Edited version of private advice

Authorisation Number: 1051779739026

Date of advice: 12 November 2020

Ruling

Subject: Capital gains tax - subdivision - mere realisation

Question

Will the profit from the sale 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. The proceeds from the sale of the Property will represent a mere realisation of a capital asset and will fall under the capital gains tax provisions in Part 3-1 and 3-3 of the ITAA 1997.

This ruling applies for the following period

Year ended 30 June 20XX.

The scheme commences on

1 July 20XX.

Relevant facts and circumstances

You purchased a property (the Property).

Your intention when acquiring the Property was to hold the Property as a long-term investment for rental purposes.

The Property was rented immediately after purchase.

A few years after the purchase of the property you established ABC Pty Ltd (ABC).

You are the sole Director of ABC.

You also have fulltime employment.

Sometime later, after the tenants vacated the Property, the Property had been left in an extremely bad condition.

The Property was unable to be rented again without conducting extensive repairs.

You made the decision to demolish the existing residential dwelling and build a set of duplexes (rather than spend money on repairs).

You considered this approach would be a far better return on investment (i.e.to rent a new set of duplexes, rather than trying to rent out an old house).

Approximately 6 years after the purchase of the property the existing residential dwelling was demolished.

Shortly after the residential dwelling was demolished construction of the new dwellings commenced around.

12 months later the construction of the duplex houses (Unit 1 and Unit 2) was completed.

You financed the construction through a 'Construction loan' however this was changed to an 'investment loan'.

Shortly after the construction of the duplexes were completed, Unit 1 was leased for a term of 26 weeks.

At the time you acquired the Property you were employed full-time.

A few years after the purchase of the property you established ABC Pty Ltd (ABC).

You are the sole Director of ABC.

Due to the following circumstances that have significantly impacted your financial position you have decided to sell the duplex known as Unit 1:

•         a few weeks after the existing dwelling at the Property was demolished you were made redundant from your full-time salary and wage position.

•         Approximately a year later you entered into a 'Binding Financial Agreement' (the Agreement) as prescribed for under the Family Law Act 1975. Under the Agreement you were required to pay an amount of $xxx,xxxx to your ex-spouse.

•         COVID 19 has significantly reduced your current work at ABC which has resulted in you being in receipt of the JobKeeper payment as an eligible business participant.

You also own a number of other properties:

1)    Location 1 - Prior to the separation with your spouse, this property was used as your primary place of residence with your spouse and two children. Following the separation, your spouse and children continued to reside at this location until construction of Unit 2 was completed and they moved to this address. Subsequently Location 1 was leased to a third party.

2)    Location 2 -. This property was acquired as an investment and is currently leased for a 12 month period.

3)    Location 3 - This property was acquired as an investment and is also currently leased.

GST issued a private ruling stating the sale of your property does not satisfy all of the criteria of the definition of a 'taxable supply' (specifically paragraph 9-5(d)) and therefore you are not liable for GST in relation to the sale in accordance with section 9-40.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 112-25

Income Tax Assessment Act 1997 Section 995-1

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 Part 3-3