Edited version of private advice

Authorisation Number: 1052173744799

Date of advice : 29 September 2023

Ruling

Subject: CGT - trading stock and small business concession

Issues

Question 1

Does the Land become trading stock of the Taxpayer for the purposes of Division 70 of the Income Tax Assessment Act 1997 (ITAA 1997) when the PSP is gazetted?

Answer

Yes.

Question 2

Where the Taxpayer chooses the market value method, is the Taxpayer treated as having sold the Land at market value upon the gazettal of the PSP for the purposes of CGT event K4, under section 104-220 of the ITAA 1997?

Answer

Yes

Question 3

Does the Taxpayer satisfy the requirements in section 152-105 of the ITAA 1997 to apply the 15-year exemption in relation to the disposal of the Land (excluding the Adjacent Land) for the purposes of CGT event K4?

Answer

Yes

Question 4

Do the advance payments relate to creating a contractual right or other legal or equitable right in another entity (promises given) for the purposes of CGT event CGT event D1, under section 104-35 of the ITAA 1997?

Answer

Yes - however as the promises given relate to the application of CGT event A1 in these circumstances, CGT event D1 does not happen in relation to the giving of the promises

This ruling applies for the following periods:

1 July XXXX to 30 June XXXX

Relevant facts and circumstances

The Taxpayer

The Taxpayer is over 55 years of age.

The Taxpayer is an Australian resident for income tax purposes and has been at all times.

The Taxpayer is the sole owner of the Land.

The Taxpayer currently holds the Land on capital account for income tax purposes.

The Taxpayer also acquired an adjacent parcel of land (Adjacent Land) in XXXX by way of a cash outlay of $X. The purpose of acquiring the Adjacent Land was to improve the lot yield, layout / aesthetic and drainage aspects of the Land (being that subject to the X lot subdivision).

The Taxpayer had previously undertaken a subdivision of a separate piece of land in XXXX into X lots and he was responsible for undertaking all aspects of that development process.

The Land

The Land consists of several lots that are adjacent to each other.

The Land comprises approximately X acres.

The business

The Taxpayer has operated a business on the Land as a sole trader.

The turnover of the business for the income years ending 30 June XXXX and 30 June XXXX is under $XM.

For income tax purposes, the Taxpayer is carrying on a business as defined by subsection 995-1(1) of the ITAA 1997.

Land zoning and market value

The Land is currently zoned rural.

The Land is subject to the precinct structure plan (PSP).

The Land currently has a market value in the vicinity of $X

Future plans for the Taxpayer

The Taxpayer continues to conduct the business and will do so into the XXXX income year. However, he intends to retire from the business in the next 12-24 months, being the estimated time for the development works to begin.

As part of his retirement plans, the Taxpayer wishes to realise the Land but does not want to be personally involved in the practical development activities given his desire to retire and scale back on activities.

Development discussions

In XXXX, the Taxpayer was approached by a land development company (Developer) to discuss working collaboratively to develop the Land. Whilst the Taxpayer has been approached by different developers in the past, he has never approached any developers himself.

The Developer is a highly experienced multifaceted development business with over 20 years' experience and expertise in residential, commercial and retail developments.

The Developer has undertaken several large-scale broad acre developments with similar size and complexity to the proposed development of the Land.

In XXXX, the Taxpayer decided to engage the Developer to provide a sequence of various services (detailed below) specifically in relation to the development of the Land.

On XXXX, the Taxpayer and the Developer entered into a Land Development Agreement (LDA).

LDA

Under the LDA, the Developer was appointed to procure the appropriate zoning for the Land.

The Taxpayer then agrees to make the Land available for the Developer to develop the Land and grants exclusive development rights to the Developer to undertake the proposed residential development of the Land in accordance with the relevant approvals (the Project).

By entering into the LDA (and LDA Variation), the Taxpayer was giving the undertaking that he would conduct the development with the counterparty according to the terms of the LDA (and LDA Variation) they had executed.

The Land is subject to the PSP, which is required to be approved before any development activities can be undertaken. The LDA and the LDA variation both contain conditions precedent that require that the PSP be approved and gazetted before the development activities can commence.

