Edited version of private advice

Authorisation Number: 1051984835602

Date of advice: 24 August 2022

Ruling

Subject: CGT - real property

Question 1

Are the proceeds from the sale of the Property ordinary income under section 6-5 of theIncome Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

Are the proceeds from the sale of the Property assessable under section 15-15 of the ITAA 1997?

Answer

No.

Question 3

Are the proceeds from the sale of the Property assessable under section 25A of the ITAA 1936?

Answer

No.

Question 4

Is the Commissioner satisfied, or thinks it is reasonable to assume, that the Property is a pre-CGT asset pursuant to subsection 149-30(2) of the ITAA 1997?

Answer

Yes.

Question 5

Does the exception to Capital Gains Tax ("CGT") event A1, as contained in paragraph 104-10(5)(a) of the ITAA 1997, apply due to the assets being acquired prior to 20 September 1985?

Answer

Yes.

Question 6

Are the compensation payments, received pursuant to paragraph 98(1)(a) and section 106 of the Planning and Environment Act 1987 (Vic) capital proceeds, as defined in section 116-20 of the ITAA 1997, from the happening of CGT event A1, as set out in section 104-10 of the ITAA 1997, when the proprietary rights of the Property are transferred as a result of the Property's rezoning?

Answer

Yes.

Question 7

Will any capital gain or loss that might arise as a result of CGT event A1 happening in relation to the rezoning of the Property be disregarded pursuant to paragraph 104-10(5)(a) of the ITAA 1997?

Answer

Yes.

This ruling applies for the following periods:

income years ending 30 June XXXX to 30 June XXXX

Relevant facts and circumstances

The Property consisting of farmland, comprising several property titles which were acquired by individuals and wholly controlled trusts and companies (together the Taxpayers) prior to 20 September 1985.

Primary Production operations have been conducted on the Property at all times.

Capital improvement works were undertaken on the Property soon after acquisition for enhancing the primary production business.

Conducting business operations

Business operations at the Property were conducted by two main entities. The Taxpayers leased the Property to those entities to conduct the business activities.

Initiallythe leasing arrangements between the parties were agreed orally. The terms of the leasing agreement were formalised by a separate Memorandum of Agreement entered into on XXXX for each of the Taxpayers.

A State Government office has determined that the primary production nature of the operations mean that the land is exempt land.

Zoning and overlays on the Property during ownership

At the time of acquisition, the Property was within Zone X and outside the urban growth area. Zone X was specifically intended to provide for certain uses. There were no overlay controls impacting the Property at the time of acquisition. Within the provisions of Zone X a planning permit was required to subdivide land to a minimum of 40 hectares.

Since that time there have been several re-zonings of the Property and none were requested by the taxpayers.

On XXXX, the Property was to be rezoned to Zone Y and to be subject to overlays.

Impact of zoning and overlays on business operations

Since the time of acquisition, the zoning of the Property progressively became more restrictive affecting the primary production operations.

The Taxpayers and XXXX submitted planning applications to the Council for the construction of a dwelling on each of their respective titles to enliven each landowner's right to claim compensation under the relevant State planning and environment legislation. This action recognised the effect on the value of land as the result of it being encumbered by a planning scheme overlay.

Under the legislation, where land has been reserved under a planning scheme a landowner may claim financial loss compensation arising from the reservation upon the happening of certain specific events including the sale of the affected land, and the refusal by a planning authority (such as Council) of a permit; or a direction by a State authority that a permit must not issue on the grounds that the land is or may be required for a public purpose.

The applications by the landowners were made on a hypothetical basis designed to trigger the necessary refusal and entitle them to receive a payment of compensation. The landowners did not intend to use the land in the way described in each permit application - this was a necessary procedural step taken to enliven their compensation rights.

Decision to sell the Property

The Taxpayers decided that the rezoning requirements and the implementation of the overlay meant that it would be both costly and inefficient to continue primary production operations on the Property. For these reasons, the Taxpayers ultimately decided to dispose of the Property.

The parcels of land comprising the Property were sold to a third party by a contract of sale dated XXXX. The Taxpayers had the ability to terminate the contract for up to 60 days from signing the contract of sale.

Compensation claim

Following the disposal of the Property, the landowners of the Property (which included the Taxpayers) lodged a compensation claim against the State Government pursuant to the relevant State legislation.

While the legislation does not prescribe a basis on which compensation must be calculated, it provides a cap on how compensation can be claimed. The legislation prescribes a maximum compensation amount which is broadly calculated as the difference between: (a) the actual value of the land, and (b) the value of the land had the land not been reserved for a public purpose. This is calculated at the date that the liability to pay compensation first arose, which is upon the sale of the land.

Financial information

A Trust, B Trust and C Unit Trust

In the XXXX accounts, Land and Buildings (which included the acquisition of the Property) is recorded as fixed assets (not as current assets or trading stock). From XXXX onwards, the A Trust recorded the Property as a fixed asset.

While the A Trust has, after the acquisition of the Property, acquired other parcels of land for development, per the financial statements the land held for development was accounted for as 'trading stock' and was recorded separate from the Property, which was described as a 'fixed asset'.

A Trust recorded income from the property from the XXXX income year onwards (for the available income years) with other entities conducting the business operations.

E PTY LTD

Per the XXXX and subsequent financial statements of E Pty Ltd, the Property has been recorded as a fixed asset since the 1985 income year (under Land and Buildings). E Pty Ltd recorded income from the property from the XXXX income year onwards (for the available income years) with other entities conducting business operations on the Property.

