Edited version of your private ruling

Authorisation Number: 1012539076736

Ruling

Subject: Property development

Question 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.

Question 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 the 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.

Question 3

If (a) you subdivide the property and sell 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 subsection 152-125(4) of the ITAA 1997 to extend the time limit under paragraph 152-125(1)(b) of the ITAA 1997 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 issued ordinary shares.

You acquired a property. There are two houses on the property which are occupied by your shareholders

You have conducted a business on the property for the entire period that you have owned the property. You are still conducting this business on the property during the early preliminary stages of developing the property. However, you are winding down this business and will cease to conduct this business altogether as the work involved in developing the property becomes more intensive. This business is not related to property development.

One of your shareholders is no longer able to work in the business due to a medical condition.

One of your shareholders had for a number of years been monitoring the state of land development in the area. They had been doing this through discussions with other land owners, local real estate agents and people involved in the business of developing property. As a result of this, you had a reasonable feel for the state of property development in the area, and the possible profits that could be generated from the property.

You entered into an arrangement with a property development company that had the necessary experience in developing property to assist you in developing the property.

You had an ongoing involvement in the development of the land.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 70-10

Income Tax Assessment Act 1997 Section 104-220

Income Tax Assessment Act 1997 Section 995-1

Reasons for decision

Question 1

CGT event K4 under section 104-220 of the ITAA 1997 happens if:

(a) you start holding as trading stock a CGT asset you already own but do not hold as trading stock; and

(b) you elect under paragraph 70-30(1)(a) of the ITAA 1997 to be treated as having sold the asset for its market value.

Section 70-10 of the ITAA 1997 provides that 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.

Section 995-1 of the ITAA 1997 defines 'business' as 'including any profession, trade, employment, vocation or calling, but not occupation as an employee'.

Taxation Determination TD 92/124 discusses in what circumstances land will be treated as 'trading stock' in relation to property development. TD 92/124 states:

1. 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.

2. Both the required purpose and the business activity must be present before the 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.

3. 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.

The question of whether a business is being carried on is a question of fact and degree. The courts have developed a series of indicators that are applied to determine the matter on the particular facts.

Taxation Ruling TR 97/11 provides the Commissioner's view of the factors used to determine if you are in business for tax purposes. In the Commissioner's view, the factors that are considered important in determining the question of business activity are:

· whether the activity has a significant commercial purpose or 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 regularity and repetition of the activity

· whether the activity is of the same kind and carried on in a similar manner to that of 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 sporting activity.

No one factor is decisive. The indicators must be considered in combination and as a whole. Whether a 'business' is carried on depends on the large or general impression.

The Full High Court in Federal Commissioner of Taxation v. St Hubert's Island Pty Ltd (in liq) (1978) 138 CLR 210; 78 ATC 4104; (1978) 8 ATR 452 (St Hubert's Island) considered whether the taxpayer was carrying on a business when determining whether land was trading stock of the taxpayer. Jacobs J stated that:

Even though the concept of trading involves repeated acts of selling a person will in ordinary language be described as trading if, having purchased a commodity in bulk for the purpose of resale he then proceeds to sell it on the occasions where and in the quantities for which there is a market. Such trading is not common but it is not unknown. A form of trade well known in the past was to charter a ship, load it with a cargo consisting of some commodity for which there was a market across the seas and carry that commodity to the various places where a market for that commodity could be expected to be found. The person who did that could properly be described as a trader and the cargo was his trading stock. It was not necessary, before he and his cargo could be so described, that he repeat or intend to repeat the venture. The one venture was a single trading operation. And that, it seems to me, is the position here. Once it is recognised that land may be trading stock then an acquisition of land for the purposes of resale, after development approval and subdivision, in subdivided lots, and a continued activity in fulfilment of that intention brought into existence a trading operation.

In FC of T v. The Myer Emporium Ltd (1987) 163 CLR 199; 87 ATC 4363; 18 ATR 693 (Myer), the Full High Court stated:

It is one thing if the decision to sell an asset is taken after its acquisition, there having been no intention or purpose at the time of acquisition of acquiring for the purpose of profit-making by sale. Then, if the asset be not a revenue asset on other grounds, the profit made is capital because it proceeds from a mere realisation. But it is quite another thing if the decision to sell is taken by way of implementation of an intention or purpose, existing at the time of acquisition, of profit-making by sale, at least in the context of carrying on a business or carrying out a business operation or commercial transaction.

