Edited version of your private ruling

Authorisation Number: 1012438675657

Ruling

Subject: Carrying on a business of property development

Questions and Answers:

1. Will the proposed subdivision of your business property be the carrying on of a business of property development and result in the property becoming trading stock and result in the happening of CGT Event K4?

Answer: No.

2. If you realise a capital gain as a result of CGT Event K4 because you commence to hold the property as trading stock, are you able to disregard that capital gain under Subdivision 152-B of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer: This question is not applicable because CGT Event K4 will not happen.

3. If: (a) you subdivide the property and sells the subdivided lots and (b) the sales of the subdivided lots are not completed within the period ending two years after you commence to hold the property as trading stock; will the Commissioner exercise the power under section 152-125(4) of the ITAA 1997 to extend the time limit under section 152-125(1)(b) to such time as you have sufficient net proceeds of sale of developed lots to enable you to make the payments to your shareholders?

Answer: This question is not applicable because CGT Event K4 will not happen.

This ruling applies for the following period

Year ending 30 June 2013

The scheme commences on

1 July 2012

Relevant facts and circumstances

You are a post-CGT company with two original post-CGT shareholders. Since your registration, over 15 years ago, you have owned post-CGT property used to carry on a business of primary production. There are X houses located on the property which are occupied by the shareholders

Your shareholders are now over 55 years old and you have entered into an agreement with a contractor (project manager) to subdivide your property into residential lots over a number of years.

When you first acquired the property, the shareholders were engaged in working in the business.

The turnover of the business conducted by you has always been less than $2 million. The Company has not yet prepared its financial reports for the financial year ended 30 June 20YY, but its total receipts for the year again were less than $2 million. The Company anticipates that its receipts, for the current financial year, from its business, again will be less than $2 million.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 70-10

Income Tax Assessment Act 1997 Section 104-220

Reasons for decision

Trading Stock

Section 70-10 of the ITAA 1997 states trading stock includes:

…anything produced, manufactured or acquired that is held for purposes of manufacture, sale or exchange in the ordinary course of a business; and live stock.

Taxation Determination TD 92/124 is about circumstances when land is treated as trading stock'. It states land is treated as trading stock for income tax purposes if:

§ it is held for the purpose of resale; and

§ a business activity which involves dealing in land has commenced.

TD 92/124 further explains:

Both the required purpose and the business activity must be present before land is treated as trading stock. The business activity is taken to have commenced when a taxpayer embarks on a definite and continuous cycle of operations designed to lead to the sale of the land. It is not necessary that the acquisition of land be repetitive. A single acquisition of land for the purpose of development, subdivision and sale by a business commenced for that purpose would lead to the land being treated as trading stock.

Carrying on a business of property development

Numerous cases have concerned the assessability of profits or proceeds from the sale of land. As a general principle, if the sale of land constitutes a business, or part of a business, then the proceeds will be assessable as ordinary income. On the other hand, if the sale is a mere realisation of the land, the proceeds will be a capital amount.

In the Full High Court case of Federal Commissioner of Taxation v. Whitfords Beach Pty. Ltd. 82 ATC 4031 (Whitfords Beach), it was decided the subdivision was done in the course of what was truly a business venture. Here, the taxpayer, in 1954, acquired 1,584 acres of land north of Perth. The land was acquired to secure for the original shareholders of the company access to shacks which they occupied on the beachfront and not for the purpose of profit-making by sale or for any business purpose. On 20th December 1967, all the shares in the taxpayer were bought by three companies which had not previously been shareholders. The three companies bought the shares only to obtain control of the land, and with the intention that the taxpayer would cause the land to be developed, subdivided and sold at a profit. Gibbs CJ concluded:

In the present case I gravely doubt whether the profits resulting from the development, subdivision and sale of the land would have been taxable if it had not been for the events that occurred on 20th December 1967. Had those events not occurred, the situation of the taxpayer would have been analogous to that of the company in Scottish Australian Mining Co. Ltd. v. F.C. of T. However, on 20th December 1967, the taxpayer was transformed from a company which held land for the domestic purposes of its shareholders to a company whose purpose was to engage in a commercial venture with a view to profit.

Not carrying on a business of property development

In the Federal Court case of Casimaty v Federal Commissioner of Taxation 97 ATC 5135 (Casimaty), the legal principles in relation to the subdivision of land were discussed at length. For the purpose of demonstrating of a mere realisation of a capital asset, i.e., not carrying on a business, the Federal Court in Casimaty cited many the legal cases, included those discussed hereafter.