Conditions precedent under the LDA

Under the LDA, the Taxpayer and the Developer acknowledge and agree that if the PSP is not gazetted by 5 years from the date of the LDA (the Sunset Date) then (by no later than 30 days from the Sunset Date), either party may by notice in writing to the other terminate the LDA as long as the PSP has not been gazetted by the date of that notice. If neither party exercises the rights under the Sunset Date clause, the LDA will be deemed to be unconditional.

Key terms of the LDA

The key terms of the LDA are as follows:

• The Developer intends to subdivide and develop the Land generally in accordance with the plan prepared by the developer in respect of each stage and each lot expected to be created by the Project (the Concept Plan).
• From the date of the LDA, the Taxpayer grants exclusive development rights to the Developer to do all things which the Developer considers necessary and desirable to undertake the Project consistent with the Concept Plan which includes:

o   To execute the objective of the Project on a day-to-day basis generally in accordance with the Concept Plan.

o   To appoint appropriate consultants and advisors for the Project.

o   To apply for, pursue and obtain all approvals required for the Project, including any planning and development consents, modifications and additional approvals that may be required by ay responsible governing authority.

o   If necessary or desirable, make and pursue all applications for any additional re-zoning of any part of the Land.

o   Create, extinguish or modify easements on use and covenants effecting the Land.

o   Vary any planning permit to optimise the financial return from the Project.

o   Procure and deliver to relevant Government agencies such bonds and securities as required for the Project.

o   Negotiate and enter into agreements for the supply of utility services to the Land in accordance with permits.

o   To prepare and seek approval in registration of any plan of subdivision.

o   To effect the marketing and sale of any part of the Land including negotiating and entering into agency agreements. (The Developer will organise the marketing and sale of any part of the Land including entering into relevant agreements. A website has been established by the Developer and sales channels such as realestate.com.au will also be used. The Taxpayer has influence on the marketing of the subdivided Land, the layout of stages and positioning of display homes. (The Taxpayer attends monthly meetings with the Developer regarding the subdivision and has input into the layout of stages, which stages to launch next and the location of display properties.))

o   Negotiating and procurement of finance.

o   Pursue court or administrative action which effects the Land and/or implementation of the Project.

o   To vote at meetings of any body or committee formed under any owner's corporation as though it were the owner of the Land.

o   Anything to do with the continuing rights of the Taxpayer as the registered proprietor of the Land.

o   Conduct and mediation, negotiation, dispute resolution or litigious proceedings.

o   Expeditiously to further the preparation and planning of each stage by stage development effectively to show the Developer is prepared to proceed in accordance with the Concept Plan.

o   Anything ancillary or incidental to any of the above or reasonably required by the Developer to further the Project in accordance with the Concept Plan.

• The Taxpayer will remain the registered proprietor of the Land throughout the development. No title in the Land will pass to the Developer or any other entity.
• The Taxpayer's role under the LDA includes:

o   To grant the Developer development rights to enable the Developer to implement the Project by making the Land available to the Developer.

o   That the Taxpayer will do and execute any act or document the Developer may request to enable it to implement the Project.

o   To execute the Power of Attorney (see more below).

o   To do any other things in accordance with the LDA.

• Under the LDA, both parties must:

o   Endeavour to achieve the objectives of the Project having regard to its obligations under the LDA.

o   Not unreasonably delay any action, approval, direction or decision which it is required to undertake or provide.

o   Act in good faith.

o   Promptly inform the other parties of all matters, punctually pay and discharge their obligations and exercise its rights and comply with its obligations under this agreement in a manner consistent with the best interests of the Project.

o   Indemnify and keep each other from and against all losses and damages that may arise as a result of them entering into any contracts or similar.

• All project costs (broadly, all third-party costs, fees and outgoings to carry out and complete) for the Project will be borne by the Developer.
• The Developer will use all reasonable endeavours to obtain finance to fund Project Costs if required.

Scope of Project

It is expected the Land will be subdivided into approximately X lots. The exact number will not be known until each stage of the subdivision is designed, constructed and completed.

