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Edited version of your private ruling
Authorisation Number: 1012463170792
Ruling
Subject: Trading stock
Question 1
Will the proceeds from the compulsory acquisition of the properties be assessable as ordinary income?
Answer
Yes.
Question 2
Will the proceeds from the compulsory acquisition of the properties be assessable as a capital gain?
Answer
No.
Question 3
Is the replacement asset roll-over provided for in subdivision 124-B of the ITAA 1997 available on compensation paid in relation to the compulsory acquisition of the properties?
Answer
No.
This ruling applies for the following period:
Year ended 30 June 2012
The scheme commences on:
1 July 2011
Relevant facts and circumstances
This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.
The company has operated as a property developer.
The company has developed and sold in excess of X properties.
Profit from the activity has always been returned as ordinary income.
Usually the company turns over developments within a maximum of Y years. It acquires properties with which it can subdivide the land, build residential houses, units or townhouses and sell them as quickly as possible.
There was no lease in place when the properties were purchased but they were rented immediately after purchase. They have been available for rent for the entire ownership period.
While no physical works had commenced, approval had been obtained from council to construct units on the properties. The development was scheduled to commence in early 20ZZ.
The State Government compulsorily acquired the properties in late 20ZZ.
The company was first notified about the compulsory acquisition in 20YY.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 6-5.
Income Tax Assessment Act 1997 Section 70-10.
Income Tax Assessment Act 1997 Section 118-25.
Income Tax Assessment Act 1997 Part 3-1.
Reasons for decision
Summary
The properties are trading stock. Therefore, proceeds received from the sale are ordinary income.
Detailed reasoning
The disposal of real estate property may fall under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) as ordinary income, or Part 3-1 of the ITAA 1997 as capital gains, or both.
In order to determine the nature of a receipt, it is necessary to identify the nature and scope of the taxpayer's business, and the intention or purpose of the taxpayer in entering into the transaction.
Profits derived in the ordinary course of the taxpayer's business are ordinary income.
Property developers are in the business of buying, selling and developing properties. Activities of development vary from minor internal renovation to demolition, subdivision and construction.
Property investors purchase a property and hold it for the purpose of long-term investment to derive future rental income. They may develop and enhance the value of the properties but they do not dispose of the properties on completion of construction. They are subject to CGT for disposal of the properties because the properties are their capital assets to derive future income. Only rent or lease income received is assessable income under section 6-5 of the ITAA 1997.
The term trading stock is defined in section 70-10 of the ITAA 1997 as including anything produced, manufactured or acquired that is held for the purposes of manufacture, sale or exchange in the ordinary course of business.
Land is treated as trading stock for income tax purposes if:
· it is held for the purpose of resale
· a business activity which involves dealing in land has commenced.
A business of land development 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 (Tax Determination TD 92/124).
You are engaged in a business activity that consists of developing properties and selling them. You have developed and sold in excess of X properties since you commenced your property development business. The facts in this case do not indicate that you are a property investor or hold properties for long-term investment. Therefore the properties are considered to be trading stock. The income from the compulsory acquisition is assessable as ordinary income under section 6-5 of the ITAA 1997.
Under section 118-25 of the ITAA 1997 a capital gain or capital loss you make from a CGT asset is disregarded if at the time of the CGT event the asset is your trading stock. Accordingly any gain you make will not be assessed under the CGT provisions and you have not made a gain against which to apply the rollover concessions contained in subdivision 124-B of the ITAA 1997.