Edited version of private advice

Authorisation Number: 1052034950906

Date of advice: 16 September 2022

Ruling

Subject: Assessable income - income vs capital

Question

Is the taxpayer carrying on the business as a property developer in respect of the Land?

Answer

Yes.

This ruling applies for the following period

Financial year ending 30 June 20xx

The scheme commenced on

1 July 20xx

Relevant facts and circumstances

The taxpayer acquired the property some 4 years prior.

The taxpayer has a business Plan that includes the following information:

Executive Summary

the taxpayer is a special purpose vehicle established for the development of the property

Our aim is to obtain development approvals and sell the whole estate within x years of acquisition subject to demand. The taxpayer believes they purchased the site at the right time.

Our competitive advantages are strong and underpin our confidence in achieving a successful outcome.

We are confident that we can adapt to changing market conditions and produce a development that meets the needs of the market

...

Our Purpose

The sole purpose of the taxpayer is to acquire and develop the residential zoned broadacre property

The design for the Land currently with Council is for approval of a subdivision in excess of 50 lots

The business strategy is to progressively release the subdivided lots to the market in stages. The aim is to obtain development approvals and sell the whole estate within x years of acquisition, subject to demand

The taxpayer has not carried out any other land development activities prior to acquiring the Land. It was an entity established for this sole purpose

The Land was purchased solely for its development potential given the residential zoning. Numerous development options were explored including unit development, potential commercial uses and residential lot subdivision. The process evolved as the various opportunities were considered and has been influenced by Council planning responses, consultants' advice, community feedback and objections. Numerous design options were explored together with feasibility studies (where relevant) for each development option

The taxpayer has undertaken investment feasibility analysis which shows the expected cash flows, expenses and return on investment in relation to the development. Expected sources of income include having dwellings on some lots (as house and land packages) and selling the balance of the estate after a staged subdivision. They expect to sell x lots per year and the whole estate in x years

No part of the Land is used for private or domestic purposes and there is no domestic dwelling on the Land.

The taxpayer has carried out various activities pursuant to developing the Land including:

• preparation of a plan of subdivision
• community consultation, and
• actively seeking and consulting with and making applications to the local Council for a planning permit

The taxpayer does not engage any employees but has engaged third-party consultants, including a land surveyor, civil engineer, town planners, bushfire consultant and traffic consultant. Various documents and reports have been obtained or prepared including a land survey, masterplan of subdivision, consultant design and reports, a planning permit report and an application for a permit to council

The controlling individuals of the taxpayer have significant property industry experience. They have carried out work relating to development of the Land as follows:

•         development design and financial feasibility aspects of the development

•         land development design, town planning management and construction

•         community consultation and engagement

The time spent by the controlling individuals on development activities can range from a few hours to 16 hours per week.

The taxpayer plans to carry out the development alone without any profit sharing or any joint venture arrangements with any other entities.

The taxpayer is registered for GST and submits quarterly BAS statements and remits GST

The taxpayer holds the Land on revenue account as trading stock, as part of its business

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 8-1

Reasons for decision

All references are to the Income Tax Assessment Act 1997, unless otherwise stated

Summary

The taxpayer is carrying on a business as a property developer in respect of the Land and income from its property development activities is assessable as ordinary business income under section 6-5 and deductions are allowable under section 8-1

Detailed reasoning

There are three ways the proceeds from a land subdivision can be treated for taxation purposes:

•         assessable ordinary income under section 6-5 as income from carrying on a business of property development

•         assessable ordinary income under section 6-5 as income from an isolated commercial transaction with a view to a profit, or

•         a realisation, often referred to as a 'mere realisation', of a capital asset, assessable under Parts 3-1 and 3-3.

Whether the proceeds are treated as income or capital will depend on the situation and circumstances of each particular case. No single factor will be determinative; rather, it will be a combination of factors that will lead to a conclusion as to the character of the activities.

Carrying on a business of property development

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

The Commissioner's view on whether a taxpayer is carrying on a business is found in Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production?

Although TR 97/11 deals with the issues of determining whether a taxpayer is carrying on a business of primary production, the same principles can be applied to the question of whether a taxpayer is in the business of property development

Paragraph 13 of TR 97/11, uses the following indicators to determine whether a taxpayer is carrying on a business:

•         whether the activity has a significant commercial purpose or character

•         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.

Whether a business is being carried on depends on the large or general impressions gained from looking at all the indicators and whether these indicators provide the operations with a commercial flavour.

Application to your circumstances

The table at paragraph 18 of TR 97/11 provides a summary of the main indicators of carrying on a business. These are set out below alongside their application to the taxpayers circumstances:

As demonstrated in the table above, the activities the taxpayer undertakes, as well as its plans and intentions, feature many of the factors that align them to carrying on a business including:

• a significant commercial activity
• a purpose and intention of carrying on a business
• an intention and expectation of profit
• the activity is carried on in a manner similar to ordinary trade for this type of activity
• the activity is organised and businesslike. It is carried on in a systematic manner and records are kept
• the size and scale of the activity is significant
• it is not a hobby, recreation or sporting activity
• a business plan exists
• there will be commercial sales of product
• the directors of the Trustee have the necessary education, knowledge and skill. Where additional skills are needed professionals have been engaged to provide these

The taxpayer was established for the sole purpose of acquiring, developing and subdividing the Land, the individual controllers have substantial experience, repetition and regularity of activity in property development.

Conclusion

After weighing up all of the relevant facts and the circumstances of this case, it is considered, the taxpayer is carrying on a business of property development.

Income from the property development activities is assessable as ordinary business income under section 6-5 and deductions are allowable under section 8-1.