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Ruling

Subject: Capital gains tax - intention to gift land to councils

Question 1

Will the proposed disposal of the subject land to two councils give rise to any capital gains tax (CGT) implications under section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997) ?

Answer

Yes

Question 2

As the land is not trading stock under subsection 6(1) of the ITAA 1936 or section 70-10 of the ITAA 1997 is it a capital asset?

Answer

Yes

This ruling applies for the following periods:

1 July 2012 to 30 June 2013

The scheme commences on:

1 July 2012

Relevant facts and circumstances

An entity is carrying on an enterprise providing development consultancy services.

The reason for purchasing the land was:

· to develop an environmental wetland to rehabilitate denuded farmland with worsening creek erosion that was prone to flooding and emitting polluted water into a marine park

· to help finance the development of the wetland ecosystem (in addition to Federal Government funding)

· a number of hectares was approved to be developed for environmentally sustainable housing.

Since the acquisition the land has been transformed and part sub-divided with the balance of land zoned 'Landscape' now largely consisting of wetlands allotments.

The entity owns a parcel of land (the Property). The land was a denuded farm that now has been transformed into a wetland ecosystem. The entity has incorporated walking trails and bike tracks for the community to use and benefit from the wetlands environment.

The entity is the developer of a residential development on land adjoining the Property. The entity also proposes to develop a 'Health and Wellbeing Precinct' (the Precinct) within the Property. The entity has offered to transfer a small number of hectares of the Precinct to local shire councils for the purpose of the development of a regional centre (the Facility).

A proposed 'Heads of Agreement', (the Agreement) details the terms of the transfer of land. The Agreement provides that prior to the transfer of land a number of expectations are envisaged including:

· Unanimous agreement between all parties regarding the design of the Facility.

· Submission of the design plans to the relevant authorities permitted under the funding committed to the construction of the Facility.

· Commencement of the rezoning process to accommodate the Precinct and the Facility.

· Testing and clearance of the land for soil, contamination, aboriginal heritage and native vegetation at the shared cost of the councils followed by a professionally prepared feasibility study for the construction and operation of the Facility upon the land also at the shared cost of the councils

· The relevant councils obtaining commitment from other levels of Government for such contribution to funding the development and/or operation of the Facility as they think prudent.

Following the above steps being completed, you would transfer the land free of security interests to the relevant councils under the following terms and conditions:

· The councils do not pay a price or other monetary value for the transfer;

· The councils bear the costs of preparing and lodging for deposit at the Land Titles Office a plan of division to divide the land from the balance of the Property;

· The councils bear the stamp duty and Land Titles Office fee on the transfer;

· The councils acquire the Site as tenants in common; and

· The councils grant you an option to purchase back the Site free of security interests for $1.00, exercisable if either:

(a) before substantial development work for the Facility is commenced on the Site, the relevant councils publicly abandon the proposal for the Facility;

(b) X months after the transfer, substantial development work for the Facility has not commenced on the land.

The Agreement also envisages that on completion of the Facility, the Facility will operate year round as a centre open to the fee-paying public. The Facility will be branded as a joint initiative of the councils with any trading profit or loss being shared equally between the councils.

A clause in the Agreement provides that the Agreement is legally binding on the parties and may be amended only by written agreement of the parties.

Relevant legislative provisions

Reasons for decision

Issue 1

As a general rule, capital gains tax must be paid on any gains made from the disposal of assets that were acquired on or after 20 September 1985.

Under section 118-25 of the Income Tax Assessment Act 1997 a capital gain or loss made from a CGT asset is disregarded if, at the time of the CGT event, the asset is trading stock of the entity.

Trading stock

The term 'trading stock' is defined in section 6-1 of the ITAA 1936 up to 30 June 1997 and section 70-10 of the ITAA 1997 as from 1 July 1997. Section 70-10 defines trading stock to include anything produced, manufactured or acquired that is held for the purposes of manufacture, sale or exchange in the ordinary course of business.

Taxation Determination TD 92/124 states that land can constitute trading stock if it is held for resale and a business activity that involves dealing in land has commenced. A single acquisition of land for the purpose of development, subdivision and sale by a business commenced for that purposes leads to the land being trading stock.

In order for an item to be classified as trading stock, therefore, it needs to be held by the taxpayer in the course of carrying on a business or directly related to a business activity.