Individual A

Individual A recorded income from the property with other entities conducting the business operations on the Property.

Individual B

Individual B recorded income from the property with other entities conducting the business operations on the Property.

Historical information

A Trust

A Trust previously operated a business which was subsequently sold.

A Trust also held an investment property which was subsequently sold.

Prior to 20 September 1985, A Trust acquired a portion of the Property. Up until this date and through to the end of the 1985 income year, the A Trust had only carried on primary production related activities and was an investor receiving income from an investment property.

On different parcels of land, A Trust undertook property development activities. These developments were always treated on revenue account and kept separate to other activities in the balance sheet.

From early in XXXX, A Trust has only held investment assets, being the land at the Property which was leased.

B Trust

Prior to 1985 the trust held an investment property which was subsequently sold.

As at 19 September 1985, the B Trust held two capital assets, owning a portion of the Property and another investment property. This investment property was sold on capital account with the capital gain being distributed to an eligible beneficiary.

B Trust commenced some development activity on land that it acquired at three sites. These three developments were developed and sold. The developments were recorded as revenue assets and treated separately from the Property.

B Trust has sold all of its land held for development.

The only asset of B Trust is the land at the Property which was leased.

C Unit Trust

The C Unit Trust conducted a business but disposed of those assets to F Pty Ltd (and its related entities), becoming a shareholder in those entities. F Pty Ltd (and its related entities) continued to conduct the business from that time.

The C Unit Trust beneficially owned an investment property and later sold it on or around before 20 September 1985.

The C Unit Trust invested in farming land at the Property prior to 20 September 1985.

On XXXX, the C Unit Trust acquired development land. This was treated on revenue account and was recorded separate to the Property in accounting records from the XXXX income year onwards.

In XXXX, the C Unit Trust part-purchased an investment property. Many entities, associated with the Taxpayers, operated their business from these premises. The investment property was sold in XXXX. The sale was treated on capital account, with the gain distributed to the unit holder.

C Unit Trust acquired land and undertook two property developments. The land was treated on revenue account and was recorded separately to the Property in the accounting records from the XXXX income year onwards.

From XXXX onwards, C Unit Trust only holds investment assets. The C Unit Trust has not held any other land since that date that has been used for development purposes. The C Unit Trust's main remaining investments include its shares in F Pty Ltd and as an owner of land at the Property.

E PTY LTD

Between the acquisition of the Property and the establishment of F Pty Ltd, E Pty Ltd had been an administrative company assisting the business conducted by C Unit Trust. Since the establishment of F Pty Ltd, its sole activities have been its investment in the Property.

Individual A and Individual B

Individual A has qualifications and business experience that relate the business operated by the trusts and companies above.

In and around the acquisition of the Property, Individual B was a director and company secretary of E Pty Ltd and the trustee companies for the A Trust, B Trust and C Unit Trust.

Historical ownership information

A and B Trusts

A and B Trusts made a family trust election (FTE) effective from XXXX in accordance with Schedule 2F of the ITAA 1936, which has not been varied or revoked. The specified individual for the FTE is Individual A.

Starting before 20 September 1985 to the date of this ruling application, the beneficiaries of both the A and B Trusts have always been Individual A and other members of Individual A's immediate family and entities owned or controlled by IndividualA.

No amendments have been made to the trust deeds for both A and B Trusts during the period to alter the identity or rights of the beneficiaries of the A or B Trusts or vary the beneficiaries or the trustee's discretionary power to distribute income or capital.

C Unit Trust and D Trust

G Pty Ltd is the trustee for the C Unit Trust. The sole unitholder of the C Unit Trust was H Pty Ltd as trustee for the D Trust since before 20 September 1985. There has been no change to the unitholder register for C Unit Trust since from and including 20 September 1985 (as there is no change in unitholding for this period).

The C Unit Trust made a family trust election effective from XXXX in accordance with Schedule 2F of the ITAA 1936, with Individual A as the specified individual.

The D Trust made a family trust election effective from 1 July XXXX in accordance with Schedule 2F of the ITAA 1936, with Individual A as the specified individual.

No amendments have been made to the trust deed for D Trust during the period to alter the identity or rights of the beneficiaries of the D Trust or vary the beneficiaries or the trustee's discretionary power to distribute income or capital.

For each of the non-fixed trusts (family trust) any distributions that were made by those family trusts, were made to:

•                     Individual members of the family group; or

•                     Unit trusts or companies that have always been wholly owned (directly or indirectly) by the members of the family group; or

•                     Other family trusts where distributions are made to individual members of the family group or to unit trusts/companies that have always been wholly owned (directly or indirectly) by the members of the family group.

