Edited version of private advice

Authorisation Number: 1052080526327

Date of advice: 31 January 2023

Ruling

Subject: Sale of property - income v revenue

Question 1

Will any part of the proceeds from the sale of the vacant land be assessable to the Owners either individually or in partnership under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

Will the sale of the vacant land represent the mere realisation of land held by the Owners?

Answer

Yes.

This ruling applies for the following period:

Income year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Individual A owned Property A and Property B until their death more than 20 years ago. The ownership of the two properties passed equally to Individual A's children (the Beneficiaries) with ownership interest held as tenants in common. Both properties were vacant land at the time of individual A's death.

A Deed of Joint Ownership of Property was signed by the Beneficiaries in relation to the two properties. This stipulated that if the majority wanted to sell either or both properties, the others were bound to sell.

Attempts to sell the properties were unsuccessful at the time with offers well below the valuer general's valuation.

As the majority of the Beneficiaries wanted to sell the properties, the remaining beneficiaries, Individual B and Individual D, decided to buy the others out. As a result, a little over 20 years ago, the interest in the properties were transferred to:

•         Individual B.

•         Individual C (individual B's child).

•         Company B (Individual B's company)

•         Company D (Individual D's company).

The owners of the two properties from the time of the transfers are referred to as the Owners in this private ruling.

Property A, to which this private ruling relates, was recently sold as unimproved vacant land.

Property B

The Owners proceeded to develop Property B as it was relatively flat and required minimal civil work.

The development of Property B involved the construction of townhouse units conducted in partnerships involving some or all the Owners.

The partnerships sold the townhouses from the development of Property A as trading stock, distributing profits from the development to the relevant partners.

Property A

The Owners never contemplated or intended to develop Property A due to the civil complexity involved with developing the site.

The Owners have engaged in activities to sell Property A en globo (undeveloped) on multiple occasions throughout their ownership period. This included listing it with various real estate agents and on the recommendation of the agents, obtaining draft concept plans for development.

A new real estate agent was recently able to secure a cash unconditional sale of Property A.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 Part 3-1 and Part 3-3

Reasons for decision

Proceeds from the sale of land will be taxed for income tax purposes as ordinary income under section 6-5 of the ITAA 1997 where the land is held as trading stock and sold as part of carrying on a business of property development and sale.

Profits from isolated commercial transaction involving the sale of land can be treated as ordinary income under section 6-5 of the ITAA 1997. Isolated commercial transactions undertaken either outside the ordinary course of a taxpayer's business or by a non-business taxpayer, involve the commercial exploitation of an asset acquired for a profit-making purpose.

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

While holding an asset for a long period of time may seem to indicate that it is a long-term capital investment, the intention of the taxpayer at the time of acquiring the asset and throughout the ownership period is an important factor in determining whether profits of or proceeds are ordinary income under section 6-5 of the ITAA 1997.

Carrying on the business of property development and sale

For Property A to be sold as trading stock with proceeds assessable under section 6-5 of the ITAA 1997 we need to determine whether each of the Owner's activities in dealing with the property, amount to carrying on the business of property development and sale, either on their own or jointly via their partnerships.

Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? (TR 97/11), provides the general indicators of a 'business' is the appropriate view with respect to the considering the activities of the individual owners and their combined activities with their partnerships.

Taxation Ruling TR 2019/1 Income tax: when does a company carry on a business? (TR 2019/1), is the appropriate view for whether companies carry on a business in a general sense. However, it does not consider whether companies carry on a particular business.

In Federal Commissioner of Taxation v St. Hubert's Island Pty. Limited (in liq) (1978) 19 ALR 1 it was concluded that land can be trading stock according to its ordinary meaning if the land was held by an entity that was involved in selling land as part of its ordinary business activities.

Taxation Determination TD 92/124 - Income tax: property development: in what circumstances is land treated as 'trading stock'? (TD 92/124) presents the Commissioner's view that land is treated as trading stock if:

(1)  the land is acquired for the purpose of resale; and

(2)  a business activity which involves dealing in land has commenced.

TD 92/124 provides that before land is able to be treated as trading stock, both the requisite purpose and the business activity must be present. When a taxpayer begins a 'definite and continuous cycle of operations' designed to lead to the sale of land, the business activity is considered to have commenced.

Isolated business transactions

Profits arising from an isolated transaction as a result of entering into a profit-making undertaking or scheme will be ordinary income under section 6-5, on revenue account, (FC of T v. Myer Emporium Ltd 1987 163 CLR 199; 87 ATC 4363; 18 ATR 693 (Myer Emporium)). This is distinguished from a 'mere realisation' which is not ordinary income.

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 decision in Myer Emporium and provides guidance in determining whether profits from isolated transactions are assessable under section 6-5 of the ITAA 1997 as ordinary income.

Paragraph 1 of TR 92/3 provides that the term isolated transaction refers to:

a)    those transactions outside the ordinary course of business of a taxpayer carrying on a business; and

b)    those transactions entered into by non-business taxpayers.

Paragraph 6 of TR 92/3 provides that a profit from an isolated transaction generally income when both of the following elements are present:

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

In general, whether a profit from an isolated transaction is income according to ordinary concepts depends very much on the individual circumstances of the case.

Paragraph 13 of TR 92/3 lists the following factors which are relevant in considering whether an isolated transaction amounts to a business operation or commercial transaction include:

•         the nature of the entity undertaking the operation or transaction

•         the nature and scale of other activities undertaken by the taxpayer

•         the amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained

•         the nature, scale and complexity of the operation or transaction

•         the manner in which the operation or transaction was entered into or carried out

•         the nature of any connection between the relevant taxpayer and any other party to the operation or transaction

•         if the transaction involves the acquisition and disposal of property, the nature of that property

•         the timing of the transaction or the various steps in the transaction.

Considering the Owner's activities and also that of the Owner's in Partnership against the factors in TR 97/11, TR 2019/1, TD 92/124 and TR 92/3 it can be concluded that the activities in dealing with the property do not amount to either carrying on a business, or a commercial transaction for the following reasons:

•         There is no evidence to suggest the Owners have ever contemplated or intended to develop Property A. On the contrary they have made continuous efforts throughout the ownership period to sell the property en globo which was ultimately successful.

•         The Owners either alone or in partnership have not undertaken activities with respect to Property A which have a significant commercial purpose or character.

•         The gain derived from holding Property A for the prolonged period cannot be explained with reference to the taxpayer's activity in dealing with the property.

The sale of the Property A by the Owners is considered to be a mere realisation of a capital asset. Gains from the sale of land are assessable as statutory income under the capital gains tax (CGT) provisions contained in Part 3-1 and Part 3-1 of the ITAA 1997.