Edited version of your written advice

Authorisation Number: 1012908498366

Date of advice: 9 November 2015

Ruling

Subject: Income v Capital

Question 1

Is the profit made by the sale of land ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 2

Is the profit made by the sale of land trading stock under Division 70 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 3

Is the profit made by the sale of land assessable under section 15 - 15 of Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 4

Is the land sold a 'mere realisation' of capital under part 3-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

This ruling applies for the following period:

1 July 2014 - 30 June 2015

The scheme commences on:

1 July 2014

Relevant facts and circumstances

The Club is registered as an Australian public company limited by guarantee, with its income (and corresponding expenses) being subject to the principle of mutuality.

The Club's constitution prevents it from making any distribution to its members and the income of property is solely applied towards the promotion of its objects as set out in the constitution of the Club.

The Club was the registered proprietor of the property sold.

The Land was acquired prior to the introduction of capital gains tax (CGT).

The Land was leased to another company for the last XX years.

The Club commissioned a company to undertake a preliminary site contamination assessment (PSCA) of the Land. At no time was it contemplated that the club would be undertaking the development on the site.

The Club appointed consultants to undertake a feasibility study in relation to the Land and its best possible use in order to optimise the likely sale price of the Land.

Development consent was received from the council for the construction of dwellings on the land.

The Club did not approach any builders or developers enter into any negotiations with builders or developers in respect of a joint venture to develop the site, nor did they approach any bank or financier to discuss financing a development on the site.

The club entered into a contract for, the sale of the land in 20XX.

Relevant legislative provisions

Section 70-10 - Income Tax Assessment Act 1997

Section 6-5 - Income Tax Assessment Act 1997

Section 15 - 15 Income Tax Assessment Act 1997

Section 995-1 Income tax assessment Act 1997

Reasons for decision

Question 1

Is the profit made by the sale of land ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Detailed reasoning

Section 6-5 of the ITAA 1997 provides that assessable income includes income according to ordinary concepts.

Taxation Ruling TR 92/3 - Income tax: whether profits on isolated transactions are income at paragraph 16 states that if a taxpayer not carrying on a business makes a profit, that profit is income if:

(a) the intention or purpose of the taxpayer in entering into the profit-making transaction or operation was to make a profit or gain, and

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

Profits from isolated transactions can be income according to ordinary concepts, or a profit making undertaking or plan, if your activities become a separate business operation or commercial transaction. In determining whether a transaction amounts to a business operation or commercial transaction, the Commissioner's guidelines are set out in TR 92/3.

Isolated transaction refers to:

(a) those transactions outside the ordinary course of business of the taxpayer carrying on a business, and

(b) those transactions entered into by non-business taxpayers.

In determining whether an isolated transaction amounts to a business operation or commercial transaction we refer to paragraph 13 of TR 92/3 which outlines a number of factors which must be considered including:

(a) the nature of the entity undertaking the operation or transaction

(b) the nature and scale of other activities undertaken by the taxpayer 

(c) the amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained

(d) the nature, scale and complexity of the operation or transaction

(e) the manner in which the operation or transaction was entered into or carried out

(f) the nature of any connection between the relevant taxpayer and any other party to the operation or transaction

(g) if the transaction involves the acquisition and disposal of property, the nature of that property, and

(h) the timing of the transaction or the various steps in the transaction. 

Conclusion

The property was purchased prior to capital gains tax and has been leased to another organisation for the last XX years. It was appropriate to consider a plan which included the sale of the land. The original intention was not to make a profit on the sale of the land. The Club is not considered to be carrying on a business of a developer or carrying out a business operation or commercial transaction. Therefore the income will not be assessable as ordinary income under section 6-5 of the ITAA 1997.

Question 2

Is the profit made by the sale of land trading stock under Division 70 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Detailed reasoning

Under section 70-10 of the ITAA 1997, trading stock is defined as including anything produced, manufactured or acquired that is held for purposes of manufacture, sale or exchange in the ordinary course of a business.