In Hudson's Bay Co v Stevens (1909) 5 TC 424, the appellant, a company, owned large tracts of land in North America. It was held by the Court of Appeal that the proceeds were not profits or gains derived from carrying on a business of dealing in land and were not assessable to income tax, where Cozens- Hardy M.R. said:

The Company are doing no more than an ordinary landowner does who is minded to sell from time to time, as purchasers offer, portions suitable for building of an estate which has devolved upon him from his ancestors.

But if instead of dealing with his property as owner he embarks on a trade in which he uses that property for the purposes of his trade, then he becomes liable to pay, not on the excess of sale prices over purchase prices, but on the annual profits or gains arising from such trade, in ascertaining which those prices will no doubt come into consideration.

Again, a landowner may lay out part of his estate with roads and sewers and sell it in lots for building, but he does this as owner, not as a land speculator. This Company is not a Company incorporated under the Companies' Acts or the Companies' Clauses Act for the purpose of dealing in land, but it is a Corporation by Royal Charter and has, therefore, all the powers of an individual except so far as the Charter expressly limits them.

In C.H. Rand v The Alberni Land Co Ltd (1920) 7 TC 629, the respondent company was incorporated to acquire, manage and develop, with a view to ultimate sale, certain lands in British Columbia, which were held on trust for various persons interested therein as owners, joint owners or trustees. Shares were allotted to those beneficiaries but not by reference to the value of the lands acquired from them. Working capital was raised by the issue to ordinary shareholders and deferred shares were issued to other persons for services rendered in enhancing the value of the lands. It was held that the surplus arising from the sale of parts of the lands was not the profits of a trade or business and that the function of the company was merely to realize the capital value of the respective interests in the lands held on trust. The court observed:

Now the Company proceeded in a very enterprising way undoubtedly. It cleared the land and formed roads. It sold parts of it and kept some of the money and put it back into the land, and so on, and it gave a share in its capital to certain people who were instrumental in bringing a railway there. Undoubtedly it has done very well. Under those circumstances the Attorney-General and the Revenue contend that it has gone beyond the stage of merely realising the property, and has embarked upon a business in land, which it has not in the real sense bought, but in land which came to it. The Commissioners have held that that is not so, and I am not prepared to differ from the Commissioners. I very much doubt, after what Lord Justice Farwell said, whether it is not a question of fact, and only appealable in the sense of the question whether there is any evidence of it or not. It is a Case which is not very far from the line, but I think it is on the right side of the line. If this had been an individual he need not have had a company. He might have done all these things, and, if he had been a prudent or a public spirited man, he would have done all these things. If a land-owner, finding his property appreciating in value, sells part of it, and uses part of his money still further to develop the remaining parts, and so on, he is not carrying on a trade or business; he is only properly developing and realising his land.

In discussing Commissioner of Taxes v Melbourne Trust Limited [1914] AC 1001 (Melbourne Trust), where the scheme was regarded as assessable income, the Federal Court in Casimaty said Melbourne Trust was distinguished as not involving:

…a question of liquidating or realising the old assets.

In The Alabama Coal, Iron, Land and Colonization Co Ltd v Mylam (1936) 11 TC 232, it was said:

In order to see clearly that the Hudson's Bay Case does not apply, his Lordship suggested (ibid) that "there must be something in the nature of buying at any rate, and not merely selling, which is mere turning your property into money''.

In the High Court of Australia case Ruhamah Property Co Ltd v Federal Commissioner of Taxation (1928) 41 CLR 148, the property owner, desiring to make additional provision for his family, transferred the property to a company in which he and the members of his family held shares. The company collected the rents and profits from the land and paid for repairs to it. After the founder's death, it sold the property. In the joint judgment of four members of the High Court it was observed, at 154:

... we do not think that it follows either necessarily or at all that a sale in such circumstances is a business operation carrying out a scheme of profit-making. A man has capacity to sell his property, but he may be realizing it and changing his form of investment and not engaging in a profit- making scheme. So it is with a company with power to sell: it may be realizing its property and changing the form of investment and not engaging in any profit- making scheme. Much must depend upon whether the company has taken the property into its trade and traded in it: whether it conducted a trading concern as opposed to a mere realization (cf. Alabama Co.'s Case (1926) 11 Tax Cas., at pp. 253-255). The nature of the company, the character of its assets, the nature of the business carried on by it and the particular sale or realization are all relevant to the issue.

