Edited version of private advice

Authorisation Number: 1051991647105

Date of advice: 7 June 2022

Ruling

Subject: Sale of CGT asset

Question 1

Is the profit or gain made from the proposed sale of Property A a capital gain pursuant to subsection 104-10(4) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Is the profit or gain made from the sale of Property A profit or gain within the ordinary course of business and therefore assessable as ordinary income pursuant to section 6-5 of the ITAA 1997, and if so will section 118-20 of the ITAA 1997 apply to reduce the capital gain to zero?

Answer

No.

Question 3

Does the profit or gain made from the sale of Property A arise from a profit making undertaking or scheme and therefore is assessable as ordinary income under section 6-5 of the ITAA 1997?

Answer

No.

Question 4

Does section 118-25 of the ITAA 1997 apply to the CGT asset?

Answer

No.

This ruling applies for the following period: XXXX

Relevant facts and circumstances

The land and buildings the subject of this ruling application, collectively described as Property A, is owned by the Corporate Trustee of the Trust (Taxpayer).

The ultimate underlying owners of the Trust are members of Family A.

The Taxpayer is controlled by the Family A.

Family A business

From XXXX they commenced a new business with the intention of developing properties to be held for the purpose of generating long-term rental income, to allow them to weather market downturns. However, from XXXX to XXXX they developed and sold several properties to build up sufficient capital to enable them to retain assets - to facilitate their desired business model/outcome.

All the above developments were completed by XXXX.

All of the above properties were owned in special purpose vehicles and the sale of the properties were treated as revenue for income tax purposes.

Once the requisite capital base was achieved, every asset since then has been developed to be held for the purpose of deriving rental income.

The distinct activities of Family A's business are as follows:

• the acquisition and development of commercial sites which are typically leased for the purpose of deriving rental income;
• investment with third parties in the acquisition and development of commercial properties;
• commencing operational businesses; and
• consultancy work for private landowners.

When Family A acquires or constructs commercial properties, they establish special purpose vehicles to own the asset.

Property comprised the X properties developed to be held for the purpose of deriving rental income.

Family A also partly owns a number of other commercial properties with unrelated parties.

The properties are recorded in the financial accounts of the relevant taxpayer as a non-current investment asset. Of the extensive property portfolio, only one property is recorded as trading stock in the financial accounts of the relevant taxpayer. When construction is completed this property will be sold and the gain will be recorded on revenue account.

Property A

The Taxpayer acquired Property A in XXXX.

A development application for the construction of a commercial property was submitted with the relevant authorities on XXXX.

A construction agreement was entered into in XXXX and construction began in XXXX and was completed in XXXX.

The Taxpayer entered into a lease agreement prior to the land being purchased and prior to development approval and commencement of construction. The lease term was for 15 years with three further options each for 5 years. The purpose of the lease agreement was to provide a rental income stream on completion.

The Taxpayer entered into a lease agreement with another entity for 10 years with a further option for 10 years. The purpose of the lease agreement was to provide a rental income stream on completion.

Property A was continuously leased upon the completion of the development.

Property A has always been recorded in the financial accounts of the Trustee as a non-current investment asset.

From XXXX the Family A started to receive unsolicited offers to purchase Property A.

These offers were rejected. However, Family A undertook a marketing program which began in XXXX as a precaution in the event the bank did not finance the purchase of another site, which had a long settlement. Within several months of beginning the marketing program they were able to obtain finance to settle on the site and the marketing program was abandoned.

In XXXX an unsolicited offer was received for the purchase of Property A above the bank valuation of the property.

After rejecting the offer a subsequent one was received from the same party which was accepted.

The offer was accepted as it was 25% above the independent valuation of the property. There were concerns regarding a tenant, who was not trading well. The Taxpayer/family group were concerned that this may lead to a rent reduction and consequential lowering of the asset value when the lease agreement was due for review in approximately six years.

The funds from the sale of Lithgow were used for a new project.

Financing arrangements

On XXXX the Taxpayer sought a facility for the purchase of the asset.

The bank approved financing relates to acquisition of Property A.

The bank provided a further loan facility for the purpose of construction.

The bank approved a long-term facility for Property A for an initial term of five years.

Property A was used by the Family A as security for another facility for Property B. Whilst Property A was used as cross collateral with Property B it was unable to be sold without alternative security. Family A anticipated that the asset would not be sold, which is why it was used as security.