A reasonable estimate for the project timeline would be somewhere between X years to complete the entire X lot subdivision.

The Developer is not looking to reduce the average size of the residential lots extracted from the Land. Lot sizes need to be consistent with the broader Precinct Structure Plan and in keeping with lot sizes required by the council and other stakeholders. All lot sizes are compliant with Council's standards.

Payment under the LDA

The Taxpayer will receive a Landowner Payment under the LDA which is equal to:

$X + (1X% x Gross sale proceeds).

The X% x Gross sale proceeds is referred to as the Landowner Percentage Payment.

Gross Sale Proceeds are broadly the total proceeds (inclusive of GST) from any sale of the Land or part of the Land. Also included are any amounts of compensation received if any part of the Land is compulsorily acquired and/or any consideration from third parties or insurance proceeds in respect of the Land.

The Landowner Payment is to ensure that the Taxpayer is properly and fully compensated for the value of the Land.

The Developer is entitled to a Development Fee for services provided. The Development Fee is an amount equal to:

Gross sale proceeds - Landowner Payment - GST payable on gross sale proceeds.

Under the LDA, the Developer must advance payments of various amounts:

• $X on the execution of the LDA;
• $X on the date of gazettal of the PSP: and
• $X on the date that is 12 months from the date of gazettal of the PSP.

These advance amounts will reduce the Landowner Payment.

Power of Attorney

At the same time as entering into the LDA, the Taxpayer entered into a limited power of attorney with the Developer that allows the Developer to carry out activity required to undertake the Project, execute and deliver relevant agreements, deeds and contracts which are authorised in writing by the Taxpayer. The Developer does not however have the power to sign contracts of sale for any subdivided Land or sign any security, finance or planning permit documents.

LDA - Deed of Variation

On XXXX, the Taxpayer and the Developer entered into a Deed of Variation of the LDA (LDA Variation).

The LDA Variation included the following clauses:

• Extension of the definition of Land to include the Adjacent Land.
• Insertion of a clause which provides the advance payment due upon the gazettal of the PSP (being part of the Landowner Payment) is to be advanced on XXXX or earlier as the parties may agree, and the parties are deemed to have waived their rights to terminate the LDA and the LDA immediately becomes unconditional.
• The Landowner Percentage Payment is deleted and replaced with X% with respect to the first X residential lots created by the Project and X% thereafter.

The LDA remains otherwise unchanged.

Subsequent activities

On XXXX, the Planning Minister approved the planning scheme amendment incorporating the PSP. The PSP was gazetted in XXXX.

The Taxpayer intends to elect to value the Land at market value and will do this by the time of lodging his income tax return in the relevant income year (i.e., the income year in which the Land becomes trading stock) pursuant to subsection 70-30(2) of the ITAA 1997.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 104-10

Income Tax Assessment Act 1997 Division 104-220

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 section 152-10

Income Tax Assessment Act 1997 subsection 152-105

Income Tax Assessment Act 1997 section 328-110

Income Tax Assessment Act 1997 section 328-125

Reasons for decision

Questions 1 and 2

Summary

The definite and continuous cycle of operations designed to lead to the sale of the land commenced upon the gazettal of the PSP and the Land will be treated as trading stock on the same date.

Where the Taxpayer chooses the market value method, the Taxpayer is treated as having sold the land at market value and the sale is subject to CGT event K4, with any capital gain or loss being brought to account unless the land is a pre-CGT asset (section 104-220 of the ITAA 1997). CGT event K4 happened upon gazettal of the PSP in September 2022.

The market value of the Land is determined having regard to the 'highest and best use' that can be made of the land at this time.

Detailed reasoning

Land becomes trading stock

Taxation Determination TD 92/124 Income tax: property development: in what circumstances is land treated as 'trading stock? (TD 92/124) explains 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.

Carrying on a business

Whether the sale of land is a disposal in the course of business is determined by examining and weighing all the relevant facts and circumstances taken as a whole.

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.

