Edited version of your written advice

Authorisation Number: 1012697021655

Ruling

Subject: Subdivision, construction and sale of one duplex due to job loss

Question

Can your proceeds from the sale of one duplex be assessed on capital account?

Answer:

Yes

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Over the last decade, you held an investment property and also paid down most of the mortgage on your main residence.

Last year, you decided to demolish your main residence and build two duplexes, for which you borrowed a substantial sum for financing.

You stated your intention was for you and your aging parent to live in each duplex. Prior to this, your aging parent lived with you, in your main residence, due to their need for care.

During the construction of the two duplexes, you lost the fulltime job you held for many years.

You contend, as a result of your job loss, you were forced to sell one of the duplexes when its construction was complete.

You submitted various financial and bank loan statements showing your financial earnings and commitments over the past years.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 10-5

Income Tax Assessment Act 1997 Section 102-5

Reasons for decision

In general, the sale of investment property is treated on capital account for taxation purposes, under sections 10-5 and 102-5 of the Income Tax Assessment Act 1997 (ITAA 1997).

The sale of property can also be treated on revenue account as ordinary income, under section 6-5 of the ITAA 1997, as a result of an isolated commercial transaction entered into by a non-business taxpayer, which is the commercial exploitation of an asset acquired for a profit making purpose.

Taxation Ruling TR 92/3 is about whether profits on isolated transactions are of a commercial nature that fall on revenue account. Factors that TR 92/3 considers to be relevant in deciding whether an isolated transaction amounts to a commercial transaction include:

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.

…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…

…the amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained;

Important, paragraph 7 of TR 92/3 states:

The relevant intention or purpose of the taxpayer (of making a profit or gain) is not the subjective intention or purpose of the taxpayer. Rather, it is the taxpayer's intention or purpose discerned from an objective consideration of the facts and circumstances of the case.

In the Federal Court of Australia case of Casimaty v Federal Commissioner of Taxation 97 ATC 5135,

Ryan J discussed the matter of financing a commercial property transaction, including referring to Turner v Last (HM Inspector of Taxes) (1965) 42 TC 517, where the financial inability to hold the land indefinitely lead to the determination the land was purchased for development rather than for investment.

In your case, we are satisfied you had the financial ability to meet the repayments on your loan, even if only for its initial interest only period, when considering you met monthly interest payments on your investment property and also paid down most of your main residence mortgage over the last decade.

Being satisfied with this objective criterion, and consideration of the information provided, the Commissioner rules your sale of one duplex can be assessed on capital account.