Carrying on a business

Under the definition in section 6(1) of the ITAA 1936, the term 'business' takes its ordinary meaning, but specifically includes (but is not limited to) any profession, trade, employment, vocation or calling; and excludes occupation as an employee. This definition was reiterated in similar terms in section 995 of the ITAA 1997.

In determining whether a taxpayer carries on a business, various courts and tribunals have held that the following factors are the key determinants: Taxation Ruling TR97/11 provides the Commissioner's view of the factors used to determine if you are in business for tax purposes.

Whether a business is being carried on will depend on the 'large or general impression gained' (Martin v. Federal Commissioner of Taxation (1953) 90 CLR 470; (1953) 10 ATD 226; (1953) 5 AITR 548) from looking at all the indicators, and whether those indicators provide the operations with a 'commercial flavour' (Ferguson v. FC of T 79 ATC 4261; (1979) 9 ATR 873).

The circumstances of the subject land will therefore determine whether it was acquired for the purpose of carrying on a business or, alternatively, for the purpose of carrying out a business or commercial transaction with the intention of making a profit or gain by sale. Under either circumstance, the land will satisfy the definition of 'trading stock' and be on revenue account.

Whether the activity has a significant commercial purpose or character

The reason for purchasing the land was:

· to develop an environmental wetland to rehabilitate denuded farmland with worsening creek erosion that was prone to flooding and emitting polluted water into a marine park

· to help finance the development of the wetland ecosystem (in addition to Federal Government grant funding)

· a number of hectares were approved to be developed for environmentally sustainable housing.

The original land transfer involved several titles all of which have since been cancelled as the land was developed over the last Y years. Planning approval was granted a number of years ago to sub-divide a portion of the land for residential homes and open space. The remaining land identified is zoned 'Landscape' and can not be residentially zoned for sub-division. There was a commercial purpose or character and a profit making motive indicated in this activity in relation to the land subdivided for residential homes and open space. However, the subject land is not capable of being subdivided and therefore, does not form part of the business of land development and subdivision.

Conclusion

The facts lead to the conclusion that in terms of the subject land the entity is not carrying on a business or, alternatively, carrying out a business or commercial transaction with the intention of making a profit or gain by sale. Accordingly, the subject land does not meet the definition of trading stock in either subsection 6(1) of the ITAA 1936 or section 70-10 of the ITAA 1997.

Issue 2

As the land is not trading stock under subsection 6(1) of the ITAA 1936 or section 70-10 of the ITAA 1997 it is necessary to determine whether it a capital asset.

A capital gains tax asset ('CGT asset) is defined in section 108-5 of the ITAA 1997 as any kind of property, or a legal or equitable right that is not property. Examples of CGT assets include land. Since the subject land is not trading stock under subsection 6(1) of the ITAA 1936 or section 70-10 of the ITAA 1997 and it was acquired after 19 September 1985, the subject land is a CGT asset under subsection 100-25(2) of the ITAA 1997 for the purposes of Part 3-1 of the ITAA 1997.

Further issues for you to consider

This ruling is based on the facts and assertion made by the applicant that it is intended that the land will be transferred to the councils at a later date. We have not considered the implications or tax consequences should the land be disposed of other than by way of transfer.

Capital Gains Tax Disposal of land as a gift

You intend to gift an interest in a block of that land in the relevant income year to a number of councils. Currently, there is no contract, and no change in ownership has occurred, therefore there is no CGT event (S104-10(3) (b). Until a contract is signed there is no legally binding agreement and this advice is subject to review of the final contract.

Capital Gains tax may apply to taxpayers who donate property valued by the Commissioner at more than $5000, as this is regarded as a disposal of a CGT asset under section 104-10 of the ITAA 97.

Subsections 104-10(1) provide that a "CGT event A1 happens if you dispose of a CGT asset. Subsection 104-10(2) provides that "You dispose of a CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law".

Therefore, if the subject land is valued at more than $5000 at the time you intend to make the gift, the proposed transfer of the land to the councils is regarded as a disposal for Capital Gains Tax purposes under section 104-10 of the ITAA97.

Conclusion

There are no specific provisions in the legislation to allow relief in your circumstances. Any capital gain or capital loss made by the entity on the proposed transfer of the land to the councils cannot be disregarded. Accordingly the capital gain would be assessable in the year the transaction occurs.