Edited version of private advice

Authorisation Number: 1052091023255

Date of advice: 16 March 2023

Ruling

Subject: Capital or revenue - sale of land

Question 1

Did you hold lots X and X as trading stock?

Answer

No.

Question 2

Are the proceeds from the sale of lots X and X assessable as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

This private ruling applies for the following period:

30 June 20YY

The scheme commenced on:

1 July 20YY

Relevant facts and circumstances

The company was incorporated in YYYY.

The company was incorporated for the purposes of acquiring and holding the land and conducting any associated business or activities in relation to this land.

The initial shareholders of the company have not changed.

Upon the death of the original directors they were replaced with family members.

In YYYY, the company signed a contract to acquire land. The land comprised X titles which encompassed:

•                     Vendor's dwellings

•                     A quarry

•                     Farming land

At the time of signing the contract, the company's ultimate intention was to develop part of the land into residential lots and to sell these for a profit. The land earmarked for such development comprised X ha, being around X% of the total land area.

The primary intention in relation to the balance of the land was to hold and/or farm the land and that the company was open to considering development of other parts of the land should the demand eventuate, with the promise of a commercial return.

The commercial agreement between the vendors and the company was that one of the vendors would retain a house and the balance of the land would be acquired by the company. However, to achieve this, the parties required consent to realign boundaries. This process took a number of years.

In YYYY, and following the successful boundary realignment, the company acquired lots X and X, with one of the vendors retaining lot X.

The company's immediate intention was to:

•                     Subdivide a defined portion of lot X (which would later become lot X) into residential allotments and engage an agent to sell the allotments;

•                     Divest the quarry as this was not required for the subdivision and was not arable and therefore not suitable for farming activities to be carried out by the company; and

•                     Hold and farm the balance of the land.

In YYYY, around a decade after signing the contract, the company lodged an application to develop lots X and X into residential allotments. Although the approval was obtained for all lots, this was really done for convenience and the company did not have any immediate intention of development the land, other than lot X. Development approval was granted in YYYY and lasted for a period of X years.

Lot X was acquired with a mixed use in mind and for this reason the company took steps to subdivide lot X so each discrete use could be allocated and managed on a separate title.

In YYYY, lot X was divided into X separate lots being:

•                     Lot X, which contained the land on which was to be subdivided/developed and sold as residential lots

•                     Lot X which contained the quarry and was earmarked for divestment

•                     Lot X which contained the balance of the land which was to be held and farmed

Lots X and X

At the time of acquisition, the company had no immediate intention to develop or farm this land. It was held as dormant land from the date of acquisition through to YYYY.

Prior to YYYY, lots X and X were slashed by local farmers/contractors.

In YYYY, the company allowed the approval in relation to lots X and X to lapse.

In YYYY, the company resolved to commence active farming on lots X and X. To this end, it successfully applied to rezone the land as Agricultural and Horticultural Land.

This land was actively farmed for the period between YYYY and YYYY.

The farming carried out on the land included growing peas, hay and cereal crops.

Over this period, the farming activities comprised a number of different commercial arrangements, including the company:

•                     Carrying out the farming activities in its own right;

•                     Engaging farming contractors to carry out certain work;

•                     Third parties entering into share farming arrangements; and

•                     Leasing the land to local farmers.

The farming activities carried out by (or on behalf of) the company included:

•                     Commissioning reports on soil, cropping and management of the land;

•                     Conducting spraying and other land management activities;

•                     Sewing, cultivating and harvesting a modest amount of crops;

•                     Acquiring and maintaining equipment; and

•                     Compiling reports on farming activities.

In around YYYY, the company was approached by the council and neighbouring land owners to develop the land. However, the company rejected this proposal for a number of reasons, including that any possibility of developing the land was completely abandoned.

In YYYY, the state government reviewed the use of the land but ultimately agreed the land should be zoned as Primary Production - Cereals and Fodder .

From around YYYY, the directors began to actively consider the sale of the land.

A sales agent was engaged by the company in YYYY.

The property was on the market for sale from YYYY until date of sale in the YYYY financial year. There were two short periods where the property was withdrawn due to change of real estate agent and then salesperson's change of company.

