Edited version of private advice

Authorisation Number: 1051924414001

Date of advice: 5 January 2022

Ruling

Subject: Assessability of government grants

Question

Are the WA Building Bonus Grants received by the partnership assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes. The WA Building Bonus grants you received are assessableunder section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997).

This private ruling applies for the following period:

year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Partner 1 and Partner 2 are in partnership (the partnership). The partnership purchased a rental property (the property) in 20XX and rented it out for a number of years as an investment.

Partner 1 has not had any previous experience in property development.

Partner 2 is a Real Estate/Settlement Agent who has undertaken property developments in the past.

In July 20XX, you applied for approval of a strata plan from the Western Australian Planning Commission and received their approval in February 20XX.

The partnership arranged for a triplex to be built on the property in 20XX.

Advice was sought from an Accountant, Surveyor and Builder in setting up or conducting this activity.

The construction contract for building the triplex was signed in September 20XX and construction began in December 20XX.

You received a total of $XXX for the "WA Building Bonus Grant" for three properties' development at $XXX each property.

There is no business plan for this activity.

When the property is completed, the partners hope to sell to the public at large due to the market cycle opportunities via a real estate agent.

The records kept in respect of the activity are bank statements, tax invoices, building contracts, statements of rates, taxes and water.

A profit and loss statement and a feasibility study for the 20XX income year have been provided.

The partnership registered for GST as a quarterly reporter with an effective date from 1 July 20XX.

The partnership began lodging its Business Activity Statements (BAS) from the September 20XX quarter period and stated their enterprise relates to "Land development or subdivision".

The partnership is a member of Western Australia's Real Estate Institute (REIWA).

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Act 1997 Subsection 25(1)

Income Tax Assessment Act 1997 Subsection 995-1(1)

Reasons for Decision

Question

Are the WA Building Bonus Grants received by the partnership assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Summary

Yes. The WA Building Bonus grants received by the partnership are assessable as ordinary income under section 6-5 of the ITAA 1997.

Detailed reasoning

Section 6-5 of the ITAA 1997 states that your assessable income includes income according to ordinary concepts derived by you as an Australian resident directly or indirectly from all sources, whether in or out of Australia during the income year.

Taxation Ruling TR 2006/3: Income tax: government payments to industry to assist entities (including individuals) to continue, commence or cease business (TR 2006/3) at paragraph 84, explains that income according to ordinary concepts is not defined in the taxation legislation. The characteristics of ordinary income have been developed by case law and generally fall into three categories:

•         income from providing personal services,

•         income from the use of property, or

•         income from carrying on a business.

Carrying on a business of property development

Section 995-1 of the ITAA 1997 states the term 'business' includes any profession, trade, employment, vocation or calling, but does not include occupation as an employee.

The question of whether a business is being carried on is a question of fact and degree. Over the years the courts have developed a series of indicators to determine if a business is being carried on.

Taxation Ruling TR 97/11: Income tax: am I carrying on a business of primary production? (TR 97/11) provides the Commissioner's view of the factors used to determine if you are in business for tax purposes. In the Commissioner's view, the factors that are considered important in determining the question of business activity are:

•         whether the activity has a significant commercial purpose or character

•         whether the taxpayer has more than just an intention to engage in business

•         whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity

•         whether there is regularity and repetition of the activity

•         whether the activity is of the same kind and carried on in a similar manner to that of ordinary trade in that line of business

•         whether the activity is planned, organised and carried on in a businesslike manner such that it is described as making a profit

•         the size, scale and permanency of the activity, and

•         whether the activity is better described as a hobby, a form of recreation or sporting activity.

In determining whether a taxpayer is carrying on a business, no one indicator will be decisive. The indicators must be considered in combination and as a whole. Whether a business is being carried on depends on the large or general impressions gained from looking at all the indicators and whether these indicators provide the operations with a commercial flavour.

Isolated transactions

Profits arising from an isolated transaction as a result of entering into a profit-making undertaking or scheme will be ordinary income under section 6-5 of the ITAA 1997, on revenue account, (FC of T v. Myer Emporium Ltd 1987 163 CLR 199; 87 ATC 4363; 18 ATR 693 (Myer Emporium)). This is distinguished from a 'mere realisation' which is not ordinary income.

Taxation Ruling TR 92/3: Income tax: whether profits on isolated transactions are income (TR 92/3) sets out the ATO view as to the application of the decision in Myer Emporium and provides guidance in determining whether profits from isolated transactions are assessable under section 6-5 of the ITAA 1997 as ordinary income.

