Edited version of private advice

Authorisation Number: 1051940707721

Date of advice: 15 February 2022

Ruling

Subject: Income tax and sale of property

Question 1

Will the profit from the sale of the Property be treated as ordinary income under section 6 -5 of the Income Tax Assessment Act 1997 (ITAA 1997) as a result of carrying on a business of property development?

Answer

No.

Question 2

Will the profit from the sale of the Property be treated as statutory income under the capital gains tax provisions in Parts 3-1 and 3-3 of the ITAA 1997 as a result of a realisation of a capital asset?

Answer

No.

Question 3

Will the profit from the sale of the subdivided properties be assessable income under subsection 6-5(1) of the ITAA 1997 as a result of an 'isolated transaction' carried out for profit and commercial in character?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Trustee (You) was formed with the intention to purchase a property to subdivide and develop the land by building new residential premises to sell.

You consider this activity to be an investment activity and not a property development business.

You acquired a Property and subdivided it into two blocks:

The blocks were of equal value.

This ruling only applies to the block which has been sold.

There was an existing dwelling on the property which was demolished prior to the subdivision of the land and the construction of two new residential properties was completed.

The Property was then placed on the market for sale.

Failure to sell the Property led to it being rented for a period of time, however you maintained the intention for it to be sold once the property market improved.

You later decided to change your loan type for the property and reaffirmed your earlier position that the Property will be sold at the earliest opportunity to maximise the return.

The meeting minutes state the trust has no intention to develop any further properties in the future.

Sometime later you made a decision to retain the Property as an investment based on the unsuccessful attempted sale of the property and the increasing rental market potential of the area.

This decision was eventually reconsidered and the Property was sold.

You treated the sale of the Property as a taxable supply.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5 (1)

Income Tax Assessment Act 1997 section 15-15

Income Tax Assessment Act 1997 section 118-20

Reasons for decision

Proceeds from the sale of property for tax purposes are treated as either:

•         income according to ordinary concepts under section 6-5 derived:

1.            in the course of carrying on a business, or

2.            from an isolated transaction for the purpose of profit making, or

•         subject to capital gains tax.

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

Carrying on a business

You have stated that you consider you are carrying on an investment activity and held the property for investment purposes.

Accordingly, the proceeds received from the sale of the unit will not be derived in the course of carrying on a business.

Capital Gains Tax

A capital gain or a capital loss may arise if a CGT event happens to a CGT asset you own. Land and other properties, or an interest in land or properties, is a CGT asset.

CGT event A1 happens if you dispose a CGT asset.

However, as explained below, the sale of the Property will be considered a profit-making commercial undertaking, with profits from the sale to be included as ordinary assessable income under section 6-5 of the ITAA 1997. Whilst a CGT event A1 will occur upon disposal, the resulting capital gain can be reduced by amounts included as ordinary assessable income under section 6-5 of the ITAA 1997.

Isolated profit-making transaction

Profits arising from an isolated business or commercial transaction will be ordinary income if the taxpayer's purpose or intention in entering into the transaction is to make a profit, even though the transaction may not be part of the ordinary activities of the taxpayer's business (FC of T v. Myer Emporium Ltd 1987 163 CLR 199; 87 ATC 4363; 18 ATR 693) (Myer Emporium).

Taxation Ruling TR 92/3 considers the principles outlined in the Myer Emporium case and provides guidance in determining whether profits from isolated transactions are assessable under section 6-5 of the ITAA 1997 as ordinary income.

TR 92/3 defines the term 'isolated transactions' as:

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

•         transactions entered into by non-business taxpayers.

It is not necessary that the intention or purpose of profit-making be the sole or dominant intention or purpose for entering into the transaction. It is sufficient if profit-making is a significant purpose.

If a taxpayer makes a profit from a transaction or operation, that profit is income if the transaction or operation is not in the course of the taxpayers business but:

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

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

The taxpayer must have the requisite purpose at the time of entering into the relevant transaction or operation. If a transaction or operation involves the sale of property, it is usually necessary that the taxpayer has the purpose of profit-making at the time of acquiring the property.

Whether an isolated transaction is business or commercial in character will depend on the circumstances of each case. Where a taxpayer's activities have become a separate business operation or commercial transaction, the profits on the asset can be assessed as ordinary income within section 6-5 of the ITAA 1997.

You purchased a property with the intention of demolishing the existing dwelling and building two new premises to make sell and make a profit.

Summary

As stated above, it is not necessary that the sole or dominant intention or purpose for entering into the transaction is to make a profit, providing it is a significant purpose. A significant purpose of what you have undertaken is to sell it at a profit. Therefore, the proceeds from the sale of that dwelling will be assessable under section 6-5 of the ITAA 1997 as ordinary income from an isolated profit-making transaction.