Miscellaneous Taxation Ruling MT 2006/1 The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number explains the circumstances in which transactions involving the subdivision and sale of land, are considered to be a profit-making undertaking or scheme, as opposed to the mere realisation of a capital asset:

264. The cases of Statham & Anor v. Federal Commissioner of Taxation (Statham) and Casimaty v. FC of T (Casimaty) provide some guidance on when activities to subdivide land amount to a business or a profit-making undertaking or scheme. In these cases, farm land was subdivided and sold. Minimal development work was undertaken to meet council requirements and to improve the presentation of certain allotments. On the particular facts of these cases the courts held that the sales were a mere realisation of a capital asset.

265. From the Statham and Casimaty cases a list of factors can be ascertained that provide assistance in determining whether activities are a business or an adventure or concern in the nature of trade (a profit-making undertaking or scheme being the Australian equivalent, see paragraphs 233 to 242 of this Ruling). If several of these 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.

Relevantly, activities etc. do not need to be conducted by the taxpayer for the taxpayer to be considered to be carrying on a business - it can be by the taxpayer, on behalf of the taxpayer or in conjunction with others: see for example, Hance & Anor v Federal Commissioner of Taxation 2008 ATC 20-085 where the court confirmed that businesses can take many forms, and can include a silent partner who delegates all responsibility for the business to another individual and consequently individual investors would be considered to be carrying on a business.

This principle was confirmed more recently in Collins & Anor ATF The Collins Retirement Fund v FC of T 2022 ATC 10-627:

63. That the applicant, with no professional experience in land development, should engage others to carry out works and market the subdivided lots is scarcely surprising. The engagement of contractors to provide advice and carry out engineering and construction works and real estate agents to market land is, I would have thought, a hallmark of modern subdivision projects. While that may mean Mr Collins was relatively passive in respect of these activities, I do not accept that this weighs heavily in the applicant's favour in the context of a development of this nature which involved the undertaking of extensive skilled work.

When an asset is ventured into the business of development, subdivision and sale is a matter of fact (see, for example, ATO Interpretative Decision ATO ID 2004/532 Income Tax: business of subdivision - time when land becomes 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.

Trading stock

Land can be trading stock before it has been turned into the condition in which it is intended to be ultimately sold - that is, land intended to be sold after subdivision is still trading stock before it is subdivided (R & D Holdings; St Hubert's Island). In ATO ID 2004/532, the Commissioner confirms that broadacre land (that is not yet subdivided) ventured into a business of subdivision, development and sale can be trading stock.

Where there is a change in the use of land that amounts to carrying on a business of property development, the taxpayer will start holding land that they already own as trading stock. In broad terms, the interaction between the CGT and trading stock provisions depends on the whether the taxpayer chooses the cost election or market value election for the purposes of section 70-30 of the ITAA 1997.

Where the taxpayer chooses the market value method, the taxpayer is treated as having sold the land at market value and the sale is subject to CGT event K4, under section 104-220 of the ITAA 1997.

Relevantly, the time of CGT event K4 is when the taxpayer starts holding the asset as trading stock.

Any capital gain or loss being brought to account unless the land is a pre-CGT asset. A taxpayer makes a capital gain from CGT event K4 if the market value of the asset just before it becomes trading stock is more than its cost base. If the market value of the asset is less than its reduced cost base, a capital loss is made.

Taxation Determination TD 97/1 Income tax: property development: if land, originally acquired as a capital asset, is later ventured into a business of development, subdivision and sale, how is the market value of the land calculated at the time it is ventured into the business? (TD 97/1) provides that the market value of the land is determined having regard to the 'highest and best use' that can be made of the land. Due weight is given to the land's potential utility and to the probability of consent being given for such potential use. In many instances, the value of land is enhanced when it becomes suitable for subdivision.

Application in these circumstances

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.

