Edited version of private advice

Authorisation Number: 1051875386790

Date of advice: 27 July 2021

Ruling

Subject: CGT - capital or revenue?

Question 1

Will the anticipated profit or gain from the proposed sale of the Property be treated as assessable ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) as an incident of a property development business?

Answer

No.

Taxation Ruling TR 97/11 Income Tax: am I carrying on a business of primary production? provides a guide to the indicators that the courts have held to be relevant to whether or not a person is carrying on a business. In your circumstances you do not meet these criteria and we do not believe you are carrying on a business.

Question 2

Will the anticipated profit or gain from the proposed sale of the Property be treated as assessable ordinary income under section 6-5 of ITAA 1997 as a result of an 'isolated transaction' carried out for profit and commercial in character?

Answer

No.

Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income provides guidance in determining whether profits from isolated transactions are income and therefore assessable. A profit from an isolated transaction will be income when:

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

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

Your intention when you purchased the property was to build a main residence and live on the property. Therefore, you did not have a profit-making intention when you entered the transaction, and this is not an isolated transaction carried out for profit and commercial in character.

Question 3

Will the anticipated profit or gain from the proposed sale of the Property be treated as statutory income under the capital gains tax provisions in Parts 3-1 of the ITAA 1997?

Answer

Yes.

A capital gain or a capital loss may arise if a capital gains tax event (CGT event) happens to a capital gain tax asset (CGT asset) you own. Land, or an interest in land, is a CGT asset (section 108-5 of the ITAA 1997). When you sell the property, you will have a CGT A1 event under section 104-10 of the ITAA 1997.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

XX XXXX 20XX

Relevant facts and circumstances

On XX XXXX 20XX you purchased the Property as vacant land.

Your intention was to build a dwelling and live in the Property as your main residence.

The Property is located in a zone which means you need to obtain a planning permit to build a dwelling on this property.

Your submission for this permit was lodged on XX XXXX 20XX and approved approximately a year later.

You have never earned assessable income from the Property.

You have made no improvements to the Property, other than receiving the planning permit.

Approximately a year after you lodged the planning permit, a property nearby was sold for what you considered was an exceptionally high price. Consequently, you have decided to remain at your current residence, sell the Property as vacant land and use the sale proceeds, in part, to fund the renovation of your existing residence.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 108-5