E PTY LTD

The shareholders for E Pty Ltd at just before 20 September 1985 were Individual A and Individual B. There have been no subsequent changes to the shareholding of E Pty Ltd.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 25A

Income Tax Assessment Act 1936 section 25A(1)

Income Tax Assessment Act 1936 section 25A(1B)

Income Tax Assessment Act 1936 Schedule 2F

Income Tax Assessment Act 1936 section 160ZZS

Income Tax Assessment Act 1936 subsection 170(9)

Income Tax Assessment Act 1997 section 6-5

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

Income Tax Assessment Act 1997 section 6-5(2)

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 Division 115

Income Tax Assessment Act 1997 section 15-15

Income Tax Assessment Act 1997 subsection 102-5(1)

Income Tax Assessment Act 1997 subsection 104-10(5)

Income Tax Assessment Act 1997 subsection 104-10(5)(a)

Income Tax Assessment Act 1997 section 116-20

Income Tax Assessment Act 1997 section 128-50

Income Tax Assessment Act 1997 subsection 149-30(1)

Income Tax Assessment Act 1997 subsection 149-30(2)

Income Tax Assessment Act 1997 subsection 149-30(3)

Income Tax Assessment Act 1997 subsection 149-30(4)

Income Tax Assessment Act 1997 subsection 149-30(5)

Income Tax Assessment Act 1997 section 995-1

Reasons for decision

These reasons for decision accompany the Notice of private ruling for Individual A', Individual B, The Trustee for the A Trust, The Trustee for the C Unit Trust, The Trustee for the B Trust and E Pty Ltd

This is to explain how we reached our decision. This is not part of the private ruling.

Question1

Summary

The sale of the Property will be a mere realisation of a capital asset, therefore no part of the sale proceeds or profit on the sale of the Property will be assessable under section 6-5 of the ITAA 1997.

Detailed reasoning

Income according to ordinary concepts

Subsection 6-5(1) of the ITAA 1997 provides that your assessable income includes income according to ordinary concepts, which is called ordinary income.

Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of an Australian resident includes income according to ordinary concepts (ordinary income) derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Proceeds from the sale of land can give rise to ordinary income under section 6-5 of the ITAA 1997 either:

•                     where the land is held as trading stock and sold as part of carrying on a business of property development

•                     where the land in not trading stock and is sold as part of an isolated commercial transaction entered into with a profit-making intention.

Alternatively, the sale of the land can be regarded as a mere realisation of a capital asset. In which case gains can be statutory income under the capital gains tax (CGT) provisions contained in Part 3-1 of the ITAA 1997.

Ordinary course of the Taxpayers' business

Section 995-1 of the ITAA97 defines 'business' as including:

... any profession, trade, employment, vocation or calling, but does not include occupation as an employee."

As established in Ferguson v FC of Taxation (1979) 9 ATR 873, ascertaining whether a business is being carried on is a question of fact. There is no one factor that is decisive of whether a particular activity constitutes a business.

Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? provides the factors used to determine if you are in business for tax purposes. Whilst this ruling was written in the context of a primary production business, its principles are equally relevant to whether an activity constitutes a business of dealing in land or property development. Paragraph 13 of TR 97/11 provides a list of indicators as to what will be considered in determining whether a taxpayer is carrying on a business as follows:

•                     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.

No one factor is decisive. The indicators must be considered in combination and as a whole. Whether a 'business' is carried on depends on the large or general impression.

Land can be trading stock before it has been turned into the condition in which it is intended to be ultimately sold - that is, land intended to be sold after subdivision is still trading stock before it is subdivided (R & D Holdings; St Hubert's Island).

As highlighted by Western Gold Mines N.L. v. Commissioner of Taxation (W.A.) (1938) 59 CLR 729, it is required that '[i]n considering whether a profit arising from a transaction is of an income or capital nature, it is necessary to make both a wide survey and an exact scrutiny of the taxpayer's activities'. This principle was further extended by such cases as GRE insurance Limited and Unitraders Investments Pty Ltd v FCT (1992) 92 ATC 4089 and Grollo Nominees Pty Ltd v FC of T 97 ATC 4585 which specifically demonstrates that the Commissioner not only can, but he must consider the relationship that the entity/taxpayer in question has with the wider economic/family group, when determining this type of case.

While some of the entities may have previously carried on a commercial activity consisting of property development, on the facts, the Property was acquired with the intention of conducting a primary production business by the group. On the evidence available it was not the intention or purpose, of the taxpayers, at the time of acquisition, that the Property was acquired for the purpose of profitable resale as part of an ordinary course of a business dealing in land. The land has been held for nearly 40 years, has been used continuously, until the rezoning, for primary production purposes. The Property has always been treated as a capital asset in the accounts of the taxpayers and it was not classified as or turned into trading stock during the period the taxpayers owned the land.

Profits from an isolated transaction

It is settled law that a profit or gain made by a taxpayer outside the ordinary course of carrying on a business, but which arises from a transaction entered into by that taxpayer with the intention or purpose of making a profit or gain, will constitute assessable income, even where the transaction is an isolated one, "if the property generating the profit or gain was acquired in a business operation or commercial transaction for the purpose of profit-making by the means giving rise to the profit..."(FC of T v. Myer Emporium Ltd (1987) 163 CLR 199 (Myer) at 209-210).

Taxation Ruling 92/3 Income tax: whether profits on isolated transactions are income (TR 92/3) provides guidance in determining whether profits from isolated transactions are ordinary income and therefore assessable under section 6-5 of the ITAA 1997.

There is a strong line of reasoning through the judgments in Whitfords Beach and Myer that suggests that profits made by a taxpayer who enters into an isolated transaction with a profit-making purpose can be assessable income. In Myer, at 163 CLR 213; 87 ATC 4369; 18 ATR 699-700, the Full High Court said about the nature of profits from isolated transactions:

It is one thing if the decision to sell an asset is taken after its acquisition, there having been no intention or purpose at the time of acquisition of acquiring for the purpose of profit-making by sale. Then, if the asset be not a revenue asset on other grounds, the profit made is capital because it proceeds from a mere realisation. But it is quite another thing if the decision to sell is taken by way of implementation of an intention or purpose, existing at the time of acquisition, of profit-making by sale, at least in the context of carrying on a business or carrying out a business operation or commercial transaction.

