Edited version of private advice

Authorisation Number: 1012623102254

Ruling

Subject: property development

Question 1

Does the property development constitute an isolated transaction in the 20XX financial year?

Answer

Yes

Question 2

Should the net proceeds from the sale of units be declared in the year of sale?

Answer

Yes

This ruling applies for the following periods:

Year ended 30 June 2013

Year ending 30 June 2014

The scheme commenced on

1 July 2012

Relevant facts

You purchased a block of land.

The sole purpose of the purchase was to subdivide the land, build units and sell the completed units to generate a profit.

You have registered for, and remitted GST.

You planned to subdivide the block but due to technical difficulties you could only apply for a small amount of units.

You secured an off-the-plan sale of one unit before construction commenced.

For this sale, progress payments were received as construction occurred.

You were related to the purchasers of one unit. When progress payments were required by the builder you paid the invoice out of your account and were immediately reimbursed by your relations. However, when the final payment was required you paid the full amount, in order for your relations to take possession of the unit. You however, allowed your relations to make progress payments to you until the full amount was paid back. Your relations possession of the unit in the 20XX financial year but you weren't reimbursed for the full amount until the 20XX financial year.

Another unit was constructed in the 20XX financial year and a sale contract was secured and settled in the 20XX financial year.

This is your first attempt at property development and you do not have any plans to do further developments.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 8-1

Reasons for decision

Question 1

Taxation Ruling TR 92/4, discusses losses on isolated transactions, and in part provides that the term "isolated transaction" means those transactions entered into by non-business taxpayers.

A loss from an isolated transaction is generally deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997), if:

(a) in entering into the transaction the taxpayer intended or expected to derive a profit which would have been assessable income; and

(b) the transaction was entered into, and the loss was made, in the course of carrying on a business or in carrying out a business operation or commercial transaction.

Taxation Ruling TR 92/3 discusses profits on isolated transactions. TR 92/3 explains that to be an isolated transaction the taxpayer must have the requisite purpose at the time of entering into the relevant transaction or operation. If a transaction or operation involves the sale of property, it is usually, but not always, necessary that the taxpayer has the purpose of profit-making at the time of acquiring the property.

Paragraph 49(g) of TR 92/3 further explains, if the transaction involves the acquisition and disposal of property, 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.

In your case, we consider you purchased the land for the purpose of development and resale to make a profit. It is also considered that the operation has the character of a commercial transaction and not that of a business of development as this is a one-off activity. Therefore it is considered that this is an isolated transaction and not a business.

Any profit made from an isolated transaction is assessable income under section 6-5 of the ITAA 1997 and any losses made are deductible under section 8-1 of the ITAA 1997.

Question 2

There are three ways a profit or loss from property sales can be treated for taxation purposes:

(1) As ordinary income under section 6-5 of the ITAA 1997, on revenue account, as a result of carrying on a business of property development. Here, the property is trading stock.

(2) As ordinary income under section 6-5 of the ITAA 1997, on revenue account, as a result of an isolated commercial transaction. Here, the property sold is not trading stock.

(3) As statutory income under the CGT legislation, (sections 10-5 and 102-5 of the ITAA 1997), on the basis that a mere realisation of a capital asset has occurred.

Section 6-5 of the ITAA 1997 states your assessable income includes income according to ordinary concepts, which is called ordinary income.

In working out whether you have derived an amount of ordinary income, and (if so) when you derived it, you are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf or as you direct.

In application to your case as outlined above it is considered that this is an isolated commercial transaction and is therefore not trading stock.

The purchasers of one unit took possession of the unit in the 20XX financial year. The builders were paid the full amount for their work by you before the purchasers took possession. As you were related to the purchasers you put in place a private arrangement whereby they paid you the remainder of the outstanding sale amount. The contract for sale of the unit did not settle until the 20XX financial year. For all intents and purposes you received the full sale amount when the purchasers took possession of the unit in the 20XX financial year. The issue of the final payment, made between the purchasers and you, was a private arrangement and does not affect when you derived the income from the sale of the unit. You therefore derived the income from the sale in the 20XX financial year and it must be declared as income in that year.

As an isolated transaction is generally reported by way of declaring net gains or deducting net losses, the sale of the property was settled in 20XX, therefore you derived the net proceeds of the sale in the 20XX financial year and any net gain must be declared as income in that year.