The loan was refinanced to increase the facility limit. Family A increased the debt against this property to assist with the acquisition and holding of other assets.

When the loan facility was refinanced over the years the Family A submitted group cashflows as evidence that they were able to service the loan. In those cashflows the only cash being generated by Property A was rental income. When comparing this against the loan repayments required for the property the cashflows demonstrated that there was sufficient cash to meet the loan repayments for the loan.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 Division 70

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 118-20

Income Tax Assessment Act 1997 section 118-25

Reasons for decision

Question 1

Summary

The sale of Property A is considered a mere realisation of capital assets and the resulting gain will be subject to capital gain tax pursuant to subsection 104-10(4) of the ITAA 1997.

Detailed reasoning

The profits or gains made from the disposal of real property can be assessed for income tax purposes in a number ways, including:

•         as ordinary income under section 6-5 of the ITAA 1997, resulting from:

­   carrying on a business; or

­   an isolated or commercial transaction that was entered into with a profit-making intention; or

•         as statutory income pursuant to the capital gains tax (CGT) provisions in Part 3-1 and 3-3 of the ITAA 1997 (section 6-10 of the ITAA 1997)

Profits or gains made in the ordinary course of business

Taxation Ruling TR 92/3- Income tax: whether profits on isolated transactions are income (TR 92/3) sets out the Commissioner's view on the application of the principles established in Federal Commissioner of Taxation v The Myer Emporium Ltd (1987) 163 CLR 199 ('Myer'). Paragraph 32 of TR 92/3 states that a profit or gain made in the ordinary course of a business includes:

•         a profit or gain arising from a transaction which is itself a part of the ordinary business of a taxpayer (judged by reference to the transactions in which the taxpayer usually engages); and

•         a profit or gain arising from a transaction which is an ordinary incident of the business activity of the taxpayer, although not a transaction entered into directly in its main business activity.

In determining whether profits or gains made from the disposal of real property are made in the ordinary course of business, one must establish if a taxpayer is carrying on a business and what the nature of the business is.

The definition of 'business' for income tax purposes is wide and includes any profession, trade, employment, vocation or calling, but does not include occupation as an employee (subsection 995-1(1) of the ITAA 1997).

The principles in Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? ('TR 97/11') provide guidance on whether a taxpayer is carrying on a business and can be applied in various contexts. Specifically, paragraph 13 of TR 97/11 provides a list of indicators that are relevant in determining whether a taxpayer is carrying on a business. In general, the indicators 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 repetition and regularity of the activity;

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

•         whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at 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 a sporting activity.

No one indicator is decisive but rather different indicators must be considered in combination and as a whole. So the question of whether a business is being carried on is determined in an objective manner based on the weighing up of all the relevant facts and circumstances of each case.

In relation to property or land development, Taxation Determination 92/124: Income Tax: property development: in what circumstances is land treated as trading stock ('TD 92/124') recognises that repetitive buying and selling of property is not necessary to establish that a business of property acquisition, development and sale is being carried on. If a 'definite and continuous cycle of operations' has been initiated, a business of property development has commenced.

Once it is established that there is a business, it then follows that the profits made in the ordinary course of carrying on that business constitute income. This principle has been discussed in many court cases, generally in the context of distinguishing between income and capital receipts. Californian Copper Syndicate (Limited & Reduced) v. Harris (1904) 5 T.C. 159 ('Californian Copper Syndicate') has been cited with authority in many Australian court cases as the leading case regarding these principles.(See for example, Westfield Limited v Commissioner of Taxation (1991) 91 ATC 4234, Commissioner of Taxation (Cth) v Myer Emporium Ltd (1987) 163 CLR 199, London Australia Investment Company Limited v Federal Commissioner of Taxation 77 ATC 4398 and CMI Services Pty Ltd v Federal Commissioner of Taxation (1990) 90 ATC 4428).

In Californian Copper Syndicate Lord Justice Clerk stated at 165-166 that:

It is quite a well-settled principle in dealing with questions of assessment to income-tax, that where the owner of an ordinary investment chooses to realise it, and obtains a greater price for it than that for which he originally acquired it, the enhanced price is not profit...But it is equally well established that enhanced values obtained from realisation or conversion of securities may be so assessable, where 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.

...

What is the line which separates the two classes of cases it 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 by an operation of business in carrying out a scheme for profit-making.