Paragraph 16 of TR 92/3 summarises the relevant authorities providing that if a taxpayer not carrying on a business makes a profit from an isolated transaction or operation, that profit is assessable ordinary income if both of the following elements are present:

•                     the intention or purposes of the taxpayer in entering into the 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 relevant intention or purpose of the taxpayer (of making a profit or gain) referred to in Myer 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 (paragraph 38 of TR 92/3).

It is also not necessary that the intention or purpose of profit-making be the sole or dominant intention or purpose for entering into the transaction. Paragraph 40 of TR 92/3 provides that it is sufficient if profit-making is a significant purpose. However, the profit-making purpose must be more than a mere possibility. In Westfield v FCT 91 ATC 4234, Hill J said:

While a profit-making scheme may lack specificity of detail, the mode of achieving that profit must be one contemplated by the taxpayer as at least one of the alternatives by which the profit could be realised... But, even if that goes too far, it is difficult to conceive of a case where a taxpayer would be said to have made a profit from the carrying on, or carrying out, of a profit-making scheme, where, in the case of the scheme involving the acquisition and resale of land, there was, at the time of acquisition, no purpose of resale of land, but only the possibility (present, one may observe, in the case of every acquisition of land) that the land may be resold.

Paragraph 41 of TR 92/3 states that 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. However, this is not always the case, as there may be special circumstances where the requisite profit-making purpose arises some time after acquisition of a property.

An example is provided in paragraph 42 of TR 92/3 where a taxpayer acquires an asset with the intention of using it for personal enjoyment but later decides to venture or commit the asset either as the capital of a business or into a profit-making undertaking or scheme with the characteristics of a business operation or commercial transaction. In such circumstances, the activity of the taxpayer would constitute 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 would be income despite the taxpayer not having the purpose of profit-making at the time of acquiring the asset.

Further, in FC of T v. Whitfords Beach Pty Ltd (1982) 150 CLR 355; 82 ATC 4031 (Whitfords Beach), the High Court found a 'profit-making scheme' even though land was originally acquired by a company for the passive recreational use of the shareholders. However, in that case, the company came under the ownership and control of new shareholders whose purpose was to use the company's asset for a profit-making undertaking or scheme.

In Casimaty v FCT 97 ATC 5135, it was held that significant changes in organisational structure or control of a landholding entity may alter the timing for the requisite profit-making purpose. Where there is no such change, it is apparent from the decision of the Full Court in Westfield that the profit-making purpose must be present when the asset is first acquired. It was held in that case that:

Once it is clear that the activity of buying and selling, which generated the profit, was not an activity in the ordinary course of business, or, for that matter, an ordinary incident of some other business activity, the profit in question will only form part of the assessable income of the appellant, by virtue of it being income in accordance with the ordinary concepts of mankind, if the appellant had a purpose of profit-making at the time of acquisition.

Based on an objective consideration of the facts provided, the Commissioner is of the view that the owners did not have the requisite profit-making purpose when they acquired the Property. This is supported by the construction of infrastructure and improvements to the Property to facilitate the efficient operation of the primary production business from the time of its purchase and the length of time the Property had been operated as a primary production business prior to any attempts to sell the property. The sale of the Property came about, not because of a desire to make a profit but because of the negative impact of the Property's rezoning on the operation of the primary production business. Therefore, the first element/condition (profit-making purpose) of paragraph 16 of TR 92/3 is not satisfied.

Of the two elements/conditions of paragraph 16 of TR 92/3, both must be satisfied in order for a profit from an isolated transaction (where a business is not being carried on) to be classified as income. As the first element/condition (profit-making purpose) of paragraph 16 of TR 92/3 is not satisfied it is not necessary to discuss further the second element/ condition (business operation or commercial transaction) of paragraph 16 of TR 92/3.

The expression 'mere realisation' is used to distinguish a mere realisation from a business operation or a commercial transaction carrying out a profit-making scheme.

Profits made on the realisation of capital assets can still be ordinary income if the activities go beyond a mere realisation and instead become a separate business operation or commercial transaction even though the taxpayer did not have a purpose of profit-making at the time of acquiring the asset.

In McClelland v FC of T [1970] HCA 39, for example, the Privy Council held that the question to be answered was whether the facts revealed a mere realisation of capital, albeit in an enterprising way, or whether they justify a finding that the taxpayer went beyond this and engaged in a trade of dealing in the asset, albeit on one occasion only.

Lord Justice Clark, in distinguishing between proceeds that are mere realisation of capital and ordinary income, stated in California Copper Syndicate v Harris (1904) 5 TC 159 at pp 165-166 that:

...What is the line which separates the two classes of cases may be difficult to define, and each case must be considered according to its facts; the question to be determined being - is the sum of the gain that has been made a mere enhancement of value by realising a security, or is it a gain made in an operation of business in carrying out of a scheme of profit-making?

In FC of T v Whitfords Beach Pty Ltd 82 ATC 4031, Gibbs CJ similarly said (at 4034), that:

When the owner of an investment chooses to realize it, and obtains a greater price for it than he paid to acquire it, the enhanced price will not be income within ordinary usages and concepts, unless, to use the words of the Lord Justice Clerk in California Copper...'what is done is not merely a realisation or change of investment, but an act done in what is truly the carrying on, or carrying out, of a business'.

