| Disclaimer This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law. You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4. |
Edited version of private advice
Authorisation Number: 1051650254097
Date of advice: 25 March 2020
Ruling
Subject: Capital gains tax
Question
Will the gain on the sale of the properties be assessable as income according to ordinary concepts under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Answer
No. It is accepted that the Trust did not have the purpose or intention of profit-making at the time of entering into the transaction and the sale of the properties is not in the ordinary course of the Trust's business. Therefore the sale of the properties will be not be assessable as income according to ordinary concepts.
Question
Will the sale of each property cause CGT event A1 to occur?
Answer
Yes. On the disposal of each property the Trust will need to calculate a capital gain or loss as CGT event A1 has occurred.
This ruling applies for the following period:
Year ended 30 June 20XX
The scheme commences on:
1 July 20XX
Relevant facts and circumstances
The Trust invests in shares, fixed interest and direct investments.
The Trust purchased a property as tenants in common with an unrelated party.
The Trust paid cash for its 50% share of the property.
The Trust intended to remove the existing house on the property and construct townhouses to take advantage of the rental yield in the market.
The existing house on the property was rented for approximately eight months.
The Trust advised a real estate agent to cancel the rental listing for the existing house on the property because the Trust and the unrelated party have decided to commence the construction phase of the development.
The Trust advised the real estate agent the expected completion date and directed the real estate agent to manage the properties. The Trust stated they were seeking leases of 12 months or more. The Trust requested an estimate of rental income for the townhouses so they could provide this information to a financial institution to obtain finance.
The real estate agent provided the Trust with a rental appraisal.
The development was initially going to be financed via a bank loan however when the Trust approached a mortgage broker they were advised that they would not be able to obtain a loan for the construction of the three townhouses.
A loan agreement was entered into between the Trust and the unrelated party for 50% of the capital required to fund the construction of the townhouses on the property.
The loan terms stated that the duration of the loan is the sooner of the sale of the investment properties or two years from the date of the agreement.
The loan agreement states at completion of the project the borrower will arrange to either re-finance or sell their half share in the project and repay the lender as soon as possible.
The interest payable by the borrower is a fixed amount, payable upon repayment of the loan.
The Trust and the unrelated party signed a contract with a builder to construct the townhouses.
The Trust waived the finance condition in the contract.
The Trust decided it could not sustain the commitment of the loan to the unrelated party over the long term and decided to sell the properties.
The real estate agent advised the Trust to sell the properties during construction as the property market was showing signs of decline.
The Trust advertised the townhouses for sale while the construction was 50% complete.
Shortly thereafter all townhouses sold for a profit.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 6-5
Income Tax Assessment Act 1936 section 25(1)
Income Tax Assessment Act 1997 section 104-10