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Edited version of your private ruling
Authorisation Number: 1012445411252
Ruling
Subject: Derivation of income from pre-sale contracts
Question 1
Can the income received on settlement of a property during a financial year, be included as assessable income in a different financial year as the property was ready for settlement in that year?
Answer
No.
Question 2
Is the income received on settlement of the property assessable in the year of receipt?
Answer
Yes.
This ruling applies for the following periods:
Year ended 30 June 2012
Year ended 30 June 2013
The scheme commences on:
1 July 2011
Relevant facts and circumstances
You purchased a block of land with the intention of sub dividing and selling.
You sold the property off the plan.
The building contracts you entered into state that once a 'certificate of compliance' is issued settlement can immediately take place.
Settlement for the property was due in financial year A, however it was stalled by the purchaser until financial year B, as in their view the property needed some minor painting or cosmetic touch ups.
You believe the property was extremely well presented and was ready for handover/settlement in financial year A.
The building contract included clauses forbidding the purchaser from delaying payment of the settlement money. Because of their delays they were forced to pay you penalty interest.
As a result of the delays you have made more assessable income than expected in financial year B.
Relevant legislative provisions
Income Tax Assessment Act 1997 Subsection 6-5(2)
Income Tax Assessment Act 1997 Subsection 70-80(1)
Reasons for decision
Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes ordinary income derived directly or indirectly from all sources during the income year.
Subsection 70-80(1) of the ITAA 1997 provides that the proceeds from the disposal of trading stock are to be included in assessable income as ordinary income.
The issue of land being treated as trading stock is dealt with in TD 92/124. The determination states as follows:
Land is treated as trading stock for income tax purposes if:
a. it is acquired for the purpose of resale, and
b. a business activity which involves dealing in land has commenced.
1. 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.
2. 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.
You are a builder who purchased a block of land for the purpose of subdivision and resale. Accordingly, under the guidelines set out in TD 92/124, land held for the purpose of resale is to be treated as trading stock.
In Gasparin v. Commissioner of Taxation (1994) 50 FCR 73; 94 ATC 4280; (1994) 28 ATR 130 (Gasparin ), the Full Federal Court held that income from the sale of allotments of land, which formed the taxpayer's trading stock, was not derived when the contracts for sale became unconditional. Rather, the income was derived once settlement occurred.
In Gasparin, the court determined the following:
§ the trading stock was real property and the allotments remained registered in the name of the vendors until settlement
§ until settlement the vendors had not lost dispositive power and had not ceased to have proprietary interest in the land
§ the allotments remained trading stock on hand until each transaction proceeded to the point where a debt accrued due from the purchaser, and
§ it was only when all contingencies and uncertainties are satisfied that a debt, being a sum certain, accrued due to the taxpayer and it was at that point that income was derived for the purpose of levying taxation (that is, at settlement).
Your case is similar to that of Gasparin. The property remains your trading stock and registered in your name until settlement, and until that time you do not loose dispositive power and do not cease to have proprietary interest in the land. Only on settlement would you derive the income from the sale of the property.
Although the property was ready for settlement in financial year A, the contract for the property was fully settled during financial year B. Therefore the income from the sale of the property is assessable in financial year B.
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