In this case, the arrangement is considered to be a mere realisation of an asset. The development application for development approval was not intended to initiate the development of the land but to instigate compensation negotiations.

On the facts, the Property was purchased by related entities with the intention to conduct a primary production business activity. Improvements to the property were made to facilitate the conduct of that primary production business and the Property has been held and utilised on that basis for a long period of time. The re-zoning process and the subsequent sale were a product of the negative impacts of the rezoning decisions on the primary production activities rather than an attempt by the taxpayers to maximise the value of property. The facts do not indicate that the purchase of the property by the relevant entities was for the purposes of conducting a business of selling land or that the property was purchased with the intention of a profit making undertaking or scheme. The sale of the Property is the mere realisation of a capital asset. Consequently, the proceeds from the sale of the Property would not constitute income under section 6-5 of the ITAA 1997.

Question 2

Summary

The sale of the Property acquired prior to 20 September 1985 does not result in assessable income under section 15-15 of the ITAA 1997.

Detailed reasoning

Subsection 15-15(1) of the ITAA 1997 states:

Your assessable income includes profit arising from the carrying on or carrying out of a profit-making undertaking or plan.

However, subsection 15-15(2) of the ITAA 1997 provides that such a profit will not be assessable under the section if it:

(a) is assessable as ordinary income under section 6-5; or

(b) arises in respect of the sale of property acquired on or after 20 September 1985.

The note to section 15-15 of the ITAA 1997 states that where property is acquired for a profit making purpose before 20 September 1985 section 25A of the ITAA 1936 will apply to include that profit in assessable income.

Even where the sale of land is not regarded as part of carrying on a business of property subdivision and sale, a transaction entered into with the purpose of profit-making by sale could give rise to assessable income.

The basic distinction between a development and sale of property as part of a business, or alternatively, a 'profit making' undertaking or scheme is that the latter will generally be a one-off event and not carried out in an overly organised or systematic manner. However, the overriding purpose and intention of the entity entering into the venture must be to make a profit.

TR 92/3 Income tax: whether profits on isolated transactions are income states:

6. Whether a profit from an isolated transaction is income according to the ordinary concepts and usages of mankind depends very much on the circumstances of the case. However, a profit from an isolated transaction is generally income when both of the following elements are present:

a) the intention or purpose of the 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 out a business operation or commercial transaction.

7. 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.

8. 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.

9. 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, but not always, necessary that the taxpayer has the purpose of profit-making at the time of acquiring the property.

On the facts, purchase of the Property was not a venture to make a profit from a property sale. The same facts and indicia considered in Question 1 previously apply here also. The Property was originally acquired for the purpose of carrying on a business. It has been held for a substantial period of time during which it was used in the business activities. Accordingly, the proceeds would not be assessable income under section 15-15 of the ITAA 1997.

Question 3

Summary

Section 25A of the ITAA 1936 cannot apply to the whole or parts of the proceeds from the sale of the Property, as the section cannot apply to profits arising in the 1997-98 or later income years.

Detailed reasoning

Section 25A of the ITAA 1936 can bring into assessable income the profit arising from the sale of property acquired for the purpose of profit-making by sale or from the carrying on or carrying out of a profit-making undertaking or scheme.

Subsection 25A(1) of the ITAA 1936 provides:

The assessable income of a taxpayer shall include profit arising from the sale by the taxpayer of any property acquired by the taxpayer for the purpose of profit-making by sale, or from the carrying on or carrying out of any profit-making undertaking or scheme.

Subsection 25A(1A) of the ITAA 1997 provides that section 25A does not apply in respect of property acquired on or after 20 September 1985.

Further, subsection 25A(1B) of the ITAA 1997 provides that this section does not apply to a profit arising in the 1997-98 year of income or a later year of income, even if the undertaking or scheme was entered into, or began to be carried on or carried out, before the 1997-98 year of income. The note to the section provides that section 15-15 (Profit-making undertaking or plan) to the ITAA 1997 deals with such profits.

As the sale of the Property occurred after the 1997-98 income year, the section does not apply.

Question 4

Summary

As the Trustees have continued to administer the trusts for the benefit of the members of Individual A's family with no amendments to trusts deeds or changes to shareholdings in the company since before 20 September 1985, it is reasonable to assume that the Property is a pre-CGT asset pursuant to subsection 149-30(2) of the ITAA 1997 for all applicants that are not individuals.

Detailed reasoning

Division 149 of the ITAA 1997 provides the rules which determine when an asset acquired by a taxpayer before 20 September 1985 is treated as being acquired after that date for capital gains tax (CGT) purposes.

Section 149-10 of the ITAA 1997 provides as follows:

A CGT asset that an entity owns is a pre-CGT asset if, and only if:

(a) the entity last acquired the asset before 20 September 1985; and

(b) the entity was not, immediately before the start of the 1998-99 income year, taken under:

(i) former subsection 160ZZS(1) of the Income Tax Assessment Act 1936; or

(ii) Subdivision C of Division 20 of former Part IIIA of that Act;

to have acquired the asset on or after 20 September 1985; and

(c) the asset has not stopped being a pre-CGT asset of the entity because of this Division.

Section 149-30 of the ITAA 1997 provides that an asset of a non-public entity stops being a pre-CGT asset at the earliest time when the majority underlying interests in the asset were not held by ultimate owners who had majority underlying interests in the asset immediately before 20 September 1985.