Taxation Determination TD 92/124 - Income tax: property development: in what circumstances is land treated as 'trading stock'? provides that land is treated as trading stock for income tax purposes if:

• it is acquired for the purpose of resale; and

• a business activity which involves dealing in land has commenced.

Both the required purpose and the business activity must be present before land is treated as trading stock. The business activity is taken to have commenced when a taxpayer embarks on a definite and continuous cycle of operation designed to lead to the sale of the land. There must be present the continuity of activity which characterises a business.

Conclusion

As the sale of the land by The Club will not constitute a business venture, the land will not be trading stock.

Question 3

Is the profit made by the sale of land assessable under section 15 - 15 of Income Tax Assessment Act 1997 (ITAA 1997)?

Detailed reasoning

Section 15-15 of the ITAA 1997 includes in assessable income all profit from the carrying on or carrying out of a profit-making undertaking or plan.

Case law has concluded that the mere realisation of a capital asset which was not acquired for the purpose of profit making by sale does not constitute a profit-making undertaking or scheme within the meaning of section 15-15(ITAA 1997), even though the realisation is effected in the most advantageous manner: Scottish Australian Mining Co Ltd v FC of T (1950) 81 CLR 188; White v FC of T (1968) 120 CLR 191; McClelland v FC of T 70 ATC 4115; FC of T v NF Williams 72 ATC 4188; (1972) 127 CLR 226; Steinberg; FC of T v Whitfords Beach Pty Ltd 82 ATC 4031. 

In Stratham v FCT (1988) 20 ATR 228, the Full Federal Court confirmed this approach. The court held that the subdivision in question was only a mere realisation and not a profit-making undertaking or scheme. Some of the factors considered were: 

• The subdivision and development occurred over a long period of time;

• The work proceeded methodically over this extended period, and

• The size of the subdivision was not sufficient to indicate a business venture or profit-making scheme.

Conclusion

In your case, the action to rezone and obtain development consent as well as selling the land lacks the features of a profit-making plan or carrying on a business. The land was acquired many years ago and not with the intention of reselling at a profit. Consequently, profit from the sale of the land would not be assessable as income according to ordinary concepts. On the basis of the information provided, it is concluded that The Club is merely realising an asset in the most advantageous manner.

Question 4

Is the sale of land a 'mere realisation' of capital under part 3-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Detailed reasoning

The mere realisation of a capital asset is not income. However, if the capital asset is used in a business operation or commercial transaction with a profit making intention, the profit may be assessable. The dividing line between realisations that give rise to assessable income and those that involve the mere realisation of a capital asset is narrow (IRC v British Salmson Aero Engines Ltd 2 KB 484, 498; Californian Copper Sydnicate v Harris (Inspector of Taxes) (1904) 5 TC 159, 165-166 (the Californian Copper case).

The Californian Copper case held that the questions to be determined are:

• is the gain that has been made a mere enhancement of values by realising security?, or

• is it a gain made in the operation of a business in carrying out a scheme of profit making?

It is therefore necessary to determine if the activity of obtaining rezoning and development consent, as well as selling the land, was conducted in the course of carrying on a business.

Section 995-1 of the ITAA 1997 defines business as including any profession, trade, employment, vocation or calling. It does not include occupation as an employee.

Carrying on a business of property development

The Commissioner's view about carrying on a business is found in Taxation Ruling TR 97/11 - Income tax: am I carrying on a business of primary production? Whilst TR 97/11 is about carrying on a business of primary production, the indicators in TR 97/11, which have been developed by the courts of law, are used for all cases about the carrying on of a business. These indicators include:

The Commissioner's view on whether a taxpayer is carrying on a business is found in Taxation Ruling TR 97/11, which uses the following indicators to determine whether a taxpayer is carrying on a business:

• whether the activity has a significant commercial purpose or character;

• whether there is repetition and regularity of the activity;

• whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business;

• whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at 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 a sporting activity.

