Edited version of private advice

Authorisation Number: 1051970861834

Date of advice: 11 April 2022

Ruling

Subject: Property development - mere realisation

Question 1

Was the deceased holding the property as trading stock as defined in section 70-15 of the Income Tax Assessment Act 1997 (ITAA 1997) at the time of death?

Answer

No, we do not consider that the deceased commenced a property development business prior to their death, so the property did not become trading stock. Attempts to dispose of the property to developers and subsequent sale to a related company did not display the characteristics of a business as outlined in TR 97/11. It is considered that the deceased was merely trying to realise the property to its best advantage.

Question 2

Had the deceased ventured the property into an isolated profit-making transaction at the time of death?

Answer

No, we do not consider that the deceased had entered an isolated profit-making transaction. As above, it is considered that the deceased was merely trying to realise the property to the best advantage. Actions in attempting to dispose of the property did not display the characteristics of an isolated commercial transaction as described in TR 92/3.

Question 3

Was the Rezoning a separate CGT asset under section 108-70 of the ITAA 1997?

Answer

No, the Rezoning likely reduced the market value of the property as it made it less desirable to developers and so would not be considered a separate asset in the form of a capital improvement. In addition, even if it was a capital improvement, the deceased opposed the Rezoning and did not incur any expenses in its occurrence so it's cost base is under the improvement threshold and is less than the 5% of capital proceeds requirements of subsection 108-70(2) of the ITAA 1997.

Question 4

Was the Consent Approval a separate CGT asset under section 108-70 of the ITAA 1997?

Answer

No, the Consent Approval was one of three major approval requirements and any increase in the value of the property from the approval would be negligible and so would not be considered a separate asset in the form of a capital improvement. In addition, even if it was a capital improvement, the deceased did not incur any expenses in its occurrence as your related company incurred the expenses so it's cost base is under the improvement threshold and is less than the 5% of capital proceeds requirements of subsection 108-70(2) of the ITAA 1997.

This ruling applies for the following periods:

Income year ended 30 June 20AA

Income year ended 30 June 20BB

Income year ended 30 June 20CC

Income year ended 30 June 20DD

The scheme commences on:

1 July 20ZZ

Relevant facts and circumstances

The deceased acquired the property before 20 September 1985.

From that time until sometime in or around 20XX or 20XX, the deceased continued to operate a business on the property.

By early 20XX, the deceased had formed the view that the business on the property was no longer viable and that they would not be able to sell the property as a xxxx.

The deceased began to receive offers from developers to either:

•                    purchase the property; or

•                    enter into a development agreement or joint venture to subdivide the property and sell the subdivided lots.

The deceased did not consider any of these offers to be reasonable.

However, the deceased granted an option over the property to Developer A. The option:

•                    granted Developer A the option to purchase the property for $XXM; and

•                    was exercisable within X months.

After several extensions, Developer A was not able to obtain the changes to the zoning regulations that they required for it to be feasible to purchase the property and the option expired and was not renewed.

The deceased received further requests to grant an option to purchase the property which were rejected by the deceased for various reasons.

The deceased granted an option to Developer B. Under this option:

•                    the purchase price was $YYM (with $ZXM payable on completion and the remainder of the purchase price payable in instalments over A years); and

•                    the option could be exercised within B months (this was extended several times).

Ultimately, this option was not exercised by Developer B and expired.

In 20CC, the property was rezoned by the local council Council (Rezoning).

The deceased did not instigate the rezoning, nor did they incur any expenses so that the property could be rezoned.

The deceased was opposed to the rezoning at the time. This was because, at that time, the deceased wanted to sell the property to developers and the rezoning reduced their prospects of doing this. This was because:

•                    most developers were looking to develop the property into residential lots; and

•                    the rezoning meant that the property could not be subdivided into residential lots.

The deceased considered numerous offers to either:

•                    sell the property to developers (all of which were subject to the developer obtaining development approval); or

•                    enter into joint venture agreements or development agreements.

The deceased did not consider that any of these offers were reasonable for various reasons.

The deceased decided that they would enter into a development agreement with Company C.

Company C was a company set up by their family in response to the frustrations of attempting to sell the property through agreements with other parties.

Its purpose was to gain development approval over the property for the deceased so that they could sell the property either as one lot or potentially more easily due to its size, subdivided as X master lots.

Company C's shares are held by a discretionary trust (Family Trust). The deceased's children are the trustees of the Family Trust. The deceased was a potential beneficiary of the Family Trust.

The Family Trust has never made a distribution, as its sole purpose was to hold shares in Company C.

The deceased entered into a development agreement with Company C (Agreement).

Under the terms of the Agreement:

•                    The deceased was to receive a fixed amount of $DD million when the property (or the B subdivided lots) was sold;

•                    Company C was to be paid a development fee equal to the balance of the proceeds after the deceased was paid their fixed amount;

•                    Company C was responsible for:

-   paying all project costs;

-   undertaking all the development works including preparing and lodging all development applications.

Company C began the process of getting approval to subdivide the property so that the deceased could either sell it as one lot or sell the B subdivided lots.

There were a number of levels of approval required at local, state and federal level.

Prior to the deceased passing away in MM20YY, Company C had:

•                    submitted an application for consent approval (Consent Approval); and

•                    submitted the development application

At the time that they died, the deceased had not incurred any expenses in relation to any applications made on their behalf by Company C.

Each application involved resolving complex environmental and infrastructure issues. These were the issues that the property developers were unable (or unwilling) to resolve.

Aside from Consent Approval, no approval had been granted before the deceased had passed away.

The deceased continued to live in the house on the property up until they passed away on MMDDYY.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 15-15

Income Tax Assessment Act 1997 section 70-10

Income Tax Assessment Act 1997 section 108-70