Subsection 149-15(3) of the ITAA 1997 relevantly defines an 'ultimate owner' to include an individual. It does not include companies that pay dividends to their members, or trusts.

Subsection 149-15(2) of the ITAA 1997 defines an 'underlying interest' in a CGT asset as a beneficial interest that an ultimate owner has (whether directly or indirectly) in the asset or in any ordinary income that may be derived from the asset.

Subsection 149-15(1) of the ITAA 1997 defines majority underlying interests. It requires ultimate owners to hold more than 50% of the beneficial interests (either directly or indirectly through one or more interposed companies, trusts or partnerships) in the CGT asset and in any ordinary income that may be derived from the asset.

Subsections 149-15(4) and (5) of the ITAA 1997 provide that an ultimate owner has an indirect beneficial interest in a CGT asset of another entity if he/she/it would receive for his/her/its own benefit any capital or ordinary income distributed by the entity through interposed entities.

Under subsection 149-30(2) of the ITAA 1997, if the Commissioner is satisfied, or thinks it reasonable to assume, that the majority underlying interests in the asset have not changed up to a particular time, then subsections 149-30(1) and (1A) of the ITAA 1997 apply and the asset continues to be a pre-CGT Asset. Simply put, subsection 149-30(2) of the ITAA 1997 requires that the Commissioner has to be satisfied that the majority underlying interests in the assets have not changed, otherwise the asset is deemed to have been acquired at the time that the change in majority underlying interests in that asset happened.

In this case, to the extent that the Property purchased prior to 20 September 1985 is not held directly by individuals, the underlying interests in the Property need to be traced through intermediary entities to the ultimate owners for the whole period from and including 20 September 1985 to the sale of that interest.

Non fixed trusts or discretionary or family trusts

Under ordinary legal concepts, where there is a discretionary trust deed, no beneficiary is entitled to income or capital of the trust until the trustee exercises its discretion to distribute income or to make an appointment of capital. Because the beneficiary of a discretionary trust does not hold an interest in any asset of the trust or in the ordinary income derived from the asset until the trustee's discretion is exercised, it would not be possible for a discretionary trust to satisfy the continuing majority underlying interests test set out in subsection 149-30(1) of the ITAA 1997.

A pragmatic administrative practice of looking through interposed entities. in the form of TaxationRuling IT 2340 Income Tax: Capital gains: Deemed acquisition of assets by a taxpayer after 19 September 1985 where a change occurs in the underlying ownership of assets acquired by the taxpayer on or before that date (IT 2340), has been developed by the Commissioner. This ruling is provided on the basis of concepts outlined in that IT. The IT applies an approach of 'looking through' interposed entities to determine which natural persons hold the beneficial interests for the purposes of section 160ZZS of the ITAA 1936, which preceded Division 149 of the ITAA 1997. This is highlighted in paragraph 2 of IT2340 which states:

The terms "underlying interest" and "majority underlying interests", on the basis of which the provision operates, have the same meanings as they have in Subdivision G of Division 3 of Part III of the Act - which deals with the income tax treatment of interest in relation to "negatively geared" investments in rental property. In both cases (and like other provisions of the Act concerned with the measurement of ownership interests) underlying interests in relation to the assets concerned mean beneficial interests held by natural persons whether directly or through one or more interposed companies, partnerships or trusts. The clear policy of the law thus permits and requires that, for the purposes of the relevant provisions, chains of companies, partnerships and trusts are to be "looked through" in order to determine whether there has been a change in the effective interests of natural persons in the assets.

In relation what is described as discretionary or family trust, paragraphs 5 and 6 of IT 2340 are relevant as they state:

5. In relation to what are generally referred to as discretionary trusts, i.e., family trusts, the trustees of which have discretionary powers as to the distribution of trust income or property to beneficiaries, in considering the question of whether majority underlying interests have been maintained in the assets of the trust it will be relevant to take into account the way in which the discretionary powers of the trustees are in fact exercised.

6. Where a trustee continues to administer a trust for the benefit of members of a particular family, for example, it will not bring section 160ZZS into application merely because distributions to family members who are beneficiaries are made in such amounts and to such of those beneficiaries as the trustee determines in the exercise of his discretion.

In this case, there are trusts and companies in the structure that will need to be 'looked through'. Due to the discretionary nature of the trusts, it is difficult to apply the factual test with certainty in order to determine whether the majority underlying interest held in the assets of the trust has changed.

Application to your circumstances

Trusts

The C Unit Trust is a unit trust and each unit provides the unit holder with a proportionate right to the income and capital of the company. There has only been one unitholder for the period 20 September 1985 to the disposal of the Property, being D Trust.

The D Trust, A Trust and the B Trust are non-fixed or discretionary trusts which do not satisfy the definition of an ultimate owner in subsection 149-15(3) of the ITAA 1997, they must be 'looked through' in order to determine whether there has been a change in the beneficial interests of the ultimate owners in the trust's pre-CGT assets (see paragraph 2 of Taxation Ruling IT 2340). The beneficiaries of the D Trust, A Trust and the B Trust have not changed in the period from 20 September 1985 to the disposal of the Property.

A and B Trusts

Because A and B Trusts are discretionary trusts and do not satisfy the definition of an ultimate owner in subsection 149-15(3), they must be 'looked through' in order to determine whether there has been a change in the effective interests of the ultimate owners in the trusts' pre-CGT assets.