In this case, the arrangement would cross the line as being far more than a mere realisation of an asset, the land development will be conducted in a large scale business like manner - relevantly:

• There is a clear change of purpose from one of farming to subdivision and sale.
• The Taxpayer was proactive in seeking re-zoning of the Land to facilitate the land development.
• In addition to his existing significant amount of farmland, the Taxpayer acquired additional land to facilitate the land development.
• The Taxpayer has a history of land development for profit.
• The size, scale and complexity of the development project.
• Lots will be sold individually upon completion of the development, rather than as an undivided land mass or masses.
• There is a sophisticated, coherent plan for the development of the land
• The development is managed in a business- like manner with a manager experienced in large scale property development.
• It is anticipated that there would be significant Council subdivision requirements involving the creation of 2,000 lots which would beyond a basic subdivision.
• The arrangement has profit or gain as its object.
• The arrangement is not risk-free to the Taxpayer.

Whether the Taxpayer already has the requisite expertise to undertake the land development and takes an active role or engages the services of someone with the relevant expertise to manage the project is not a determinative factor in these circumstances.

The Taxpayer is carrying on a business of land development and is holding the Land for the purpose of resale.

The LDA and LDA Variation require that the PSP be approved and gazetted before the activities (subdivision of the land) can commence. The gazettal of the PSP is critical to embarking on the definite and continuous cycle of operations designed to lead to its sale in these circumstances.

Consequently, the time at which the Taxpayer's Land became trading stock, and CGT event K4 happened, is upon gazettal of the PSP in September 2022.

Question 3

Summary

The disposal of the Land for the purposes of CGT event K4 is in connection with the Taxpayer's retirement.

The Taxpayer is least 55 years old and will be using the capital proceeds with respect to the disposal of the Land for their retirement.

Detailed reasoning

Small business 15-year exemption

Subdivision 152-B of the ITAA 1997 allows a CGT small business entity to disregard a capital gain arising from a CGT asset that it has owned for at least 15 years if certain conditions are met.

Relevantly, for an individual, section 152-105 of the ITAA 1997 provides:

152-105 15-year exemption for individuals

If you are an individual, you can disregard any *capital gain arising from a *CGT event if all of the following conditions are satisfied:

(a) the basic conditions in Subdivision 152-A are satisfied for the gain;

(b) you continuously owned the *CGT asset for the 15-year period ending just before the CGT event;

...

(d) either:

(i) you are 55 or over at the time of the CGT event and the event happens in connection with your retirement; or

(ii) you are permanently incapacitated at the time of the CGT event.

Basic conditions in Subdivision 152-A of the ITAA 1997

Subsection 152-10(1) of the ITAA 1997 sets out the basic conditions.

Relevantly, the requirements include the following:

• A CGT event happens in relation to a CGT asset in an income year.
• The event would (apart from Division 152 of the ITAA 1997) have resulted in a gain.
• You are a CGT small business entity for the income year.
• The CGT asset satisfies the active asset test in section 152-35 of the ITA 1997.

CGT event giving rise to a capital gain

Section 102-20 of the ITAA 1997 provides that a capital gain or capital loss is made if a CGT event happens to a CGT asset.

The Land is a CGT asset (section 108-5 of the ITAA 1997).

Relevantly, under subsection 104-220 of the ITAA 1997, where you start holding a CGT asset as trading stock and you choose the market value method, you are treated as having sold the CGT asset at market value at that time (subsections 104-220(1) and 104-220(2) of the ITAA 1997).

The effect of CGT event K4 happening is that you make a capital gain if the capital proceeds from the disposal are more than the asset's costs base or a capital loss if those capital proceeds are less than the asset's reduced cost base (subsection 104-220(3) of the ITAA 1997).

Small business entity

Pursuant to subsection 152-10(1AA) of the ITAA 1997:

You are a CGT small business entity for an income year if:

•         you are a small business entity for the income year; and

•         you would be a small business entity for the income year if each reference in section 328-110 to $10 million were a reference to $2 million.

As defined in section 995-1 of the of the, a small business entity has the meaning given by subsection 328-110(1) of the ITAA 1997, as follows:

You are a small business entity for an income year (the current year) if:

•         you carry on a business in the current year; and

•         one or both of the following applies:

o   you carried on a business in the income year (the previous year) before the current year and your aggregated turnover for the previous year was less than $10 million;

o   your aggregated turnover for the current year is likely to be less than $10 million.

