ATO ID 2004/407: Assessable income: residential properties instalment sales contracts - investor not carrying on a business
Date of decision: 24 November 2003
Year of income: Year ended 30 June 2004 Year ended 30 June 2005
Business line: Private Groups and High Wealth Individuals

Issue
Is the taxpayer, an investor who is not carrying on a business, assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) on the profit on the sale of a residential property under an instalment sale contract, in the year in which the contract is entered into?

Decision
No. The profit will not be included in the assessable income of the taxpayer under section 6-5 of the ITAA 1997 in the income year in which the contract is entered into, as the income has not yet been derived.

Facts
The taxpayer, an investor, entered into a joint venture agreement with a property manager. The agreement provided that the taxpayer would purchase a property chosen by the manager, with the intention of selling it to a third party purchaser, under an instalment sales contract with vendor finance. Under the joint venture agreement, the property manager supervises the performance of the instalment sales contract. At regular intervals, the property manager distributes equally, between the taxpayer and itself, the amount remaining from the instalments after deducting the joint venture expenses, including the taxpayer's loan repayments. The taxpayer is not carrying on a business of selling residential properties under instalment sales contracts. The joint venture agreement states the agreement does not constitute a partnership. The interest earned by the taxpayer as a result of the provision of the vendor finance is derived for taxation purposes at the time of receipt. The instalment sales contract between the third party purchaser and the taxpayer has the following features:

Reasons for decision
Summary: Subsection 6-5(1) of the ITAA 1997 provides that assessable income includes income according to ordinary concepts (ordinary income). Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year. In certain circumstances a profit made through an isolated transaction will be ordinary income. Taxation Ruling TR 92/3 deals with isolated transactions and at paragraph 16 states that: If a taxpayer not carrying on a business makes a profit, that profit is income if: Paragraph 40 of TR92/3 states that it is not necessary that the intention or purpose of profit making be the sole or dominant intention for entering into the transaction, although it must be a significant purpose. Paragraph 41 of that ruling also states that if the transaction or operation involves the sale of property, it is usually necessary that the taxpayer has the profit making intention or purpose at the time of acquiring the property. In the circumstances here, whilst the taxpayer also intended to derive interest income under the instalment contract, they had the clear and significant intention of making a profit through buying and selling the property under the terms of the joint venture agreement. The terms of the joint venture agreement meant that the taxpayer was assured of making a profit by entering into the instalment sale contract soon after purchase of the residential property, for a price in excess of the purchase price. The purchase of the property and subsequent entering into of the instalment contract constitutes a 'commercial transaction' as envisaged by TR 92/3. Therefore, the profit was made in the carrying out of a commercial transaction. In the case Gasparin v. Federal Commissioner of Taxation (1994) 50 FCR 73; 94 ATC 4280; (1194) 28 ATR 130 (the Gasparin Case) , where contracts for the sale of land were executed in one income year but settled in another, it was held that the income was not derived until settlement. Taxation Ruling TR 97/9, while specifically dealing with the sale of wool, discusses the impact of the Gasparin Case in relation to the sale of real property and at paragraph 89 states: The derivation of income from the sale of goods should be contrasted with the derivation of income from the sale of real property. It was held in Gasparin that income from the sale of land was not derived until settlement had taken place. We do not think that von Doussa J's decision was based on the fact that legal ownership in the land would not be transferred until settlement. The explanation for the judgement rather lies in the realisation that a vendor in a real property transaction will not have performed all that is needed to become entitled to a payment prior to settlement. At settlement, transfers are effected which put the purchaser in a position to become registered as owner. As such, the vendor does not earn the income from the sale until settlement. Under the instalment sale contract in question, whilst the relevant contract provides for the payment of instalments over a number of years, as in the Gasparin Case, the income from the sale of the properties has not been derived until settlement of the contract. At settlement, the taxpayer as vendor will transfer the title to the property, and will at that point, have done all that is required in order to derive the payments in respect of the sale of the property. Accordingly, no income from the sale of the property has been derived under subsection 6-5(2) of the ITAA 1997 until the instalment contract is completed and settlement has occurred.

Legislative references: Income Tax Assessment Act 1997 section 6-5 subsection 6-5(1) subsection 6-5(2)
Case references: Gasparin v. Commissioner of Taxation (1994) 50 FCR 73 94 ATC 4280 (1994) 28 ATR 130
Related public rulings and determinations: Taxation Ruling TR 92/3 | Taxation Ruling TR 97/9
Related ATO interpretative decisions: ATO ID 2004/25 | ATO ID 2004/26 | ATO ID 2004/27 | ATO ID 2004/28 | ATO ID 2004/29 | ATO ID 2004/406
Subject references: Disposal of real estate Isolated transactions Joint ventures Real estate transactions Sale by instalments