Edited version of private advice

Authorisation Number: 1052267282837

Date of advice: 12 July 2024

Ruling

Subject: Carrying on of a business - property development

Question 1

Will the property constitute your trading stock and will the proceeds from the sale of the property constitute the carrying on of a business pursuant to section 6-5 of Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No. When considered against the factors outlined in TR 97/11 Income tax: am I carrying on a business of primary production? we do not consider that you are carrying on a business of property development. You do not satisfy majority of the key criteria listed in TR 97/11.

Question 2

Will the entry into the co-operation agreement and the profits from the sale of the property constitute a profit from an isolated transaction as part of a profit-making scheme pursuant section 6-5 of the ITAA 1997?

Answer

No. When considered against the factors outlined in TR 92/3 Income tax: whether profit on isolated transactions are income we do not consider that the money received from the sale of land to be the result of an isolated profit-making transaction. You do not satisfy majority of the key criteria listed in TR 92/3.

Question 3

Will the sale of the property constitute the mere realisation of a capital asset and subject to the capital gains tax provisions under section 104-10 of ITAA 1997?

Answer

Yes. As explained above, as we consider that the transactions are not in the course of carrying on a business or an isolated profit-making transaction the sale of the property is a mere realisation of a capital asset.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

Purchase of the Land

You and your spouse purchased the Land after 20 September 1985 which did not contain a residence on the property. You provided us with details on the purchase amount and purchase date.

Since the purchase of the Land, it has been used as a hobby farm and to grow fruit trees. The Land has not produced any income since the purchase.

At the time of purchase the Land was zoned as rural. Some years ago the Land was rezoned as an Urban Growth Zone as it is situated within a structure plan. When this occurred your council rates increased significantly along with being subject to an annual land tax liability, these additional costs imposed a large cash flow burden on you.

Decision to enter into an agreement with Company A

You have not previously made any attempts to sell the Land or have you been approached by any real estate agents to sell the Land. In the recent years, the property became nestled within a master planned development by Company A. Company A owned a significant amount of land adjacent to the property.

As part of the Project A development plan, the local council determined that the existing Street D was to be extended. Part of your Land was designated to be used as the Street D extension which would then be transferred to the relevant road Authority.

As part of the Road Reserve Plan you have transferred part of your land being sold to the relevant road Authority and limited remedial works were undertaken on the adjacent land adjoining the Road Reserve Plan. You confirmed that no other works were undertaken on the Land.

As Company A were undertaking the Project A development on the land adjacent to yours, they were engaged to undertake the Street D extension. As part of the extension, Company A required access to your Land to undertake the necessary work.

Company A approached you few years ago for you to grant them the rights of access your Land in order to construct the Street D extension. In granting the access, Company A agreed to preparation of plans of subdivision of the property at their own cost and to use their own expertise and in-house resources.

The only activities that Company A were involved in was the Street D extension for the purposes of the Project A Development and the preparation of the plans of subdivision for the property. Company A were not engaged to undertake any subdivision or development activities on your Land.

Whilst you had no intention to subdivide the property yourself, you agreed for Company A to draw up the plans of a subdivision at their own cost as this would ensure that the plans were consistent with the plans for the Project A Development. If a sale was to eventuate it would maximise your sale price for the Land if subdivision plans were included.

Co-Operation Agreement and plan of subdivision

You entered into a Co-Operation Agreement with Company A on a specified date to construct the Street D extension works and plans of subdivision on the property. You provided us with a copy of the agreement which detailed that Company A will carry out all activities in relation to the subdivision and development plans and will incur all costs.

Whilst the agreement required Company A to prepare subdivision and development plans for your benefit, the agreement impose no obligation on you to undertake the development on the property, once these plans had been finalised. The agreement also contained no obligations on you to enter into any other agreements in relation to the future development or sale of the property.

The local City Council issued a planning permit for a subdivision of the land into a number of lots. You provided us with a copy of the permit which included the issue date, the works approved and the number of years the permit is valid for.

Decision to sell the Land

You made the decision to sell the Land due to the significant additional costs of land tax and increased council rates following the rezoning to Urban Growth Zone and the growing urbanisation of the surrounding area. Due to the Project A Development the use of the Land for private recreational purposes was no longer appropriate.

You have no experience in property development and had no intention of developing or subdividing the Land.

Your intention was to sell the Land as a single parcel for the highest price in the shortest time.

A few years after entering into the agreement with Company A, you made the decision to sell your Land as a single parcel of land via a public marketing campaign. Due to the agreement with Company A this enabled you to maximise the sale proceeds of your Land by including the approved plans of subdivision and development.

You engaged Company B to sell your Land as a single parcel of land through a public marketed campaign. Company B were engaged once all the work was completed on the Land as per the Co-Operation Agreement which included the Street D extension works and registering the plans of subdivision.

Your Land was marketed for sale by expression of interest with a permit approved for a specified number of residential lots which closed on a specified date. When the Land was marketed the part of your Land that related to the road was excluded. You provided us with details on the size of the Land that was marketed.

You provided us with details on the number of expressions of interest you received during the campaign for the sale of your Land. The highest bidder from the campaign was Company A.

On a specified date, you received a letter of offer for the Land from Company A. The offer set out that that they were seeking to provide maximum value for your offer.

You accepted the offer by Company A for a specified amount.

You entered a contract of sale of the Land with Company A on a specified date for a specified amount with settlement estimated to occur after a year from date of the contract.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 Part 3-3

Income Tax Assessment Act 1997 section 104-10