Edited version of your written advice

Authorisation Number: 1013041802478

Date of advice: 28 June 2016

Ruling

Subject: Property - subdivision - disposal

Question 1:

Will the profit on the sale of the property be assessable income including under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer:

Yes.

Question 2:

Will the profit from the sale of the property be treated as statutory income under the capital gains tax provisions in Parts 3-1 and 3-3 of the ITAA 1997?

Answer:

Yes. However, section 118-20 of the ITAA 1997 will apply to reduce the capital gain to the extent that the profit from the sale of the property is otherwise included as assessable income including under section 6-5 of the ITAA 1997.

This ruling applies for the following period

30 June 2016.

The scheme commences on

1 July 2015.

Relevant facts and circumstances

You are a Trustee of a Trust.

After 20 September 1985, you entered into a contract to purchase a property (the Property) which has a land area of less than 10 acres and which was residentially zoned land.

Settlement on the purchase of the Property occurred a number of years after the purchase contract had been entered into.

Your intention when you purchased the Property was to develop it for the purpose of making a profit.

You have not undertaken any similar activities in the past.

You applied for a multi-unit development planning permit and incurred substantial sums in relation to the development application.

Approval of the development application was granted.

During the 2015-16 income year, you sold the Property without the development permit.

You have made a profit on the sale of the Property.

For the purposes of this ruling you will not undertake any similar activities in the future.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 118-20

Income Tax Assessment Act 1997 Section 995-1

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 Part 3-3

Reasons for decision

Legislative references referred to herein are from the Income Tax Assessment Act 1997 (ITAA 1997).

Summary

Based on the information provided, you are not carrying on a business of property development. However, any profit from the sale of the Property will still be accounted for on revenue account as an isolated commercial transaction. While you had not made the profit on the sale of the Property in the manner intended when the Property was purchased, you have ultimately made a profit by selling the Property by other means.

Detailed reasoning

Taxation treatment of property sales

 There are three ways profits from property sales can be treated for taxation purposes:

1. As ordinary income under section 6-5, on revenue account, as a result of carrying on a business of property development, involving the sale of land as trading stock; or

2. As ordinary income under section 6-5, on revenue account, as a result of an isolated business transaction entered into by a non-business taxpayer, or outside the ordinary course of business of a taxpayer carrying on a business, which is the commercial exploitation of an asset acquired for a profit making purpose; or

3. As statutory income under the capital gains tax legislation.

Whether the proceeds are treated as income or capital depends on the situation and circumstances of each particular case.

Carrying on a business of property development

The Commissioner's view on whether a taxpayer is carrying on a business is found in Taxation Ruling TR 97/11 (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.

Application to your situation

You had purchased the Property with the intention of developing it and selling it for a profit. You have sold the Property and have made a profit.

You have not undertaken any similar activities in the past.

Based on the information provided, it is not viewed that you are carrying on a business on buying and selling property, or that this is the commencement of you carrying on a business of buying and selling land.

Therefore, any gain made on the disposal of the Property will not be assessable income under section 6-5 as ordinary income from the carrying on of a business.

Isolated business transactions

Profits arising from an isolated business or commercial transaction 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 (TR 92/3) considers the principles outlined in Myer Emporium and provides guidance in determining whether profits from isolated transactions are assessable under section 6-5 of the ITAA 1997 as ordinary income.

The ruling outlines at paragraph 6 that whether a profit from an isolated transaction will be ordinary income will depend on the circumstances of the case, however a profit from 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.

TR 92/3 outlines that 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.

At paragraphs 56 and 57, TR 92/3 explains that a profit is income where it is made in any of the following situations:

• a taxpayer acquires property with a purpose of making a profit by whichever means prove most suitable and a profit is later obtained by any means which implements the initial profit-making purpose; or

• a taxpayer acquires property contemplating a number of different methods of making a profit and uses one of those methods in making a profit; or

• a taxpayer enters into a transaction or operation with a purpose of making a profit by one particular means but actually obtains the profit by a different means.

Paragraph 15 of TR 92/3 provides that if a taxpayer makes a profit from a transaction or operation, that profit is income if the transaction or operation is not in the course of the taxpayers business but

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

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

Application to your situation

You purchased the Property with the intention of developing it and selling it for a profit. You obtained a development permit for the Property, however you sold the Property whole without the development permit and made a profit.

In very general terms, a transaction or operation has the character of a business operation or commercial transaction if the transaction or operation would constitute the carrying on of a business except that it does not occur as part of repetitious or recurring transactions or operations.

In this case, there was a demonstrated intention to profit and the transaction has been undertaken in a commercial manner with the Property being purchased by a trustee in a company and trust arrangement.

Your intention in relation to how the Property would be sold changed, however the original intention to sell the Property for a profit did not change. The intention had always been to make a profit on the sale of the Property and a profit was made when the Property was sold. Ultimately, it does not matter how you made the profit, but that you had intended to make a profit and had made a profit.

Based on the information provided, the activity will be an isolated activity and is not one of a series of activities done in the form of a property development business.

Accordingly, the Commissioner is satisfied that the proceeds from the sale of the Property will be those from an isolated transaction as you are not carrying on a business of buying and selling property.

Consequently, the proceeds from the sale of the Property will be a profit from an isolated transaction under the guidelines of TR 92/3 as discussed above, and will be included as ordinary income under section 6-5.

Capital gains tax

The basic capital gains tax (CGT) provisions are contained in Part 3-1 of the ITAA 1997. Broadly, these provisions include in your assessable income any assessable gain made when a CGT event happens to a CGT asset that you own (to the extent that they are not reduced by capital losses).

A CGT asset is any kind of property or a legal or equitable right that is not property. CGT event A1 under section 104-10 happens if you dispose of a CGT asset. You make a capital gain if your capital proceeds exceed the CGT asset's cost base.

Section 118-20 contains anti-overlap provisions which operate to reduce capital gains by any amounts which are included in your assessable income under a provision of the ITAA outside of Part 3-1 of the ITAA 1997, for example, as ordinary income under section 6-5 of the ITAA 1997.

Application to your situation

Making an overall assessment on the factors set out in TR 92/3, it is the Commissioner's view that the sale of the Property will not be a mere realisation of a capital asset.

Accordingly, whilst CGT event A1 under section 104-10 will occur on the disposal of the Property, the disposal will be viewed as an isolated transaction, and any capital gain arising from this CGT event will be reduced to the extent any profit is also assessable under section 6-5.