There were no bona fide third party offers to acquire the property during this period until the ultimate purchaser entered into negotiations.

The property continued to be used for primary production activities from YYYY until the date of sale either directly by the company or via a lease to other primary producers.

At the time of sale, the land was subject to a farming lease with a local farmer.

At the time of sale the land did not have any development approvals in place.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Reasons for decision

Question 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.

In accordance with Taxation Determination 92/124 Income tax: property development: in what circumstances is land treated as 'trading stock'? 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. 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.

Application to your circumstances

In this case we do not consider that at the time of sale you were holding the land for the purpose or resale nor were you carrying on a business activity which involved dealing with the land. Therefore you did not hold the land as trading stock.

Question 2

Carrying on a business of property development

As discussed at question 1 we do not consider you were carrying on a business activity which involved dealing in land. The land had been used for a significant period of time for various farming activities. Therefore we do not consider the disposal was in the course of carrying on a business.

Isolated commercial transaction with a view to profit

Profits arising from an isolated business or commercial transaction will be ordinary income if the taxpayer's purpose or intention in entering into the transaction is to make a profit, even though the transaction may not be part of the ordinary activities of the taxpayer's business (FC of T v. Myer Emporium Ltd 1987 163 CLR 199; 87 ATC 4363; 18 ATR 693)(Myer Emporium).

Taxation Ruling TR 92/3 considers the principles outlined in the Myer Emporium case and provides guidance in determining whether profits from isolated transactions are assessable under section 6-5 of the ITAA 1997 as ordinary income.

TR 92/3 defines the term 'isolated transactions' as:

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

•                     transactions entered into by non-business taxpayers.

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.

If a taxpayer makes a profit from a transaction or operation, that profit is income if the transaction or operation is not in the course of the taxpayers business but:

•                     the intention or purpose of the taxpayer in entering into the profit-making 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.

Whether an isolated transaction is business or commercial in character will depend on the circumstances of each case. Where a taxpayer's activities have become a separate business operation or commercial transaction, the profits on the sale of subdivided land can be assessed as ordinary income within section 6-5 of the ITAA 1997. TR 92/3 lists the following factors to be considered:

a)            the nature of the entity undertaking the operation or transaction;

b)            the nature and scale of other activities undertaken by the taxpayer;

c)            the amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained;

d)            the nature, scale and complexity of the operation or transaction;

e)            the manner in which the operation or transaction was entered into or carried out;

f)             the nature of any connection between the relevant taxpayer and any other party to the operation or transaction;

g)            if the transaction involves the acquisition and disposal of property, the nature of that property; and

h)            the timing of the transaction or the various steps in the transaction.

In addition to the above general factors, Miscellaneous Taxation Ruling MT 2006/1 provides a list of specific factors relevant to isolated transactions and sales of real property. If several of the factors are present, it may be an indication that a business or an adventure or concern in the nature of trade is being carried on. These factors are as follows:

•                     there is a change of purpose for which the land is held;

•                     additional land is acquired to be added to the original parcel of land;

•                     the parcel of land is brought into account as a business asset;

•                     there is a coherent plan for the subdivision of the land;

•                     there is a business organisation - for example a manager, office and letterhead;

•                     borrowed funds financed the acquisition or subdivision;

•                     interest on money borrowed to defray subdivisional costs was claimed as a business expense;

•                     there is a level of development of the land beyond that necessary to secure council approval for the subdivision; and

•                     buildings have been erected on the land.

No single factor is determinative; rather it will be a combination of factors that will lead to a conclusion as to the character of the activities.

Application to your circumstances

In this case from the date of purchase until date of sale the properties were used for various farming activities either directly by you or via agistment leases. The properties were placed on the market for sale in YYYY without a development approval in place. Lots X and X were sold in the YYYY financial year in a single transaction without any development approval attached.

While you had undertaken development activities in relation to other parcels of land, the original development approval was allowed to lapse for lots X and X. Further, you then made a successful application to have it rezoned as agricultural and horticultural land. The lots were then used for this purpose for more than X years. We accept that the proceeds from the sale of lots X and X are not assessable as profits from an isolated transaction. Therefore the proceeds are not assessable as ordinary income under section 6-5 of the ITAA 1997.