developer or that the transaction is anything other than the sale of your property to the developer for consideration consisting of money and one subdivided block.

Individual

There is no indication that you had the purpose of profit-making at the time of acquiring the property, however it is likely that the sale of the property will result in a profit or gain. Applying the above factors at paragraph 13 of TR 92/3 as listed above to your circumstances leads to the following conclusions:

(a) you are undertaking the sale of your property in your own name

(b) there is no indication in this case that there have been other similar activities undertaken by you

(c) your costs in relation to the sale of the property will be minimal and all subsequent development will be carried out by the developer. Your proceeds from the transaction will be quite large however.

(d) you are selling one property which is not a large scale or complex transaction

(e) the sale is being carried out in your name and not as a separate business

(f) the transaction is simply the sale of the property to the developer

(g) the sale involves property which has been used for private purposes over a lengthy period of time and

(h) you did not take any steps to sell or subdivide immediately following the purchase of the property and are now only proceeding some years later.

A consideration of the above factors leads to the overall impression that the sale of your property is not business or commercial in nature. The sale constitutes the realisation of a capital asset and the disposal of a property with no or minimal additional preparation by you prior to disposal.

Your share of any profit from the sale of the property will therefore not be a profit from an isolated transaction, or as a result of a profit-making undertaking or plan, under the guidelines of TR 92/3 as discussed above.

Conclusion

As any profit from the sale of the property, or your interest in the property, is not the result of carrying on a business of property development or as a result of an isolated transaction or profit-making undertaking or plan, any proceeds from the sale of your interest in the property will not be assessable as ordinary income under section 6-5 of the ITAA 1997 or as statutory income under section 15-15 of the ITAA 1997.

Question 2

The developer in your case wants to transfer part of the property to him after the initial payment has been made. This would result from a subdivision.

The above determination in relation to the assessability of the proceeds from the sale of your interest in the property will not be affected by transferring title to part of the property to the purchaser ahead of final settlement.

Question 3

You may be directed into selling part of your land to certain statutory authorities prior to settlement with the developer. The compensation from the authorities for these sales will become a deduction from the developer's fixed price and will be paid to you.

The above determination in relation to the assessability of the proceeds from the sale of your interest in the property will not be affected by any sales of parts of your property to the authorities ahead of final settlement. The above determination would also apply to the proceeds of the sale of any part of the property to the statutory authorities, and as such, the proceeds from these sales would also not be included in your assessable income under either section 6-5 or 15-15 of the ITAA 1997.

There would be no other income tax issues resulting from the transfer.

Question 4

The sale of your interest in the property will be subject to the CGT provisions in Parts 3-1 and 3-3 of the ITAA 1997.

Your interest in the property will be the relevant CGT asset in this case, being a CGT asset under paragraph 108-5(2)(a) of the ITAA 1997. However, as you acquired this interest before 20 September 1985, any capital gain or capital loss you make from the disposal of the interest is disregarded under paragraph 104-10(5) of the ITAA 1997.

If the property is subdivided by the purchaser prior to the disposal of your interest in the property to the developer, any subdivision will not result in a CGT event until you dispose of your interest in any of the subdivided blocks. The date you acquired the subdivided blocks is the date you acquired the original property, that is, the subdivided blocks will retain their pre-CGT status.

The proceeds from the disposal of your interest in the property or any subdivided blocks will therefore not be subject to CGT.

Note

The above determination in relation to the CGT provisions will not be affected by the fixed sale price contract, transferring title to part of the land to the purchaser ahead of final settlement or the transfer of parts of the property to statutory authorities.

Additionally these transactions will not affect any main residence status of the property, however as any capital gain or capital loss is already disregarded under paragraph 104-10(5) of the ITAA 1997, the main residence exemption will have no application in your case.