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Edited version of your written advice
Authorisation Number: 1012814291939
Ruling
Subject: Capital gains tax
Question 1
Will the sale of land be a mere realisation of a pre-capital gains tax (CGT) asset and accordingly be exempt from CGT?
Answer
Yes.
This ruling applies for the following periods:
Year ending 30 June 2015.
The scheme commences on:
1 July 2014.
Relevant facts and circumstances
You acquired land prior to 20 September 1985 for the purpose of building a house and commencing business operations.
A house and business structures were constructed within two to three years of acquiring the land.
The land has been continuously been held by you, however the business has been carried out by ABC Pty Ltd as trustee for the ABC Family Trust. No formal lease has been executed and regular rental has never been paid.
The business continued for 40 years until one aspect of operations was discontinued due to urbanisation of the neighbouring properties making it difficult to operate. There was also a need to upgrade business infrastructure which, given the environmental circumstances, could not be justified.
The land continues to be used for other aspects of the original business.
In 200X adjacent land was being rezoned to facilitate urbanisation. Increased urbanisation would make it more and more difficult to operate the business in the area. You decided to dispose of the land.
Your preference has always been to sell the land as one lot.
From 200X - 20XX you engaged various town planners and consultants to:
• investigate how best to sell the land
• submit rezoning applications
• carry out studies and reports for flooding and other environmental factors for you and other surrounding land owners
• submit applications for subdivision
• provide costings of carrying out subdivision process
You continued carrying on the business, whilst still looking for ways to realise the value of the land.
Having considered the costs and difficulties in subdivision, you decided to keep to your original intentions and sell the land as one lot.
Throughout, you have not completed any physical work on the land other than the construction of your residence and structures required for your business operations.
No contractors have been engaged to undertake any redevelopment and no agents have been engaged to sell the land.
You are in negotiations with two entities to sell the land as tenants in common.
You intend to sell to XYZ Pty Ltd - a company controlled by your child, and to 123 Pty Ltd- a large, well-established developer on a X% and Y% basis respectively.
After settlement, the companies will partition the property so that each company will acquire their own share on a separate land title.
You will have no involvement in the operation of your relative's company, XYZ Pty Ltd.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 6-5.
Income Tax Assessment Act 1997 section 102-20.
Reasons for decision
We need to determine whether the proceeds from the sale of the land are:
• assessable ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) as you were carrying on a business of property development
• assessable ordinary income under section 6-5 of the ITAA 1997 as you conducted an isolated commercial transaction with a view to a profit, or
• a realisation of a capital asset and assessable under the CGT provisions of the ITAA 1997.
Carrying on a business of property development
Based on the information provided, we do not considered that any proceeds received from the sale of the land would be derived in the course of carrying on a business.
Profits from an isolated transaction
Profits arising from an isolated business or commercial transactions will be ordinary income if the taxpayer's purpose or intention in entering into the transaction is to make a profit, even though the transaction may not be part of the ordinary activities of the taxpayer's business (FC of T v. Myer Emporium Ltd 1987 163 CLR 199; 87 ATC 4363; 18 ATR 693) (Myer Emporium).
Taxation Ruling TR 92/3 considers the principles outlined in the Myer Emporium case and provides guidance in determining whether profits from isolated transactions are assessable under section 6-5 of the ITAA 1997 as ordinary income.
Having regards to your circumstances and the factors outlined in TR 92/3, we do not consider that the proceeds from the sale of the land will be assessable under section 6-5 of the ITAA 1997. We consider that the disposal of the property will be a mere realisation of a capital asset.
Section 102-20 of the ITAA 1997 provides that a capital loss or gain is made as a result of a capital gains tax (CGT) event. The most common event is CGT event A1 which happens when a person disposes of a CGT asset to another entity. CGT assets include real estate acquired on or after 20 September 1985.
You acquired your land prior to 20 September 1985, it is therefore considered a pre-CGT asset and accordingly exempt from CGT.