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Ruling

Subject: Income - land development

Question

Are the proceeds from the sale of land considered assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

This ruling applies for the following period:

1 July 2011 - 30 June 2012

The scheme commences on:

1 July 2011

Relevant facts and circumstances

You and your former spouse purchased vacant land as an investment after September 1985.

You later experienced a marriage breakdown. It was a condition of the marriage breakdown process that the land was to be sold at public auction. The land went to auction, the successful bidder being a company of which you were a director.

The company treated the property as a business asset as it had other land development activities which when viewed as a whole made the treatment of the property as a business asset appropriate.

The company later lodged a development application for a number of townhouses on the property, which was approved. A building company, of which you were an employee, were engaged to prepare the development application.

The company sold the property at market value to Company A which acted as trustee for your family trust (the Trust). You are a director of Company A.

The Trust identified the development approval could be amended again to maximise the value of the land. A revised development application was lodged by the taxpayer for a development twice the size previously approved on the property.

The land is zoned high density residential. This zoning has remained consistent throughout the entire period of ownership between all the entities involved.

Prior to the lodgement of the revised development application by Company A (on behalf of the Trust), it had not previously undertaken any other property subdivisions or developments.

A new development application for a substantially identical development has been sought as the application has now expired.

The expected sale price of the property was provided.

There is no intention to develop the land. It was always intended to sell the property with the development approval in place to maximise the return.

The Trust also owns commercial property.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

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

Taxation Ruling TR 92/3 sets out the Commissioner's view on whether profits made from isolated transactions are ordinary income. 'Isolated transactions' refers to:

· those transactions outside the ordinary course of business of a taxpayer carrying on a business; and

· those transactions entered into by non-business taxpayers.

Whether a profit from an isolated transaction is income according to ordinary concepts depends very much on the circumstances of the case. However, where a taxpayer who does not carry on a business makes a profit from an isolated transaction, that profit is income if:

(a) the intention or purpose of the taxpayer in entering into the profit-making transaction or operation was to make a profit or gain; and

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

Intention or purpose

The relevant intention or purpose of the taxpayer (of making a profit or gain) is not the subjective intention or purpose of the taxpayer. Rather, it is the taxpayer's intention or purpose discerned from an objective consideration of the facts and circumstances of the case.

It is not necessary that the intention or purpose of profit-making be the sole or dominant intention or purpose for entering into the transaction. 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. Where 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 land or property.

Making a profit or gain

The term 'profit or gain' is not defined and consequently it takes its ordinary meaning. It refers to concepts commonly used in the commercial world and can encompass a 'profit or gain' of an income or capital nature. (Paragraph 385 of MT 2006/1).

Carrying out a commercial transaction

For a transaction to be characterised as a business operation or a commercial transaction, it is sufficient if the transaction is business or commercial in character. Paragraph 13 of TR 92/3 lists factors which may be relevant in considering whether an isolated transaction amounts to a business operation or commercial transaction. Relevant factors 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;

· 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.

In addition to the above factors, for the purposes of determining whether the activities undertaken in relation to real property and development equate to a profit-making undertaking or scheme, Miscellaneous Taxation Ruling MT 2006/1 aligns itself with TR 92/3 and provides a list of factors which, if present may be an indication that a business or profit-making undertaking or scheme is being carried on. If several of these factors are present it may be an indication that a business or an adventure or concern in the nature of trade is being carried on. These factors are as follows:

· there is a change of purpose for which the land is held;

· additional land is acquired to be added to the original parcel of land;

· the parcel of land is brought into account as a business asset;

· there is a coherent plan for the subdivision of the land;

· there is a business organisation - for example a manager, office and letterhead;

· borrowed funds financed the acquisition or subdivision;

· interest on money borrowed to defray subdivisional costs was claimed as a business expense;

· there is a level of development of the land beyond that necessary to secure council approval for the subdivision; and

· buildings have been erected on the land.

No single factor is determinative; rather it will be a combination of factors that will lead to a conclusion as to the character of the activities.

Paragraph 270 of MT 2006/1 states that in isolated transactions, where land is sold that was purchased with the intention of resale at a profit (which would be ordinary income) the Commissioner considers these activities to be an enterprise. This would be so whether the land was sold as it was when it was purchased or whether it was subdivided before sale. An enterprise would be carried on in this situation because the activities are business activities or activities in the conduct of a profit making undertaking or scheme and therefore an adventure or concern in the nature of trade.

Application to your circumstances

There is an intention to make a profit

The actions of the Trust and the director of the trustee company suggest that the Trust's intention in acquiring the property from a related entity was to make a profit or gain upon its disposal.

This is evidenced by the fact that the company (the disposal company) was in the business of land development and was controlled by the same individual who effectively controls the Trust. Shortly after acquisition by the Trust, it submitted a revised development application to council which doubled the size of the development. This is notwithstanding the fact that it already had approval for a set development which was obtained during the company's ownership.

The fact that a new development application was lodged soon after taking ownership of the land suggests that the Trust had an intention (at the time of acquisition) of re-selling the land with DA approval relatively quickly.

The transaction is commercial in nature

The factors in determining whether a transaction is commercial in nature are listed in Paragraph 13 of TR 92/3 and are discussed above. These factors in relation to this case are discussed:

The nature of the entity undertaking the transaction is a discretionary family trust.

The Trust owns and leases out commercial property to a related entity. It also holds the vacant land. It has been stated that the Trust is not involved in other land development activities. However, the disposal company which is related to the Trust is in the business of land development. You are a director of the disposal company.

The amount of money involved in the operation is significant. The land was acquired by the Trust for X, but after having gained council approval, the vacant land will be listed with a real estate agent at Z plus GST.

The transaction is not significantly complex, but would require the services of architects, surveyors etc with significant cost involved. The trust has drawn on the skills of its controller which they exercised in a professional capacity for preparation of the development application.

The disposal company acquired the land at public auction and was in the business of land development. This company obtained approval for a number of townhouses. It subsequently sold the land to the Trust (a related entity). The Trust (effectively controlled by the same person) obtained council approval for development double the size on the same land shortly after acquisition.

All entities that have owned the land are connected. The director of the disposal company was an owner of the land in the previous marriage and is also the director of the company who acts as trustee for the Trust.

The nature of the property is vacant land with development potential.

All events happened within a relatively short period of one another. The disposal company, who was in the business of land development, acquired the land at auction. Council approval was sought for the development. The land was sold to the Trust and within approximately 12 months the Trust applied to vary the approved development application by doubling the size of the development.

From a consideration of the facts above it can be concluded that the transaction is commercial in nature.

Summary

On a weighing of the facts it can be concluded that in this situation the disposal of the vacant land with a development application in place would be beyond that of a mere realisation of a capital asset and amount to an isolated profit making transaction.

There is a demonstrated intention to profit and the transaction has been carried out in a commercial manner. Accordingly, the proceeds will be considered ordinary assessable income under section 6-5 of the ITAA 1997 and the CGT provisions will not apply by virtue of section 118-20 of the ITAA 1997.