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Edited version of private advice
Authorisation Number: 1012624186772
Ruling
Subject: Property development and sale
Question 1
Will the sale of the property be assessable as a profit making undertaking or plan?
Answer
No.
Question 2
Will the sale of the property be assessable as a capital gain?
Answer
Yes.
This ruling applies for the following periods:
Year ended 30 June 2015
The scheme commences on:
1 July 2014
Relevant facts and circumstances
You have owned a residential rental property for over ten years.
The property has been a residential rental property from the date of ownership.
The property has never been your main residence.
You are considering demolishing the house and constructing two freestanding houses or a dual occupancy duplex on the same block of land.
If you proceed, you intend to sell one of the newly constructed houses to a relative and retain the other house. The house that is retained will be rented.
The house that will be sold to your relative will be sold at cost.
You have not been involved in any type of development previously.
You have no history of property development.
You have not acquired the land with the intention to develop or subdivide and sell.
You do not intend to sell the new house at a profit.
You have undertaken this development with the intention of creating a property to sell to your relative.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 6-5
Income Tax Assessment Act 1997 Section 15-15
Income Tax Assessment Act 1997 Section 108-5
Reasons for decision
Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that assessable income includes income according to ordinary concepts. Typical examples of ordinary income include salary and wages, proceeds from carrying on a business, rent, interest and dividends. Profits from the sale of a capital asset are generally not income, although they may be assessable as statutory income under the capital gains provisions.
Section 15-15 ITAA 1997 provides that your assessable income also includes profit arising from the carrying on, or carrying out, of a profit-making undertaking or plan. Subsection 15-15(2) goes on to say that this section does not apply to a profit that is assessable as ordinary income under section 6-5 or arises in respect of the sale of property acquired on or after 20 September 1985.
Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income (TR 92/3) deals with determining whether profits on isolated transactions are income. According to TR 92/3, a profit from an isolated transaction is generally income if the intention or purpose of the taxpayer in entering into the transaction was to make a profit or gain; and the transaction was entered into, and the profit was made, in the course of carrying on a business or in carrying out a business operation or commercial transaction.
In your case, you do not intend to sell the new house at a profit, you did not acquire the land with the intention to develop or subdivide and sell, you have no history of property development and you intend on undertaking this development with the intention of creating a property to sell to your relative. Therefore, it is considered that the profit which is derived from the development and subsequent sale of the land is not assessable as ordinary income. Further, we do not consider that the profits that will be derived are as a result of a profit making undertaking. Therefore, the profits are not assessable under section 15-15 of the ITAA 1997.
Capital gains tax (CGT)
Land, or an interest in land, is a CGT asset under section 108-5 of the ITAA 1997. The sale of the land is a disposal which gives rise to CGT event A1. You dispose of a CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law.
In your case, you intend to sell part of the land to your relative. The sale of the land will trigger a CGT event as you are disposing of a CGT asset and a change in ownership will occur. Therefore the CGT provisions will apply to the sale of a portion of your land.
Note
As you are selling part of your property to a related party at cost price, the value of the property sold will be the market value for CGT purposes.