No amendments to the trust deeds have occurred to include or exclude different classes of beneficiaries and appointments of trust income by the trustees have only been made to those beneficiaries who are members of Individual A's family group.

Accordingly, it is reasonable for the Commissioner to assume that the majority underlying interests have been held at all times in relation to A and B Trusts' interest in the Property, by the same ultimate owners who held such interests immediately before 20 September 1985.

Therefore, Division 149 does not apply to the interests in the Property held by A and B Trusts to remove their pre-CGT asset status.

Application to unit trusts and private companies

C Unit Trust & D Trust

The sole unitholder of the C Unit Trust was H Pty Ltd as trustee for the D Trust since before 20 September 1985. The unitholders of C Unit Trust have remained unchanged for the period from and including 20 September 1985 to the present. D Trust is a non-fixed or discretionary trust.

No amendments to the trust deed have occurred to include or exclude different classes of beneficiaries and appointments of trust income by the trustee have only been made to those beneficiaries who are members of Individual A's family group.

The D Trust (and indirectly the C Unit Trust) has been administered for the benefit of Individual A and his family group since before 20 September 1985.

It is reasonable for the Commissioner to assume that the majority underlying interests in the C Unit Trust's interest in the Property has been held at all times by the same ultimate owners who held such interests immediately before 20 September 1985.

Therefore, Division 149 will not apply to remove the pre-CGT status of C Unit Trust's interest in the Property.

E Pty Ltd

The individual shareholders in E Pty Ltd have remained unchanged for the period 20 September 1985 to the time of the sale of E Pty Ltd's interest in the Property.

Therefore, Division 149 will not apply to remove the pre-CGT status of E Pty Ltd's interest in the Property.

Question 5

Summary

As the Property was acquired prior to 20 September 1985, paragraph 104-10(5)(a) of ITAA97 will apply to disregard the capital gain upon disposal.

Detailed reasoning

Pre-CGT asset

CGT event A1 happens when the Taxpayers disposed of the Property.

Relevantly, the time of the event is when the contract for sale is entered into (paragraph 104-10(3) of the ITAA 1997).

Paragraph 104-10(5)(a) of ITAA 1997 operates to disregard a capital gain made as a result of CGT event A1 where the asset was 'acquired' before 20 September 1985.

A CGT asset is 'acquired' when the disposal contract is entered into, or, if none, when the disposing entity stops being the asset's owner. The Property was purchased or acquired before 20 September 1985.

In accordance with Question 4 above, Division 149 of the ITAA 1997 will not apply to treat the Property as having lost its pre-CGT asset status.

As the Property was acquired prior to 20 September 1985, paragraph 104-10(5)(a) of the ITAA 1997 will apply to disregard any capital gain or loss made upon its disposal.

Questions 6 and Question 7

Summary

The Compensation payments are capital proceeds received for the loss of proprietary rights in the Property when the Property is rezoned and CGT event A1 happens. However, any capital gain or loss resulting is disregarded as the Property and hence the relevant proprietary rights were acquired prior to 20 September 1985.

Detailed reasoning

Subsection 6-10(4) of the ITAA 1997 provides that your assessable income includes statutory income amounts that are not ordinary income but are included in assessable income by another provision.

The provisions dealing with statutory income are listed in section 10-5 of the ITAA 1997. Included in this list is capital gains (section 102-5 of the ITAA 1997).

Section 102-20 of the ITAA 1997 states that a capital gain or capital loss is made only if a CGT event happens.

Section 108-5 of the ITAA 1997 provides that a CGT asset is any kind of property, or a legal or equitable right that is not property.

The right to seek compensation is the right of action arising at law or in equity and vesting in the taxpayer on the occurrence of any breach of contract, personal injury or other compensable damage or injury.

Although "compensation" is not defined in the ITAA 1997, Taxation Ruling TR 95/35 Income tax: capital gains: treatment of compensation receiptscontains a definition of compensation receipt:

A compensation receipt, or compensation, includes any amount (whether money or other property) received by a taxpayer in respect of a right to seek compensation or a cause of action, or any proceeding instituted by the taxpayer in respect of that right or cause of action, whether or not:

•                     in relation to any underlying asset;

•                     arising out of Court proceedings; or

•                     made up of dissected amounts.

A right to seek compensation is an asset for the purposes of Part 3-1 of the ITAA 1997. The right to seek compensation is acquired at the time of the compensable wrong or injury and includes all of the rights arising during the process of pursuing the compensation claim. The right to seek compensation is disposed of when it is satisfied, surrendered, released or discharged. This disposal triggers a CGT event C2.

For income tax purposes, a compensation amount generally bears the character of that which it is designed to replace. Taxation Ruling TR 95/35, in dealing with the taxation treatment of compensation receipts, suggests the assessability of a lump sum in the hands of the recipient depends on whether it is a receipt of capital or income nature. It is the character of the receipt in the hands of the recipient that must be determined: FCT v. Slaven (1984) 52 ALR 81; 15 ATR 242; 84 ATC 4077 (Slaven's Case). Generally, the material factor in determining whether compensation is of an income or capital nature is not the measure of the compensation, but what it is truly paid for: Glenboig Union Fireclay Co Ltd v. IR Commrs (1921) 12 TC 427.

