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Edited version of your written advice
Authorisation Number: 1012849891147
Date of advice: 29 July 2015
Ruling
Subject: Property development
Question 1
Are you carrying on a business of property development?
Answer
Yes.
Question 2
Is the property held by the company trading stock?
Answer
Yes.
Question 3
Should income from the disposal of property be declared by the company when it is received at settlement?
Answer
Yes.
This ruling applies for the following period
Year ended 30 June 2014
Year ended 30 June 2015
The scheme commences on
1 July 2013
Relevant facts and circumstances
The company was incorporated in 20XX.
The purpose of the incorporation was to enable the company to purchase residential and commercial real estate and construct commercial and residential buildings for resale.
The company purchased vacant freehold residential property and constructed a number of townhouse dwellings.
The dwellings were sold on completion. The dwellings were not tenanted prior to sale.
The company purchased commercial property and obtained a planning permit for construction of retail premises.
An application to subdivide the retail property was lodged and granted.
The company purchased adjoining commercial property which was sold soon after.
The company sold the adjoining retail premises in the 20YY-ZZ financial year.
The company is now actively pursuing development opportunities with the proceeds of the prior year's development profits.
Relevant legislative provisions
Income Tax Assessment Act 1997 subsection 70-10
Income Tax Assessment Act 1997 section 995-1
Reasons for decision
Trading stock
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.
Land is treated as trading stock, for income tax purposes, if it is held for the purpose of resale and a business activity which involved dealing in land has commenced.
Carrying on 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'.
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 described as 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 indicator must be considered in combination and as a whole. Whether a 'business' is carried on depends on the large or general impression.
Having regards to your circumstances and the factors outlined above, we consider the company is carrying on a property development business. Therefore, the property will be treated as trading stock as it is held for the purpose of resale and the company is conducting a business activity.
Income - timing
Taxation Ruling TR 97/15 at paragraph 23 states that:
It is an accepted principle of income tax law that the method under which a taxpayer accounts for its business or income producing activities for the purposes of income tax must 'give a substantially correct reflex of the taxpayer's true income'
In Gasparin v. Federal Commissioner of Taxation (1994) 50 FCR 73 71 ATC 4157; (1971) 2 ATR 497 (the Gasparin Case) the taxpayer argued that income from the sale of allotments of land was not derived until settlement. It was found that until settlement; the vendor has not done all that is required in order to derive the payments in respect of the sale of the properties. As such, the vendor does not earn the income from the sale until settlement.
In this case, the company is required to declare income from the sale of property when it is received at settlement.