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Edited version of your written advice
Authorisation Number: 1012919423179
Date of advice: 8 December 2015
Ruling
Subject: Value of property bought into development in an isolated transaction
Question 1
Can you use the market value of the property at the time it was ventured into the commercial transaction to determine the net profit assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Answer
Yes
Question 2
Is there any capital gain made when venturing the pre-CGT property into the commercial transaction?
Answer
No
This ruling applies for the following period
Year ended 30 June 2016
The scheme commenced on
1 July 2015
Relevant facts
The arrangement that is the subject of the private ruling is described below. This description is based on the following document. The document forms part of and is to be read with this description. The relevant document is:
• Private Ruling application.
The land and building which is your principal residence was acquired before September 1985, pre-capital gains tax legislation.
You are considering subdividing the land into less than five blocks, contracting a builder to demolish the building and for the builder to construct less than five townhouses on the land.
One townhouse will be your residence, one or two will be built in order to be sold and if only one is sold the other will be rented out as an investment property.
You have not carried out this type of building activity previously. You do not work in an associated industry.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 6-5
Reasons for decision
This activity of demolishing the house and subdividing the land and building less than five townhouses is a one off event. Activities of this nature have not been carried out before and you do not work in a related industry. The block of land is where your principal residence is and was not acquired specifically for the purposes of property development. The activity is considered to be an isolated transaction of a commercial nature on revenue account as you are not just realising the land but are entering into the construction of townhouses with the intent of selling one or two of these townhouses at a profit.
The Commissioner addresses whether the profits or losses on isolated transactions are income or deductible in Taxation Rulings TR 92/3 and TR 92/4, respectively.
It is the net income at the finalisation of the transaction that forms part of your assessable income in the year that the property settles. To calculate the net profit assessable under 6-5 of the ITAA 1997 the sale proceeds will be reduced by the market value of the property at the time it was ventured into the commercial transaction (i.e. the time the decision was made to subdivide and/or develop the property), costs associated with the development and cost associated with selling.
There is no capital gain when you bring the property in at market value for the purposes of calculating this net profit, as the property was purchased pre September 1985 and is therefore not subject to the capital gains tax legislation.