In London Australia Investment Company Limited v Federal Commissioner of Taxation 77 ATC 4398 ('London Australia'), Gibbs J, in discussing the above principles, stated:

Their Honours [in Colonial Mutual Life Assurance Society Ltd v Federal Commissioner of Taxation (1945) 73 CLR 604] went on to point out that not all of the proceeds of a business carried on by a taxpayer are income for the purposes of the [Income Tax Assessment] Act; they will be so only if they are income 'in accordance with the ordinary usages and concepts of mankind, except in so far as the Act states or indicates an intention that receipts which are not income in ordinary parlance are to be treated as income' (see at p. 615). However it is in my opinion established by this and many other cases in which Californian Copper Syndicate v. Harris has been applied that if the sale in question is a business operation, carried out in the course of the business of profit-making, the profit arising on the sale will be of an income character. To apply this criterion it is necessary 'to make both a wide survey and an exact scrutiny of the taxpayer's activities': Western Goldmines N.L. v. C. of T. (W.A.) (1938) 59 C.L.R. 729 at p. 740.

Gibbs J also noted that the test in Californian Copper Syndicate is applicable to any business.

Similarly, in Myer, the High Court stated that:

Although it is well settled that a profit or gain made in the ordinary course of carrying on a business constitutes income, it does not follow that a profit or gain made in a transaction entered into otherwise than in the ordinary course of carrying on the taxpayer's business is not income. Because a business is carried on with a view to profit, a gain made in the ordinary course of carrying on the business is invested with the profit-making purpose, thereby stamping the profit with the character of income.

Isolated transaction with a profit making intention

In some instances a profit or gain made from an isolated or commercial transaction could constitute ordinary income if the taxpayer's purpose or intention in entering into the transaction was to make a profit, notwithstanding that the transaction was not part of its daily business activities.

This was discussed in Myer, where the full bench of the High Court stated that:

But a gain made otherwise than in the ordinary course of carrying on the business which nevertheless arises from a transaction entered into by the taxpayer with the intention or purpose of making a profit or gain may well constitute income. Whether it does depends very much on the circumstances of the case. Generally speaking, however, it may be said that if the circumstances are such as to give rise to the inference that the taxpayer's intention or purpose in entering into the transaction was to make a profit or gain, the profit or gain will be income, notwithstanding that the transaction was extraordinary judged by reference to the ordinary course of the taxpayer's business. Nor does the fact that a profit or gain is made as the result of an isolated venture or a "one-off" transaction preclude it from being properly characterized as income (F.C. of T. v. Whitfords Beach Pty. Ltd. 82 ATC 4031 at pp. 4036-4037, 4042; (1982) 150 C.L.R. 355 at pp. 366-367, 376). The authorities establish that aprofit or gain so made will constitute income 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.

And further:

The important proposition to be derived from [Californian Copper Syndicate] and [Ducker v. Rees Roturbo Development Syndicate Ltd (1928) A.C. 132] is that a receipt may constitute income, if it arises from an isolated business operation or commercial transaction entered into otherwise than in the ordinary course of the carrying on of the taxpayer's business, so long as the taxpayer entered into the transaction with the intention or purpose of making a relevant profit or gain from the transaction.

And further:

The proposition that a mere realization or change of investment is not income requires some elaboration. First, the emphasis is on the adjective "mere" (Whitfords Beach, at ATC pp. 4046-4047; C.L.R. p. 383). Secondly, profits made on a realization or change of investments may constitute income if the investments were initially acquired as part of a business with the intention or purpose that they be realized subsequently in order to capture the profit arising from their expected increase in value - see the discussion by Gibbs J. in London Australia, at ATC pp. 4403-4404; C.L.R. pp. 116-118. 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 realization. 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.

TR 92/3 also provides that profits from an isolated transaction will be income when:

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

•         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.

Even where the requisite intention may not exist on entering into the transaction, the High Court held in Whitfords Beach Pty Ltd v Federal Commissioner of Taxation (1983) 14 ATR 247 (Whitfords) there can be a change of intention.

In Whitfords there was a change of intention at the time a company holding a large parcel of land originally acquired for long-term investment, adopted a new set of articles that changed the intended usage of the land.