In determining whether a taxpayer is carrying on a business, no one indicator will be decisive. The indicators must be considered in combination and as a whole. Whether a business is being carried on depends on the 'large or general impressions gained' from looking at all the indicators and whether these indicators provide the operations with a commercial flavour.

In your situation, the Commissioner is satisfied you are not carrying on a business of property development. The repetition, scale and volume of your activity are not of the same nature as is ordinarily carried on by a property developer that is carrying on a business.

However, whilst you are not carrying on a business of property development, the proceeds from the sale of the land may still be assessable as ordinary income, if those proceeds are considered to be from an isolated business transaction.

Isolated business transactions

The Commissioner's view on whether profits from isolated transactions are assessable as ordinary income is found in Taxation Ruling TR 92/3. The term 'isolated transactions' refers to:

a) those transactions outside the ordinary course of business of a taxpayer carrying on a business; and

b) those transactions entered into by non-business taxpayers.

TR 92/3 states profits on an isolated transaction will be ordinary income when:

a) the intention or purpose of a taxpayer in entering into the transaction was to make a profit or gain; and

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

For a one-off land sale to be considered to be of a business or commercial nature, it is usually necessary that a taxpayer has the purpose of profit-making at the time of acquiring the property. In the legal case Federal Commissioner of Taxation v. The Myer Emporium Ltd (1987) 163 CLR 199; 87 ATC 4363; 18 ATR 693, the Full High Court said the following about the nature of profits from isolated transactions and the purpose of profit-making at the time of acquisition:

It is one thing if the decision to sell an asset is taken after its acquisition, there having been no intention or purpose at the time of acquisition of acquiring for the purpose of profit-making by sale. Then, if the asset be not a revenue asset on other grounds, the profit made is capital because it proceeds from a mere realisation. But it is quite another thing if the decision to sell is taken by way of implementation of an intention or purpose, existing at the time of acquisition, of profit-making by sale, at least in the context of carrying on a business or carrying out a business operation or commercial transaction.

In general, whether a profit from an isolated transaction is income according to ordinary concepts depends very much on the individual circumstances of the case. Matters listed in TR 92/3, which are relevant in considering whether an isolated transaction amounts to a business operation or commercial transaction include:

a) the nature of the entity undertaking the operation or transaction;

b) the nature and scale of other activities undertaken by the taxpayer;

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

d) the nature, scale and complexity of the operation or transaction;

e) the manner in which the operation or transaction was entered into or carried out;

f) the nature of any connection between the relevant taxpayer and any other party to the operation or transaction;

g) if the transaction involves the acquisition and disposal of property, the nature of that property; and

h) the timing of the transaction or the various steps in the transaction.

Casimaty v. FC of T 97 ATC 5135; (1997) 37 ATR 358 (Casimaty) considered the sale of farming land. The proceeds were held to not be income according to ordinary concepts, but rather constituted the mere realisation of a capital asset, carried out in an enterprising way so as to secure the best price. Consequently, the profit derived from the subdivision and sale of the land by the taxpayer was not assessable income under section 6-5 of the ITAA 1997.

In your situation, the Commissioner is satisfied proceeds from the sale of the land will not be that of an isolated business transaction and will not be assessable as ordinary income under section 6-5 of the ITAA 1997.

Conclusion

The activities involved in the sale of the land do not amount to the carrying on of a business. The Club did not have a profit-making purpose at the time of acquiring the land, and the subsequent transactions do not have the character of business operations or commercial transactions. There is no indication that this activity has become a separate business operation or commercial transaction, or that the club was carrying on or carrying out a profit-making undertaking or plan.

The proceeds are therefore not ordinary income and not assessable under sections 6-5 and 15-15 of the ITAA 1997, or any other income tax provision of the ITAA 1997. The proceeds represent a mere realisation of capital assets as per the Casimaty case, which will fall for consideration under the CGT provisions in Part 3-1 of the ITAA 1997. However, the land was purchased prior to the introduction of capital gains tax, so it will maintain its pre-CGT status and any capital gain or loss that results from the disposal of the land will be disregarded.