Active asset test

Under subsection 152-35(1) of the ITAA 1997, a CGT asset will satisfy the active asset test if:

•         you have owned the asset for 15 years or less and the asset was an active asset of yours for a total of at least half of the test period, or

•         you have owned the asset for more than 15 years and the asset was an active asset of yours for a total of at least 7½ years during the test period.

Under subsection 152-35(2) of the of the ITAA 1997 the period:

• begins when you acquired the asset; and
• ends at the earlier of:

o   the CGT event; and

o   if the relevant business ceased to be carried on in the 12 months before that time or any longer period that the Commissioner allows - the cessation of the business.

Subsection 152-40(1) of the ITAA 1997 provides that a CGT asset is an active asset at a time if, at that time you own the asset and it is used, or held ready for use, in the course of carrying on a business that is carried on by you, or your affiliate, or another entity that is connected with you.

Continuously owned

The Commissioner explains in Taxation Determination TD 94/89 Income tax: capital gains: in what year of income is a taxpayer required for tax purposes to include a capital gain or loss in relation to land disposed of under a contract which is made in one year of income, but which is settled in a later year of income? that, generally for CGT purposes, ownership in relation to the disposal of property is determined with reference to settlement:

3. However, a taxpayer is not required to include any capital gain or loss in the appropriate year until an actual change of ownership occurs. Settlement effects a change of ownership and a disposal (subsection 160M(1)) which then triggers the operation of subsection 160U(3). When settlement occurs, the taxpayer is then required to include any capital gain or loss in the year of income in which the contract was made (subsection 160U(3)). If an assessment has already been made for that year of income, the taxpayer may need to have that assessment amended.

However, whether an entity has continuously owned the CGT asset for the 15-year period set out in paragraph 152-105(1)(b) of the ITAA 1997 is determined with reference to when the CGT asset commences to be owned by the entity to just before the CGT event (in the case of CGT event K4, the date the entity commenced holding the CGT asset as trading stock).

In connection with retirement

This phrase 'in connection with their retirement'has no statutory definition.

The provisions relating to the small business 15-year exemption do not define what is meant by the phrase 'in connection with their retirement', nor does it give any indication of the degree of retirement for the purposes of this concession.

Whether a CGT event happens in connection with an individual's retirement depends on the particular circumstances of each case.

The Explanatory Memorandum (EM) to the New Business Tax System (Capital Gains Tax) Bill 1999 makes the following comments about the requirement to be permanently incapacitated or retiring as one of the conditions for the concession:

Requirement to be permanently incapacitated or retiring

1.68 One of the requirements of this concession for an individual small business taxpayer is that they must be either permanently incapacitated at the time of the CGT event, or at least 55 years old and using the capital proceeds for their retirement.

The legislation does not provide a specific definition of the word 'retirement' for the purpose of subparagraph 152-105(1)(d)(i) of the ITAA 1997. Consequently, it takes its ordinary meaning. The Macquarie Dictionary (online version, downloaded 7 August 2019) defines 'retirement' to mean 'removal or retiring from service, office, or business, especially in reaching the end of one's working life'.

The phrase 'in connection with' has been judicially considered in numerous cases.

In Collector of Customs v Pozzolanic Enterprises Pty Ltd (1993) 43 FCR 280 (Pozzolanic), it was stated by the Full Court of the Federal Court that:

The words 'connected with' are capable of describing a spectrum of relationships ranging from the direct and immediate to the tenuous and remote. As Sheppard and Burchett JJ observed in Australian National Railways Commission v Collector of Customs (SA) [(1985) 69 ALR 367 at 377-378; 8 FCR 264, at 265] the meaning of the word 'connection' is wide and imprecise, one of its common meanings being 'relation between things one of which is bound up with, or involved in, another': Shorter Oxford English Dictionary. (at 288)

Given the potential width of the words 'in connection with', the question remains in a particular case what kind of relationship will suffice to establish the connection contemplated by the statute. This in turn will require a value judgment about the range of the statute: see e.g. Pozzolanic at 289 and Taciak v Commissioner of Australian Federal Police (1995) 59 FCR 285 at 295.