In Rosgoe Pty Ltd v Commissioner of Taxation (2015) FCA 1231, Logan J reinforced that the intent at acquisition and later, on sale of the property should be considered separately and the transactions as distinct activities:

When, later, the property was sold, the profit here arose not from the purchase but from the sale and because the sale was not part of the profit-making scheme the profit did not arise 'from the carrying on or carrying out' of that scheme.

The intention and purpose need to be carefully considered in each and every case. In Westfield v Commissioner of Taxation [1991] 91 ATC 4234 (Westfield'), Hill J said at 4241:

What was said in Myer has been applied in a number of cases in this court since. Among them are Moana Sand Pty Limited v Federal Commissioner of Taxation (1988) 88 ATC 4897, and Federal Commissioner of Taxation v Cooling (1990) 22 FCR 42. It does not, however, follow from the judgment in Myer, or for that matter, from the judgments in any later cases, that every profit made by a Taxpayer in the course of his business activity will be of an income nature. To so express the proposition is to express it too widely, and to eliminate the distinction between an income and a capital profit.

The relevant intention or purpose of the taxpayer (of making a profit or gain) is the taxpayer's intention or purpose discerned from an objective consideration of the facts and circumstances of the case. Generally, in cases where a person's subjective purpose or intention is a relevant issue, the person's evidence as to their subjective purpose or intention can be considered but it must be tested closely, and received with the greatest caution.

Capital gain from mere realisation

For CGT to apply there needs to be a CGT event that happens to a CGT asset.

A CGT asset is defined in section 108-5 of the ITAA 1997, with note 1 indicating land is a CGT asset.

Division 104 of the ITAA 1997 sets out the CGT events that can happen to a CGT asset and section 104-10 provides that CGT event A1 occurs on the disposal of an asset.

As a consequence of CGT event A1, subsection 104-10(4) of the ITAA 1997 provides that you make a capital gain if the capital proceeds from the disposal are more than the assets cost base or conversely you make a capital loss if the capital proceeds are less than the assets reduced cost base.

The mere realisation of a capital asset will be subject to the CGT provisions.

Where the sale is a 'mere realisation' the sale is on capital account to which the CGT rules will generally apply. These proceeds are not ordinary income.

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.

In Westfield, the company was in the business of designing, constructing, letting and managing shopping centres. The company acquired land in the early 1970s and further land via an option which it subsequently sold and realised at a substantial gain. The Full Federal Court held that the disposal of land was on capital account as the necessary intention or purpose of making a profit on the sale of the land was absent. This was because the main aim of the company was to secure contracts to design, develop and operate/manage a shopping centre on the land. The disposal of the land was incidental to these purposes. The fact that the transaction was commercial or a business transaction was, of itself, insufficient.

The Full Federal Court in reaching its decision considered the judgement in Myer and stated at 4241 that Myer 'emphasises that where a transaction occurs outside the scope of ordinary business activities, it will be necessary to find, not merely that the transaction is "commercial" but also that there was, at the time it was entered into, the intention or purposes of making a relevant profit'.

Other aspects of the judgement in Westfield discussed when profits from transactions outside the ordinary course of business of an entity constituted ordinary income at 4243:

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 its being income in accordance with the ordinary concepts of mankind, if the appellant had a purpose of profit-making at the time of acquisition.

And further at 4243:

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. Such was the case in [Steinberg v Federal Commissioner of Taxation (1972-5) 134 CLR 640]. 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 a 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. The same may be said to be the case where s. 25(1) of the Act is involved. As the court observed in Myer, in the passage already set out, the property, which generates the gain, must be acquired in an operation of business or commercial transaction:

"... for the purpose of profit-making by the means giving rise to the profit."

In determining whether a receipt is on revenue or capital account, the authorities establish that it is necessary to conduct "a wide survey and an exact scrutiny of the taxpayer's activities": Commissioner of Taxation v Stone (2005) 222 CLR 289 at [19]; Federal Commissioner of Taxation v Montgomery (1999) 198 CLR 639 at 663 [69]; both citing Western Gold Mines NL v Commissioner of Taxation (WA) (1938) 59 CLR 729 at 740 per Dixon and Evatt JJ.

This 'wide survey' is particularly important where the sale of the asset is by a taxpayer conducting a business. Jacobs J noted in London Australia at 127:

The identification and characterization of the business carried on by the taxpayer is the essential task.

