Edited version of private advice

Authorisation Number: 1051873504147

Date of advice: 20 August 2021

Ruling

Subject: Are you carrying on a business?

Question 1

Is the sale of the Property the mere realisation of a capital asset?

Answer

Yes.

The Trust does not carry on a business of buying, selling or developing land. The Trust purchased the Property with the intention of constructing apartments and holding for a long-term rental investment. However, due to issues involved in the approval of a development application, finance issues and COVID the Trust sold the property prior to construction.

The proceeds from the sale of the Property will not be included in the Trust's ordinary income. Rather, the sale will be considered a capital transaction subject to the capital gains tax provisions in Part 3-1 of the Income Tax Assessment Act 1997 (ITAA 1997).

Question 2

Is the Trust entitled to claim the 50% capital gains tax discount?

Answer

Yes.

As the Trust held the Property for more than 12 months, the 50% discount can apply in calculating the net capital gain.

This ruling applies for the following period:

Year ended 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 Trust is a fixed unit trust.

The multiple entities were set up to hold separate investment properties as part of the asset protection and succession planning strategy. Historically, the group purchased the properties with insignificant renovation costs.

All of the properties are held in long term and currently tenanted. The group had never been involved in property redevelopment where they purchase a property, redevelop/ subdivide and resell it to generate profit.

The Trust located the Property which had potential to knock down the existing dwelling and rebuild a multiple unit apartment building.

The Trust was set up to purchase the Property.

The Trust arranged for architects to prepare various reports to lodge a development application (DA) to ascertain the costs and viability of the knockdown and rebuild of the Property.

An external company completed a valuation report advising a projected rental income of $X per week. This figure is supported by a separate rental appraisal conducted by a real estate agent.

The original DA was rejected by Council.

The Trust successfully purchased the Property for an agreed value of $X million, settlement was planned to occur on XX XXX 20XX, however due to finance delays settlement occurred on the X XXXX 20XX. The Property was leased back to the vendor for a short period of time.

On X XXXX 20XX, the Trust, obtained funding with the condition of a minimum rental income requirement of $XX per annum as income to sufficiently cover the loan repayment and the property outgoings. A total of $X million was secured to purchase the property, the remaining balance was paid from surplus cash.

As per the financier's conditions, the property had a tenant move in, but natural disasters and market conditions affected the rent able to be obtained.

Due to the reduced rental income, there was potential issue that the financier could conduct an annual review which lead the Trust to recommence pursuing the option of knockdown and rebuild the property into an apartment block. The local was only prepared to approve the rebuild of smaller apartment building.

After a prolonged legal battle, Court Orders were granted approval to amend the development application and granted approval to demolition of existing dwelling and commence construction of a larger apartment building at the Property.

After the court order was granted and due to the effects of COVID-19 economy turndown such as other properties requesting a reduction in rent and the overall legal battle to obtain approval to build, the Trust did not have sufficient cash flow to follow through on the project and was unable to secure lending in order to continue with the building process for the property. The overall income for the group was significantly decreased and the bank lending was tightened and no longer viable.

The Property was placed on the market which sold for $X million on XX XXXX 20XX to be settled in X months of the contract date.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 104-70

Income Tax Assessment Act 1997 Subdivision 115-C