Edited version of your written advice

Authorisation Number: 1051353890711

Date of advice: 23 March 2018

Ruling

Subject: Proceeds from sale of land following subdivision – whether capital or revenue

This ruling applies to: X Pty Ltd as trustee for X Family Trust (Trustee)

Question

Are the proceeds from the sale of each lot of the Trustee’s land as comprised in the Land assessable under Part 3-1 or Part 3-3 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following period

1 July 20xx to 30 June 20xx

The scheme commences on:

1 July 20xx

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling

The Trustee bought a piece of land (Land), zoned as general farming, to carry out the primary production business (Business) of the controller of the trust, Y. Y has been in the primary production business all their life except for several years when they served in the armed forces.

A few years after the purchase of the Land, Y was incapacitated due to illness which reduced their capacity to carry on the Business. This coupled with drought and lack of rainfall significantly affected the Business. The Trustee attempted to sell the Land in one piece but failed to attract any good offer.

The Land was subsequently rezoned by the relevant Council as rural living. The Trustee sold part of the Land in a number of stages. The Trustee engaged an expert consultancy farm that carried out all activity regarding application to the Council for subdivision. The farm also engaged subcontractors to carry out the compliance works and paid them for the works done. The Trustee then reimbursed the farm for the expenses incurred. No additional works were done to improve the Land except what was required under the planning permits to receive the compliance certificate from the Council. Similarly, the Trustee engaged a local real estate agent who had done all activities required to sell the Lots.

The Trustee continues the Business in the rest of the Land following the sale of the subdivided Lots.

Relevant legislative provisions

Income Tax Assessment Act 1997 Part 3-1

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Summary

The proceeds from the sale of each lot of the Trustee’s land as comprised in the Land assessable under Part 3-1 or Part 3-3 of the ITAA 1997.

Detailed reasoning

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

1. as ordinary income under section 6-5 of the ITAA 1997, on revenue account, as a result of carrying on a business of property development, involving the sale of land as trading stock;

2. as ordinary income under section 6-5 of the ITAA 1997, on revenue account, as a result of entering into a profit-making undertaking or scheme (including an isolated transaction); or

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

The courts have generally addressed the issue as to whether a particular asset disposed of was held on capital account or not as being the distinction between a mere realisation or change of investment and a transaction that is an act done in what is truly carrying on or carrying out of a business: California Copper Syndicate v. Harris (Surveyor of Taxes) (1904) 5 TC 159. A number of cases that discussed this issue include London Australia Investment Co Ltd v. FCT (1977) 138 CLR 106; McClelland v FC of T 70 ATC 4115; Whiteford Beach Pty Ltd v FC of T 82 ATC 4031; Crow v FC of T 88 ATC 4620 at 4625-4626; (1988) 19 ATR 1565. FC of T v The Myer Emporium Ltd 87 ATC 4363 considered that the initial intention and purpose existing at the time of acquisition was a determining factor. Dixon J in Sun Newspapers Ltd v. FCT (1938) 61 CLR 337 said (at p 363) that there were three matters to be considered in determining whether an expenditure is of a capital or of a revenue nature:

(a) the character of the advantage sought

(b) the manner in which it is to be used, relied upon or enjoyed; and

(c) the means adopted to obtain it.

In Hallstroms Pty Ltd v. FCT (1946) 72 CLR 634, Dixon J added the following comments to his criteria in Sun Newspaper (at 648):

The contrast between the two forms of expenditure corresponds to the distinction between the acquisition of the means of production and the use of them; between establishing or extending a business organisation and carrying on the business; between the implements employed in work and the regular performance of the work in which they are employed; between an enterprise itself and the sustained effort of those engaged in it.

A number of Court cases dealt with situation which are more relevant to the present situation of the Trustee. They are Scottish Mining Co. Ltd v FC of T (1949) 9 ATD 135; (1950) 81 CLR 188; Statham & Anor v FC of T 89 ATC 4070; (1988) 20 ATR 228; Casimaty v FC of T 97 ATC 5135 and McCorkell v FC of T 98 ATC 2199. In all these cases, the Courts looked at the facts very closely as to the initial purpose of acquiring the land, the manner in which the land was sold, the works that were done to attract the customers and the involvement of the owners, and have concluded that selling of land per so was not carrying on a business if what the owners have done was simply to realise the land to the best advantage.

In the present case, the Trustee acquired the Land to carry out the Business of Y who had been in business similar to the present one for a long time prior to acquisition of the Land. It was the combination of diminishing capacity of Y, the drought, low commodity price, higher interest rate, failure to sell the Land in one pierce and the rezoning of area to rural living that motivated the Trustee to apply for subdivision and sale of the Affected Land. The Trustee was never actively involved in the application process, carrying out of the works and subsequent sale of the Lots. The Trustee continued to carry on the Business as it had done previously and despite the sale of the Affected Land, the scale of the Business was not reduced significantly to say that the Trustee was no longer carrying on the Business.

It is considered that all the Trustee did was to take the necessary steps to realise the land to the best advantage. Therefore, the proceeds from the sale of each Lot of the Affected Land are assessable under Parts 3-1 or 3-3 of the ITAA 1997 as a mere realisation of a capital asset.