In the High Court of Australia case Scottish Australian Mining Co. Ltd. v. Federal Commissioner of Taxation (1950) 9 ATD 135; (1950) 81 CLR 188 (Scottish Australian Mining), a company, formed primarily to carry on the business of coal mining, purchased land for the purpose of its coal mining operations. After those operations ceased the company subdivided the land, built roads and a railway station, made sites available for schools, churches and parks, and sold the subdivided parcels at a considerable profit. It was held that the profits should not be included in the company's assessable income. It is important to observe that the company had carried on coal mining on the land until it was no longer business-like to do so, and that it was not a company formed for the purpose of dealing in land, and that it had not in fact engaged in such a business. (Excerpt from the judgement of Gibbs CJ in Whitfords Beach).

In the Supreme Court (Tasmania) case Roberts v Federal Commissioner of Taxation (1981) 12 ATR 191; (1981) 81 ATC 4421, the taxpayers had conducted market gardens on three or four separate parcels of land, including one of slightly over seven acres in Glenorchy ("the McGann land''). In response to a newspaper advertisement, they had offered, in 1969, to sell the McGann land to a building and development company but, when that offer was refused, they decided to subdivide the land themselves. The resultant sales of allotments took place between 1974 and 1976. The taxpayers gave evidence, which Green CJ accepted, that their decision to sell the McGann land had been prompted by the resignation of two employees who had each managed separate parts of the market gardening venture and for whom they had been unable to find satisfactory replacements. In upholding the taxpayers' appeal against their assessment to tax, his Honour, at 4425, took account of the following matters, each of which has a parallel in the circumstances of the taxpayer in Casimaty:

The appellants were market gardeners, the McGann land had in fact to the appellants' knowledge been successfully used as a market garden and they in fact did use it as such after purchase.

The appellants had never before been involved in the subdivision of land or the buying and selling of land for profit, but had been involved in the business of market gardening for many years.

Isolated commercial transactions

Taxation Ruling TR 92/3 is about whether profits on isolated transactions are income. Here, specifically in relation to the disposal of property, paragraph 49(g) states:

In very general terms, a transaction or operation has the character of a business operation or commercial transaction if the transaction or operation would constitute the carrying on of a business except that it does not occur as part of repetitious or recurring transactions or operations. Some factors which may be relevant in considering whether an isolated transaction amounts to a business operation or commercial transaction are…if the transaction involves the acquisition and disposal of property, the nature of that property (Edwards v. Bairstow ; Hobart Bridge 82 CLR at 383). For example, if the property has no use other than as the subject of trade, the conclusion that the property was acquired for the purpose of trade and, therefore, that the transaction was commercial in nature, would be readily drawn…

Application of law in your case

In your case, we consider your land will not be trading stock because we consider you will not be carrying on a business of property development. As shown, the body of case law about carrying on a business of property development is historically lengthy and large. Some relevant quotes from the body of case law, cited above, which are directly applicable to your situation, include:

· a question of liquidating or realising the old assets…

· a land-owner, finding his property appreciating in value, sells part of it, and uses part of his money still further to develop the remaining parts, and so on, he is not carrying on a trade or business; he is only properly developing and realising his land…

· there must be something in the nature of buying at any rate, and not merely selling…

· the company had carried on coal mining on the land until it was no longer business-like to do so, and that it was not a company formed for the purpose of dealing in land…

· the appellants were market gardeners, the…land had in fact to the appellants' knowledge been successfully used as a market garden and they in fact did use it as such after purchase.

· the appellants had never before been involved in the subdivision of land or the buying and selling of land for profit, but had been involved in the business of market gardening for many years.

The Commissioner's views in TD 92/124 and TR 92/3 accord with the body of law, in highlighting "the acquisition" of land for the purpose of development, subdivision and sale as a criterion for carrying on a business of property development or for a commercial transaction. Unlike the criterion in paragraph 49(g) of TR 92/3, your property had uses other than trade, i.e., for market gardening and private residential. Unlike the criterion in paragraph 49(g) of TR 92/3, your property was not acquired for the purpose of trade but, instead, acquired for the market gardening and private residential.

In summary, you have not acquired new land. Instead, as provided for in the legal cases cited above, your subdivision will simply be the mere realisation of old assets.

As for the scale and complexity of your proposed subdivision, this is not a salient factor. The subdivisions in the High Court cases of Scottish Australian Mining and Whitfords Beach were of large scale and complexity however, in those cases, these were not salient factors in the High Court decisions.

It follows your land will not be trading stock because you will not be carrying on a business. Thus, CGT Event K4 will not happen in your case.