Profits on the sale of subdivided land can be income according to ordinary concepts if the taxpayer's subdivisional activities have become a separate business operation or commercial transaction. Casimaty v. FC of T 97 ATC 5135; (1997) 37 ATR 358 (Casimaty) and McCorkell v. FC of T 98 ATC 2199; (1998) 39 ATR 1112 (McCorkell) demonstrate that in circumstances where there is an absence of profit making intention when farming land is acquired, the likelihood of any profit made on the eventual sale of land being income according to ordinary concepts is greatly diminished.

In Federal Commissioner of Taxation v. Whitfords Beach Pty Ltd [1982] HCA 8; (1982) 150 CLR 355; 82 ATC 4031; (1982) 12 ATR 692, the taxpayer company purchased land in 1954 for the purpose of the shareholders having access to shacks on a beachfront and not for the purpose of profit-making by sale or any business purpose. In 1967, the shareholders sold their shares to three companies who had the intention that the taxpayer would cause the land to be developed, subdivided and sold at a profit. Gibbs CJ, in deciding what the intention or purpose of the taxpayer company was, stated that:

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 20^th 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 20^th 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.

Gibbs CJ concluded:

The purpose of those controlling the taxpayer was to engage in a business venture with a view to profit. Moreover, although the taxpayer was not formed for the purpose of selling land, after December 1967 it became a company which existed solely for the purpose of carrying out the business operation on which the new shareholders had decided to embark when they acquired their shares. It is in the light of these circumstances that the extensive work of development and subdivision is seen to be more than the mere realization of an existing asset and to be work done in the course of what was truly a business venture. For these reasons, although the case is not without its difficulties, I have concluded that the profits were income within ordinary concepts and taxable accordingly.

In Stevenson v FC of T 91 ATC 4476 (Stevenson), the taxpayer, who owned and worked a family farm, decided to sell most of the land. After failing to find an interested developer, the taxpayer himself commenced subdivision of the land. The taxpayer was the sole decision-maker in respect of all matters of consequence in relation to the subdivision, although professional advice was obtained. The taxpayer organised the finance and marketing aspects of the development. The Administrative Appeals Tribunal found that the taxpayer had committed the land to a business. In distinguishing between a mere realisation and carrying on a business, it was relevant that the taxpayer undertook the planning and management of the activities.

In Casimaty, the proceeds were held not to be income according to ordinary concepts, but rather constituted the mere realisation of a capital asset, carried out in an enterprising way so as to secure the best price.

Taxation Ruling TR 92/3 discusses whether profits on isolated transactions are income. Paragraph 49(g) of TR 92/3 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 of the 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 not 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…

Applying the above to your circumstances

The overall impression in this case is that you are not carrying on a business as a property developer. You are simply entering into a management agreement with a property developer for the management of the development of your property. Apart from this agreement and development, you are not currently involved in any land developments, although we accept that you are actively involved in the current development.

You have also not previously been involved in any land developments and there is no indication that you intend to carry out any further land development in the future. These facts indicate that you have no intention to engage in business. There is a lack of regularity and repetition of the activity as there is no trading pattern of buying, developing and selling land, and the development of the property appears to be as a result of one of the shareholders being unable to work in the market garden business for medical reasons and the winding down of this business.

Additionally, the decisions in St Hubert's Island, Myer, Casimaty and McCorkell confirm that one of the factors to be considered in determining whether a business of property development is carried on is whether the land was acquired for the purposes of resale. In your case, you did not acquire the land for the purpose of resale. There is no indication in this case that you will be undertaking any activities beyond the subdivision of the land such as constructing buildings, and the development of the land is simply a realisation of an existing asset held by you. The property also had uses other than as the subject of trade as discussed above in Taxation Ruling TR 92/3, that is, for business purposes and for private residential purposes.

Your circumstances can be distinguished from those in Stevenson as you are not carrying out the development activities yourself and you are not the sole decision maker in respect of all matters of consequence in relation to the development even though you are involved in the development activities.

Conclusion

As you are not carrying on a business in relation to the subdivision and development, the property will not be trading stock in your hands under section 70-10 of the ITAA 1997 and CGT event K4 under section 104-220 of the ITAA 1997 will not happen in this case.

Questions 2 and 3

These questions are not applicable because CGT event K4 will not happen.