Under the principle in Grollo Nominees Pty Ltd v Commissioner of Taxation (1997) 73 FCR 452 at 514-515 there will be occasions when it is appropriate to take into account the activities of the broader group of which the taxpayer is a part.

Application to your circumstances

Profits or gains made in the ordinary course of business

The Taxpayer is part of the wider business of Family A who are in the business of commercial leasing.

The nature and scale of the activities, together with the other indicators of business set out in TR 97/11 are satisfied and support the conclusion that the Taxpayer is carrying on a business.

Scope of the business

A wide survey and an exact scrutiny of Family A's business activities indicate it has a portfolio of commercial buildings it has held for significant periods of time - including the Taxpayer.

The activities of Family A include:

a)    The acquisition of commercial properties to hold as capital assets for the purpose of deriving rental income;

b)    The acquisition and development of commercial properties to hold as capital assets for the purpose of deriving rental income

c)    operational business relating to tenants of commercial properties; and

d)    consultancy work for private landowners.

The business is structured in such a way that there are discrete special purpose vehicles for each property acquisition or property acquisition and development activity.

All properties (once Family A had achieved sufficient capital bases to implement the business model of acquiring or acquiring and developing property for long term lease) are earmarked at the time of acquisition for long-term leasing activities.

When Family A commenced a business in XXXX for the purposes of acquiring or acquiring and developing properties for lease, they developed and sold several properties from XXXX to XXXX to enable them to generate capital to establish their rental property portfolio. Once they achieved sufficient capital in XXXX, properties were not developed for sale. The factors that demonstrate the Taxpayer's intention to hold the property for the long term (as set out below) indicate that sale of Property A reflects exceptional circumstances.

These factors indicate the scope of the Taxpayer's (and Family A's) activities mainly relate to the acquisition and development of property to hold for the long-term leasing.

The sale of Property A for profit is outside the ordinary course of the Taxpayer's (and Family A's) business.

Profit making intention

The relevant intention or purpose of the taxpayer (of making a profit or gain) is the taxpayer's intention or purpose discerned from an objective consideration of the facts and circumstances of the case.

In these circumstances there are a number of factors that indicate the property has been acquired and held as a capital asset for the purpose of generating long term rental income rather than acquired for the purpose of profiting from the sale of the property.

The following factors indicate an intention to hold the property long-term:

•         The business structure segregates each property acquisition or acquisition/development for commercial leasing activity - including from previous property acquisition and development for sale activities.

•         Where there is an intention by Family A to acquire property for sale at a profit, the property has been held as trading stock.

•         The Taxpayer acquired the property in XXXX.

•         The Taxpayer had held the property for over 5 years and intended to continue to own the property to derive rental income - Family A intended to hold Property A along with the other properties in their portfolio for the long-term.

•         The property was leased at all times. The Taxpayer had long terms lease arrangements in place - including 10 and 15 year leases.

•         Property A was recorded in the financial accounts as a non-current investment asset.

•         Property A was used as collateral with respect to other properties in Family A's property portfolio - property being held for the long term.

•         Family A increased the debt against Property A to assist with the acquisition and holding of the other assets. The rental income from Property A was sufficient to meet the loan repayments for the Property A loan.

•         Family A did not seriously contemplate the sale of Property A - they undertook a marketing program in case financing fell through for the acquisition of another property to add to their property portfolio, but that was not pursued once financing was approved.

•         Family A had rejected a number of unsolicited offers, but the offer of 25% above the current valuation was too good to refuse as the funds could be used for a new project (which Family A is developing to be held for the purpose of deriving rental income) - having regard to the ability to source commercial finance in the current climate.

These factors all indicate, with the exception of one property (in which Family A has a 50% interest) in an extensive property portfolio, an intention to hold the properties, including Property A, for the purpose of long-term leasing.

Conclusion

This leads to the conclusion that the land was not acquired with the intention of profit making by sale, but rather to hold as a long-term investment for the purpose of gaining income from commercial leasing.

The decision to realise the capital assets that comprise Property A does not make the proceeds from the sale either income from a business activity or profits from the sale of an undertaking or scheme.

The sale of Property A is considered a mere realisation of capital assets and is subject to capital gains tax pursuant to subsection 104-10(4) of the ITAA 1997.

Question 2

Summary

The profit or gain made from the sale of Property A will not be profits in the ordinary course of business and therefore will not be assessable as ordinary income pursuant to section 6-5 of the ITAA 1997, nor will section 118-20 of the ITAA 1997 apply to disregard the capital gain.

