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Ruling

Subject: Property sale

Question 1

Is the profit from the sale of your investment property assessable income under section 6-5 of the Income Tax Assessment Act 1997(ITAA 1997)?

Answer

No.

Question 2

Do the capital gains tax (CGT) provisions apply to the sale of your investment property?

Answer

Yes.

This ruling applies for the following period

Year ending 30 June 2012

The scheme commenced on

1 July 2006

Relevant facts and circumstances

You bought a block of land for development in 2006 and you built a house on the land. The house was completed in late 2007.

You intended to sell the property on completion or rent it for a time if it didn't sell. You had it on the market for approximately six months and when it didn't sell in that time you rented it out from mid 2008 to mid 2011 and sold it a short time later.

You are not in the business of property development.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5
Income Tax Assessment Act 1997 section 102-22
Income Tax Assessment Act 1997 section 104-10
Income Tax Assessment Act 1997 section 108-5
Income Tax Assessment Act 1997 section 110-25
Income Tax Assessment Act 1997 section 116-20

Reasons for decision

Whether you are carrying on a business of buying and selling property is a matter of fact.

There are several indicators which have been identified by the courts to determine whether a business is being carried on. These factors are: 

· whether the activity has a significant commercial purpose of character

· whether the taxpayer has more than just an intention to engage in business

· whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity

· whether there is a repetition and regularity of the activity

· 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

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

· the size, scale and permanency of the activity; and

· whether the activity is better described as a hobby, a form of recreation or a sporting activity.

You bought one block of land and built a property that has been used as a rental property on the land. Taking into account the factors above it is considered that you are not carrying on a business of property development and therefore the proceeds on the sale are not assessable as ordinary income.

You are a property investor in relation to this transaction, and the sale of the rental property is subject to CGT provisions.

A capital gain or capital loss may be made if a CGT event happens to a CGT asset.

Your rental property was a CGT asset and its disposal is a CGT event A1. An event happens if you dispose of a CGT asset; the time of the event is when you enter into the contract for the disposal or if there is no contract when change of ownership occurs.

You make a capital gain if the capital proceeds from the disposal are more than the asset's cost base. You make a capital loss if those capital proceeds are less than the asset's reduced cost base.