Wilcox J of the Federal Court considered the meaning of the phrase 'in connection with the retirement' in Claremont Petroleum NL v Cummings (1992) 110 ALR 239 (Claremont). The case concerned the application of provisions within the Queensland Companies Code and in particular, whether payments made were in connection with the retirement of certain individuals. Wilcox J made the following observations on the phrase 'in connection with:

The phrase "in connection with" is one of wide import, as I had occasion to observe in a different context in Our Town FM Pty Ltd v Australian Broadcasting Tribunal (1987) 16 FCR 465 at p479-80; 77 ALR 577 at pages 591-2:

The words 'in connexion with'...do not necessarily require a causal relationship between the two things: see Commissioner for Superannuation v Miller (1985)8 FCR 153 at 154, 160, 163; 63 ALR 237at 238, 244, 247. They may be used to describe a relationship with a contemplated future event: see Koppen v Commissioner for Community Relations (1986) 11 FCR 360 at 364, Johnson v Johnson [1952] P 47 at 50-1. In the latter case the United Kingdom Court of Appeal applied a decision of the British Columbia Court of Appeal, Re Nanaimo Community Hotel Ltd [1945] 3 DLR 225, in which the question was whether a particular court, which was given 'jurisdiction to hear and determine all questions that may arise in connection with any assessment made under this Act', had jurisdiction to deal with a matter which preceded the issue of an assessment. The trial judge held that it did, that the phrase 'in connection with' covered matters leading up to, or which might lead up to an assessment. He said...: 'One of the very generally accepted meanings of "connection" is "relation between things one of which is bound up with or involved in another"; or, again "having to do with". The words include matters occurring prior to as well as subsequent to or consequent upon so long as they are related to the principal thing. The phrase "having to do with" perhaps gives as good a suggestion of the meaning as could be had.'

Having regard to the context of subparagraph 152-105(1)(d)(i) of the ITAA 1997, the Commissioner considers that it would be reasonable to adopt the meaning given to the phrase 'in connection with' in Claremont such that it is not necessary for there to be a permanent and everlasting retirement from the workforce; however, there would need to be at least a significant reduction in the number of hours worked or a significant change in the nature of the activities to be regarded as a retirement for the purposes of paragraph 152-105(1)(d)(i) of the ITAA 1997.

Similarly, the words 'in connection with' can apply where the CGT event occurs sometime after retirement. Again, this would depend on the particular facts, and would need to be considered on a case-by-case basis.

Application in these circumstances

The Land in this context excludes the Adjacent Land.

Relevantly, in this case:

• The basic conditions for relief in Subdivision 152-A of the ITAA 1997 are satisfied:

o   the sale of the Land will result in a capital gain for the purpose of CGT event K4.

o   the Taxpayer is carrying on a business and the aggregated turnover is less than $2 million for the purposes of section 328-110 of the ITAA 1997; and

o   the Land is an active asset as it was owned by the Taxpayer for more than 15 years and it was used by the Taxpayer for a total of at least 7½ for the period it was owned in carrying on the Taxpayer's farming business activities.

• The Taxpayer has continuously owned the CGT asset (i.e. the Land) for the 15-year period ending just before the CGT event.
• The Taxpayer will be reducing their activities/involvement in the farming business due to the development of the Land under the Project.

As such, the Commissioner is satisfied that in these circumstances the deemed sale of the Land is in connection with the Taxpayer's retirement for the purpose of subparagraph 152-105(1)(d)(i) of the ITAA 1997.

Question 4

Summary

The advance payments relate to promises to facilitate the sale of the lots under the agreement.

CGT event A1 will apply in preference to CGT event D1 and consequently CGT event D1 does not happen in relation to the giving of the promises in these circumstances.

Detailed reasoning

The treatment of the advance payments

Interaction between revenue and capital provisions

In broad terms, where a taxpayer is carrying on a business of property development, the land, the subject of the property development, will be treated as trading stock and the outgoing and earnings are subject to the operation of trading stock regime set out in Division 70 of the ITAA 1997.

The interaction between the CGT and trading stock provisions depends on the whether the taxpayer chooses the cost election or market value election for the purposes of section 70-30 of the ITAA 1997.