Detailed reasoning

As determined in Question 1, the sale of Property A is a mere realisation of capital assets and therefore the profits or gain on the disposal of the assets will be subject to capital gains tax pursuant to subsection 104-10(4) of the ITAA 1997.

Section 118-20 of the ITAA 1997 operate as the anti-overlap provision to reduce any capital gain by the amount which has been otherwise assessed as ordinary income under section 6-5 of the ITAA 1997.

As concluded in Question 1 the Taxpayer (and Family A) is not in the business of commercial property development for sale. It is accepted that the realisation of Property A was part of a business strategy of acquiring or acquiring and developing long-term commercial leasing properties.

Therefore the sale of Property A occurred outside of the ordinary course of the Taxpayer's and Family A's business and any profits or gain from the sale is not business income.

Further, the gain from the disposal of the asset by the Taxpayer will not be ordinary income and therefore will not be included in their assessable income under section 6-5 of the ITAA 1997. As such section 118-20 of the ITAA 1997 will not operate to disregard the capital gain.

Question 3

Summary

The profit or gain made from the sale of Property A does not arise from a profit making undertaking or scheme and therefore is not assessable as ordinary income under section 6-5 of the ITAA 1997.

Detailed reasoning

As determined in Question 1, the sale of Property A is a mere realisation of capital assets and therefore the profits or gain on the disposal of the assets will be subject to capital gains tax pursuant to subsection 104-10(4) of the ITAA 1997.

Further, it was concluded that the proposed sale was not an ordinary incident of the Taxpayer's (or Family A's) ordinary enterprise.

It is also accepted that Property A and the properties (other than those that were specifically acquired from the outset for profit from the sale of the property) were acquired as a long-term investment for the purposes of gaining income from commercial leasing. The realisation of Property A was fortuitous: it complemented Family A's business strategy of acquiring or acquiring and developing long-term commercial leasing properties

The Taxpayer (and Family A) did not acquire the asset with the intention of profit making by sale and in fact always intended the property be held long-term as an investment asset, with the proposed sale motivated by the need for capital and not to make a profit.

As there was no intention or purpose of making a profit or gain by sale at the time of acquisition and this intention did not change, it is concluded that this was not an isolated or commercial transaction entered into with a profit making intention.

As such the profit on the sale of Property A will not be income according to ordinary usage.

Question 4

Summary

Section 118-25 of the ITAA 1997 will not apply as the asset is not considered to be trading stock.

Detailed reasoning

Division 70 deals with the tax treatment of trading stock. The term 'trading stock' is defined very widely to include anything produced, manufactured or acquired, that is held for manufacture, sale or exchange in the ordinary course of business (section 70-10). This definition includes land.

Taxation Determination TD 92/124 Income tax: property development: in what circumstances is land treated as 'trading stock? (TD 92/124) provides that land will be treated as trading stock if it is held for the purpose of resale and a business activity which involves the dealing in land has commenced. Both the required purpose and the business activity must be present.

TD 92/124 further provides that the business activity is taken to have commenced when a taxpayer embarks on a definite and continuous cycle of operations designed to lead to the sale of the land.

TD 92/124 provides that land is treated as trading stock for income tax purposes if it is held for the purpose of resale and the Landowner embarks on a definite and continuous cycle of operations designed to lead to the sale of the land. It is not necessary that the acquisition of land be repetitive; a single acquisition of land for the purpose of development, subdivision and sale by a business commenced for that purpose would lead to the land being treated as trading stock.

The purpose of landholding can alter. Where land was originally acquired as a capital asset but is later ventured into a property development business it will become trading stock of the taxpayer. Section 70-30 of the ITAA 1997 applies where an item which is already owned by the taxpayer (but is not held as trading stock) starts being held as trading stock.

As discussed in Question 1, the sale of Property A does not reflect a change in the intention of the Taxpayer (or Family A) to treat Property A as trading stock of a business of property development. Family A's approach is to treat property acquired for sale at a profit as trading stock: otherwise, the property is held as a non-current investment asset. In keeping with this practice, Property A was acquired under a special purpose vehicle and held at all times by the Taxpayer as a non-current investment asset. Property A was held as a capital asset at all times, including at the time of disposal for the purposes of CGT event A1.