In TR 95/35 the term 'underlying asset' is used. The underlying asset is defined in paragraph 3 of TR 95/35 as:

... the asset that, using the 'look-through' approach, is disposed of or has suffered permanent damage or has been permanently reduced in value because of some act, happening, transaction, occurrence or event which has resulted in a right to seek compensation from the person or entity causing that damage or loss in value or against any other person or entity.

Paragraph 4 of TR 95/35 states that:

If an amount of compensation is received by a taxpayer wholly in respect of the disposal of an underlying asset, or part of an underlying asset, of the taxpayer the compensation represents consideration received on the disposal of that asset. In these circumstances, we consider that the amount is not consideration received for the disposal of any other asset, such as the right to seek compensation.

Further, Taxation Ruling TR 97/3 Income tax: capital gains: compensation received by landowners from public authorities states:

6. A strict application of Part IIIA would require the compensation received from a public authority to be treated as consideration in respect of the disposal by the landowner of the right to compensation. However, TR 95/35 focuses on the asset to which the compensation receipt most directly relates. In the case of the restriction of ownership rights under statute and the consequential right to compensation, the most relevant asset is the landowner's pre-existing land with its rights of ownership including, for example, the right to use or enjoy the property. This right to use or enjoy the property is forfeited in part when the Property is rezoned. The loss of part of this right constitutes the disposal of part of the underlying asset (the land) for Part IIIA purposes (paragraph 160M(3)(b), subsection 160M(1) and section 160R).

Applying this approach, an amount of compensation received by a landowner for the loss of part of the rights of ownership is accepted as being consideration received in respect of the part disposal of the underlying asset (the land). The amount is not consideration for disposal of the right to seek compensation. Taxation Ruling TR 97/3 states:

Compensation received by a landowner under a statute which imposes a limitation on the owner's use of the land

12. An amount of compensation may be received by a landowner in respect of a reduction in the value of land resulting from limitations on the owner's use of the land imposed by statute. For example, the Native Vegetation Act 1991 (SA), the object of which is to preserve, enhance and manage native vegetation, limits rights of certain landowners to clear their land.

13. These compensation receipts are treated in the same way as compensation for a compulsorily acquired easement. Here again, there is a loss of some of the rights of ownership of the land. The compensation is treated as consideration in respect of the disposal of those rights, that is, in respect of a part disposal of the underlying land.

Section 98(1)(a) of the Planning and Environment Act 1987 (Vic) permits a landowner to claim compensation for financial loss suffered as the natural, direct and reasonable consequence of the land being reserved for a public purpose under a planning scheme. Accordingly, the compensation sought directly relates to a reduction in value of land resulting from statutory limitations imposed on the landowner's use of the land.

Any amount of compensation received in relation to the rezoning of the Property pursuant to paragraph 98(1)(a) of the Planning and Environment Act 1987 (Vic) is considered to be received in respect of the disposal of part of the rights of ownership of the underlying asset, the Property. Consequently, any amounts received as compensation for the giving up of proprietary rights in relation to the Property will be considered to be capital proceeds from the disposal of those rights.

CGT event A1 occurs when there is a disposal of a CGT asset (subsection 104-10(1) of the ITAA 1997). An entity is taken to dispose of a CGT asset if a change of ownership occurs from the entity to another entity, whether because of some act or event or by operation of law. The event happens when you enter into the contract for disposal, or if there is no contract when the change of ownership occurs (subsection 104-10(3) of the ITAA 1997).

In this case the owners of the Property disposed of certain proprietary rights in relation to that land when restrictions on the Property's use was legislated, resulting in the Property being rezoned to the Rural Conservation Zone and subject to the ESO4 and PAO7 overlays.

A capital gain arises where the capital proceeds from disposal is greater than the asset's cost base and a capital loss arises where asset ' s reduced cost base is greater than the capital proceeds.

Under subsection 116-20(1) of the ITAA 1997, the capital proceeds from a CGT event are the total of:

(a) the money you have received, or are entitled to receive, in respect of the event happening; and

(b) the market value of any other property you have received, or are entitled to receive, in respect of the event happening (worked out as at the time of the event).

Therefore, in this case, the capital proceeds in relation to the disposal of the proprietary rights as a result of the legislated restrictions on the Property's use will be the compensation amount received in relation to those restrictions.

Section 170 of the ITAA 1997 authorises the Commissioner to amend an assessment in specified circumstances. Sub-section 170(9) of the ITAA 1936 permits the Commissioner to amend an assessment to ensure its completeness and accuracy where an assessment of the taxable income of a taxpayer has included an estimated amount of income or of profits or gains of a capital nature derived by the taxpayer in a year from an operation or series of operations extending over more than one year and the actual profit or loss is subsequently ascertained. The Commissioner may amend an assessment at any time within 4 years after the total profit or loss actually derived or arsing is ascertained. This provision ensures that a taxpayer's income tax liability is limited to the ultimate taxable income derived.

In this case, once the final compensation amounts that relate to the CGT events are determined or received in later income years, the Commissioner may at any time within four years after the ascertainment of the total profit or loss actually derived or arising, amend the relevant Taxpayers assessments for the relevant income year to correctly reflect the taxable income derived.

However, subsection 104-10(5) of the ITAA 1997 provides that a capital gain or capital loss will be disregarded if the asset was acquired before 20 September 1985 (pre-CGT assets). In this case the proprietary rights were acquired before 20 September 1985 and any capital gain or loss on the happening of CGT event A1 is disregarded. Refer to the explanation for Question 4 for discussion of the pre-CGT status of the portions of the Property held by the company and the trusts.