Edited version of private advice

Authorisation Number: 1051865515478

Date of advice: 16 July 2021

Ruling

Subject: Property development

Question 1

Will the profit on the sale of one unit be assessable under section 6-5 or section 15-15 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

Will the profit on the sale of one unit be assessable under the capital gains tax (CGT) provisions of the ITAA 1997?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Your parents built townhouses on the land and lived in one (townhouse 1) and rented out the other one (town house 2).

On the death of one parent, you inherited the rented townhouse.

On the death of your other parent, townhouse 1 was transferred to you and your two siblings equally as per the Will.

Your children jointly purchased the townhouse 1 from you and your siblings.

You provided the finance for the purchase.

Townhouse 1 was then rented out.

The intention of getting your children to purchase townhouse 1 was to do a redevelopment and build units for each of them to live in as their main residence.

Some of your children moved overseas.

As a result of your children moving overseas, you decided to purchase townhouse 1 from your children.

Your intention is to sell one of the units on completion and rent out the others.

The construction cost of the development has been funded by you with no finance.

You have not been involved in any other previous property development activities and subdivisions.

You are not carrying on a business of property development, you are retired and live from the income generated from your various investments.

You engaged with a designer for architectural design and project management on the development project.

You also incurred costs for consultants, legal fees, land tax, council and water rates, etc.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 6-10

Income Tax Assessment Act 1997 Section 15-15

Income Tax Assessment Act 1997 Section 70-10

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 Part 3-3

Reasons for decision

Broadly, there are three ways profits from a land development, subdivision and sale can be treated for taxation purposes:

•         As ordinary income as a result of carrying on a business of property development, involving the sale of land and buildings as trading stock;

•         As ordinary income 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, where the land was acquired or subsequently held for the purpose profit making; or

•         As statutory income under the capital gains tax legislation as a result of the sale of a capital asset.

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

Under section 6-5 of the ITAA 1997, your assessable income includes the ordinary income you derived directly or indirectly from all sources, during the income year. Additionally, section 15-15 of the ITAA 1997 includes profit arising from the carrying on or carrying out of a profit-making undertaking or plan. However, this provision does not apply to a profit that is assessable as ordinary income under section 6-5 of the ITAA 1997, or which arises in respect of the sale of property acquired on or after 20 September 1985.

In FC of T v The Myer Emporium (1987) 163 CLR 199; 87 ATC 4363; (1987) 18 ATR 693 (Myer Emporium), the Full High Court expressed the view that profits made by a taxpayer who enters into an isolated transaction with a profit making purpose can be assessable income.

Taxation RulingTR 92/3 Income tax: whether profits on isolated transactions are incomeconsiders the assessability of profits on isolated transactions in light of the principles outlined in Myer Emporium. According to Paragraph 1 of TR 92/3, the term isolated transactions refers to:

•         those transactions outside the ordinary course of business of a taxpayer carrying on a business, and

•         those transactions entered into by non-business taxpayers.

Paragraph 35 ofTR 92/3 states that when a taxpayer makes a profit from an isolated transaction other than in the course of carrying on a business, the amount will be income where:

a)    The intention or purpose of the taxpayer in entering into the transaction was to make a profit or gain.

b)    The transaction was entered into, and the profit was made, in the course of carrying on a business or in carrying out a business operation or commercial transaction.

Some of the factors to consider when looking at whether an isolated transaction amounts to a business operation or commercial transaction are listed at paragraph 13 of TR 92/3. They are:

a)    the nature of the entity undertaking the operation or transaction

b)    the nature and scale of other activities undertaken by the taxpayer

c)    the amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained

d)    the nature, scale and complexity of the operation or transaction

e)    the manner in which the operation or transaction was entered into or carried out

f)     the nature of any connection between the relevant taxpayer and any other party to the operation or transaction

g)    if the transaction involves the acquisition and disposal of property, the nature of that property and

h)    the timing of the transaction or the various steps in the transaction.

In your case, your intention was to do a redevelopment and build units for your children to live in as their main residence. Some of your children moved to overseas and are unlikely to reside in Australia in the future. Your intention now is to sell one unit on completion and rent out the other units. You have never been in the business of land development and you have minimal involvement in the development project.

Therefore, the profit you receive from the sale of one unit is not ordinary income and not assessable under sections 6-5 or 15-15 of the ITAA 1997. The profit represents a mere realisation of a capital asset which will fall for consideration under the CGT provisions in Part 3-1 and 3-3 of the ITAA 1997.