Anti-overlap

Relevantly, where the taxpayer chooses the market value method, the taxpayer is treated as having sold the land at market value and the sale is subject to CGT event K4.

The inclusion of the proceeds from on the sale of trading stock, that is a CGT asset, pursuant to Division 70 of the ITAA 1997, does not negate the CGT event that has happened in respect of the CGT asset. However, section 118-20 of the ITAA 1997 operates to ensure that amounts which are assessable income outside of the CGT provisions are not also taxed as capital gains. Consequently, any capital gain will be reduced by the amount included as assessable income pursuant to Division 70 and section 6-5 of the ITAA 1997

Application of CGT provision

Section 108-5 of the ITAA 1997 defines a 'CGT asset' as being:

• Any kind of property; or
• A legal or equitable right that is not property.

Relevantly, Land and rights created are CGT assets for the purposes of section 108-5 of the ITAA 1997.

Division 104 of the ITAA 1997 sets out the CGT events that can happen to a CGT asset.

CGT event D1

CGT event D1 (section 104-35 of the ITAA 1997) happens 'if you create a contractual right or other legal or equitable right in another entity' (a promise given). The time of the CGT event D1 will be when the right is created.

You will make a capital gain if the capital proceeds from creating the right are more than the incidental costs you incurred that relate to the event. You will make a capital loss if those capital proceeds are less than those costs.

At the time the undertaking is made, CGT event D1 may happen. Any amount received would be considered capital proceeds received as a result of CGT event D1.

Relevantly, CGT event D1 does not happen when the right requires the taxpayer to do something that is another CGT event that happens to the taxpayer.

Section 102-25 of the ITAA 1997 provides that where more than one event can apply, the one you use is the one that is the most specific to your situation.

CGT event A1

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.

Application in these circumstances

With the signing of the LDA, the Taxpayer makes a promise to make the Land available to the developer for development or if he opts out to sell the land to the developer in stages. With the signing of the Variation to the LDA, the Taxpayer makes a promise to make the Land available to the developer for development.

The Taxpayer provided an undertaking. The undertaking he provided was in the form of the executed LDA itself. The Taxpayer chose to enter into the LDA with the counterparty and by doing so effectively gave an undertaking that should a PSP be granted, he would undertake the development with the counterparty according to the terms of the LDA they had executed. The LDA and its constituent terms wholly represented the undertaking that he would not pull the pin once the PSP was approved.

CGT event D1 effectively happens when the promise was given - each promise has value as an amount is specifically attributed to it in the contract. In these circumstances, a capital gain would apply to the creation of rights under CGT event D1 as a separate specified amount was allocated for the creation of those rights in the relevant contract.

The lots that are trading stock remain CGT assets for the purposes of section 108-5 of the ITAA 1997.

CGT event A1 happens upon the disposal of blocks of land created under the property development.

The promises are given in relation to the disposal of the blocks and are required to enable the Taxpayer to complete the sale of the blocks. That is. each promise is made in the context of the creation and disposal of the blocks. CGT event A1 will apply in preference to CGT event D1 and consequently CGT event D1 does not happen in relation to the giving of the promises in these circumstances.

The offsetting with respect to the advance payments against the payments to be received under the Landowner Payment formula with the disposal of lots would provide an appropriate basis for accounting for the advance payments in stages.

Due to the operation of section 118-20 of the ITAA 1997, any capital gain will be reduced by the amount included as assessable income pursuant to Division 70 and section 6-5 of the ITAA 1997. To the extent there is any capital gain, the Taxpayer may apply the relevant CGT concessions (where the requirements pertaining to the concession is met). Broadly, the Taxpayer would add all the capital gains made during the year (if multiple blocks sold in a year) and then apply the steps in section 102-5 of the ITAA 1997 to arrive at a net capital gain amount for that year. The discount would apply where the net gain is greater than the revenue amount (for the purposes of section 6-5 and Division 70 of the ITAA 1997). To the extent there is a capital gain after the section 118-20 of the ITAA 1997 reduction amount, the method in section 102-5 of the ITAA 1997 would apply (which may mean the application of e.g. the general CGT discount).