Edited version of private advice

Authorisation Number: 1052058145072

Date of advice: 10 March 2023

Ruling

Subject: Property development

Question

Is the Property regarded as land held as trading stock by Trust A for its property development business?

Answer

No

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

Trust A is a discretionary Trust initially established more than 25 years ago to hold real estate investments for Individual A and their spouse Individual B, and also to potentially receive income from other business activities conducted by Individual A and Individual B.

Company A was established to be the trustee of Trust A.

Individual A and Individual B are both equal shareholders and directors of Company A. Individual A is the secretary of Company A.

Trust A purchased the Property approximately 20 years ago. The Property was purchased by Trust A for it to be used as the family's primary residence initially with a view to its future development.

At the time of acquisition, the Property included more than 10 Ha of land and a house. The house was renovated extensively and used by the family as their primary residence.

In addition to the Property, Trust A also holds a farm and cash.

Trust A entered a sale contract for approximately one quarter of the land with an unrelated property development company more than 5 years ago.

Trust A or related entities intends to develop the retained land of the Property as a starting point for further property developments.

To facilitate this, the sale included a condition that the property development company would obtain a development approval that included the land retained by Trust A.

The development approval (the Approval) was subsequently obtained allowing for the subdivision of the land retained by Trust A into 6 lots.

The sale of the one quarter portion of the Property's land to the development company settled around 2 years after the sale contract date.

The development company is currently developing their portion of land as a residential housing estate.

The house on the Property ceased being the primary residence of the family when the sale contract to the development company settled.

The house is currently rented to a caretaker.

Trust A is intending to manage the development with the assistance of the child of Individual A and Individual B who is a project manager.

Trust A is currently unable to be proceed with the development of the retained land until the adjacent development is near completion. This will bring the required infrastructure (power, phone, internet, sewerage and water) up to the boundary of the Property. It is expected that this will occur within the next 12 months.

Depending on the prevailing market conditions, Trust A may need to defer the development and or subsequent sales.

Trust A was previously involved with developing a commercial property which it held as a capital asset for related business and leasing activities. This was subsequently sold after approximately 15 years.

Trust A also held another commercial property which it managed and leased for approximately 15 years

Relevant legislative provisions

Income Tax Assessment Act 1997 section 70-10

Reasons for decision

Summary

The Property is not trading stock of Trust A, held as part it its property development business. Trust A's activities so far dealing with the land are considered preliminary and preparatory to the commencement of its property development business.

Detailed reasoning

Taxation Determination TD 92/124 Income tax: property development: in what circumstances is land treated as 'trading stock'? (TD 92/124), provides the relevant view to be applied in this case as follows:

1)    Land is treated as trading stock for income tax purposes if:

•         it is held for the purpose of resale; and

•         a business activity which involves dealing in land has commenced.

2)    Both the required purpose and the business activity must be present before land is treated as trading stock. 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.

3)    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.

In this case the Property was acquired by Trust A for its eventually development. As it is no longer utilised by the family for their residence, we accept that it is now held by Trust A for the Purpose of resale. For the land to be considered trading stock, Trust A must have commenced a business activity dealing in in the land in order to satisfy the second condition outlined in paragraph 1 of TD 92/124.

The question of whether a business is being carried on is a question of fact and degree and depends on the impression of a taxpayer's activities considered as a whole. Over the years the courts have developed a series of indicators to determine if a business is being carried on. The Commissioner's view on relevant factors used to determine if an entity is carrying on a business are set out in Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? (TR 97/11):

•         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.

•         Whether the activity is better described as a hobby, a form of recreation or sporting activity.

The actual date of commencement of a business activity is a question of fact and the nature of the activity said to amount to the business is critical to determining whether that business has actually commenced or whether activities are preliminary or preparatory to the commencement (Goodman Fielder Wattie Ltd v. FC of T 91 ATC 4438 at 4447; (1991) 22 ATR 26) (Goodman Fielder Wattie).

A mere intention to carry on a business is not enough. There must be activity. Brennan J in Inglis v. FC of T 80 ATC 4001 at 4004-4005; (1979) 10 ATR 493 at 496-497 (Inglis) said that:

'The carrying on of a business is not a matter merely of intention. It is a matter of activity.... At the end of the day, the extent of activity determines whether the business is being carried on. That is a question of fact and degree.'

Application to your circumstances

The private ruling application sets out that Trust A is intending to undertake the development of the retained land as a starting point for a property development business. The prior professional and business experience of Individual A and Individual B is suitable to undertaking the current subdivision. Trust A is also intending to manage the development with the assistance of the child of Individual A and Individual B who is a project manager.

Trust A has previously undertaken a development of a commercial property that was then held on capital account for leasing activities. However, it has not previously been a property development business where the land was held and sold as trading stock.

The Property was acquired for use as the family's primary residence with a view to its future development. Because of the initial private use of the Property, the Property will not be considered as trading stock until Trust A commences a property development business in relation to the Property.

The proposed development is relatively small in size, being only 6 lots available for sale. The amount of work Trust A is required to undertake has also been minimised by aligning and planning for its development to follow on from the adjacent development.

Trust A has already acquired the Approval for the development of the retained land, and we accept that the proposed development activity will be undertaken by Trust A for the purpose of generating profits. Also, Trust A intends to engage in the development of the retained land as part of a property development business and much of the work undertaken for the development will be undertaken by Trust A. We therefore accept that despite its smaller scale, the proposed development activity has a significant commercial purpose or character.

Consideration of all of the above factors leads to a conclusion that the land including the lot with the existing house will likely become trading stock of Trust A should it commence with the physical onsite property development activities.

Despite this, Trust A is currently unable to commence physical works until the neighbouring development nears completion providing access to necessary services and infrastructure. It also remains a possibility that Trust A may delay the development or sales in light of prevailing market conditions.

With reference to Inglis and Goodman Fielder Wattie, the relevant business in this case has not yet commenced. The level of the activity so far undertaken by Trust A in dealing with the land are considered preliminary and preparatory to the commencement of the property development business and the Property is not yet trading stock of Trust A.