Paragraph 16 of TR 92/3 states that if a taxpayer not carrying on a business makes a profit, that profit is income if:

(a) the intention or purpose of the taxpayer in entering into the profit-making transaction or operation was to make a profit or gain; and

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

Paragraph 13 of TR 92/3 outlines the following factors which may be relevant when considering whether an isolated transaction amounts to a business operation or commercial transaction:

•         the nature of the entity undertaking the operation or transaction;

•         the nature and scale of other activities undertaken by the taxpayer;

•         the amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained;

•         the nature, scale and complexity of the operation or transaction;

•         the manner in which the operation or transaction was entered into or carried out;

•         the nature of any connection between the relevant taxpayer and any other party to the operation or transaction;

•         if the transaction involves the acquisition and disposal of property, the nature of the property, and

•         the timing of the transaction or the various steps in the transaction.

TR 92/3 outlines that the relevant intention or purpose of the taxpayer, of making a profit or gain, is not the subjective intention or purpose of the taxpayer. Rather, it is the taxpayer's intention or purpose discerned from an objective consideration of the facts and circumstances of the case.

Profits on the sale of subdivided land can therefore be income according to ordinary concepts within section 6-5 of the ITAA 1997 if the taxpayer's subdivisional activities amount to a business operation or commercial transaction.

Paragraph 42 of TR 92/3 provides that if a taxpayer acquires an asset with the intention of using it for personal enjoyment but later decides to venture or commit the asset either:

a)    as the capital of a business; or

b)    into a profit-making undertaking or scheme with the characteristics of a business operation or commercial transaction,

the activity of the taxpayer constitutes the carrying on of a business or a business operation or commercial transaction carrying out a profit-making scheme, as the case may be. The profit from the activity is income although the taxpayer did not have the purpose of profit-making at the time of acquiring the asset.

In addition to the above factors, for the purposes of determining whether the activities undertaken in relation to real property and development equate to a profit-making undertaking or scheme, Miscellaneous Taxation Ruling MT 2006/1 (MT 2006/1) aligns itself with TR 92/3 and provides a list of factors which, if present may be an indication that a business or profit-making undertaking or scheme is being carried on.

In determining whether activities relating to isolated transactions are a profit making undertaking or are the realisation of a capital asset, it is necessary to examine the facts and circumstances of each particular case. This may require a consideration of the factors outlined above; however there may also be other relevant factors that need to be weighed up as part of the process of reaching an overall conclusion. No single factor will be determinative; rather it will be a combination of factors that will lead to a conclusion as to the character of the activities.

Application to your situation

Taking all of the available facts into consideration, and on weighing the various factors, your activities in building the properties and the proceeds from the sale of the proposed properties will either be those from the carrying on of a business or from the undertaking of an isolated transaction.

In your case you have approached the property development in a business-like way indicated by the following factors:

•         You obtained the development approval from local council in February 20XX

•         You conducted research and sought expert advice from accountant, surveyor and relevant authorities.

•         Partner B is a settlement agent, real estate agent and mortgage broker with previous property development experience and is involved in the day-to-day activities of the development activities.

•         You don't have a business plan but you have reasonable belief that the activity is likely to generate a profit.

•         Your intention is to sell to the public at large via a real estate agent once the property is completed. You have a purpose of profit as well as a prospect of profit from undertaking the development.

•         You did not acquire the property with property development in mind and rented it out as investment property. However, you have changed your purpose by deciding to develop the property.

•         You have complied with legal requirements by obtaining the appropriate licences/approvals from the relevant authorities.

•         You kept all records of your activities including bank statements tax invoices, building contracts, statements of rates and water and taxes.

•         Your decision to develop the properties shows your choice to engage in exposure to the risks of the development, including the profits, losses and its general success for the purpose of maximising the potential profit made on the sale of the three properties. You will retain all the rewards and carry most of the risks from the sale. The assumption of the risks and the receipt of the subsequent rewards (or losses) is a strong indicator of profit-making activity.

Therefore, we consider that your activities are organised and carried on in a business-like manner and systematically. You will either be carrying on a business of property development or undertaking a profit-making scheme. The WA Building Bonus grants received by you were received in the course of carrying out your business or profit-making scheme. Therefore, the grants will be assessable as ordinary income under section 6-5 of the ITAA 1997.