Edited version of private advice

Authorisation Number: 1052234614963

Date of advice: 22 March 2024

Ruling

Subject: Property - Am I in business?

Question

Will proceeds from the proposed sale of townhouses currently rented out, be considered capital in nature, and subject to capital gains tax under section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

The proceeds from the sale of your townhouses will be subject to capital gains tax pursuant to section 104-10 of the ITAA 1997 and assessable as statutory income under section 102-5 of the ITAA 1997.

We do not consider that you are carrying on a business (Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production) or the sale has the characteristics of an isolated profit-making transaction (Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income). This is because:

•        You do not have a business plan, employ any staff or have a space you regard as an office

•        You do not have any previous experience or qualifications in rental properties or property development

•        Your intent, as outlined in your Trust Deed has always been to rent the townhouses as passive investment to receive income in the form of dividends, interest and rents from the trust investment.

•        The activity is not recurrent or regular in nature.

•        You are selling due to financial hardship and not with the view of making a profit.

This ruling applies for the following periods:

Year Ending 30 June 20XX

Year Ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

Your trustee is a corporate entity.

Individual A and Individual B are the Directors of the company.

Both Directors have full-time occupations.

You do not have a business plan.

You are not registered for GST and have never been registered for GST.

You purchased a property at a specified address. You provided the contract date and settlement date.

You purchased the property with the intent of using it as an investment opportunity.

The trust deed outlines that the income of the trust fund will be dividends, interest, and rents from the investment of the trust fund.

The pre-existing house and land purchased was not in a good condition and minimal rent was received between specified financial years.

Due to the minimal rent received, you engaged a builder to demolish the pre-existing house and build a specified number of townhouses. You provided the date that you signed the build contract.

You provided specific details on the following:

•        When the deposit was paid

•        When the first invoice was paid

•        When construction on the townhouses commenced

You have never claimed GST on any construction costs.

The build contract covered all the townhouses and stated that the townhouses were to be constructed and finished at the same time.

The townhouses were completed and received certificate of occupancy on a specified date.

You provided the name of the estate agent you engaged to rent out all the townhouses.

You are not involved in any part of managing the rental properties. All management duties are completed by the specified estate agent.

The running costs of the townhouses, COVID-19, the increase in the cost of living, and high interest rates made it more difficult for you to see a positive return on your investment.

You provided details on rental losses you incurred in specific financial years.

You intend to sell all the townhouses in a specified calendar year for cashflow purposes. You engaged the services of a real estate agent on a specified date to sell the townhouses.

Your intent has always been to use the townhouses as a passive investment, and if costs were not so high, you would keep the townhouses as a passive investment.

You do not have any property development qualifications or experience.

You have never completed developments prior with the intent of making a profit.

You do not have a space that you would regard as an office for your rental activities.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 102-5

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 995-1