Private ruling: Tax treatment of gain on sale of property
Published: January 2013
Ruling period: Year ending 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Is the proposed sale of the Property a mere realisation of a capital asset and hence taxable on capital account under the capital gains tax (CGT) rules for the purposes of the taxation legislation? | A1: No.

Relevant facts and circumstances: You are a discretionary trust with a corporate trustee. The directors and shareholders of your Trustee are named as your primary beneficiaries in the Trust deed. The primary beneficiaries have a history of property development through other entities. Their experience involves the physical construction of premises on land for the purpose of sale. Both have skills and expertise in the project management of construction activities. The Property is comprised of multiple adjacent lots. Since purchase the lots have been rented at various times. You acquired the Property with the intention of developing and selling it as part of a joint venture with a large property developer. During the 2009-10 financial year the negotiations with the property developer fell through. You were unable to secure funding and decided to abandon your intention to carry on a development business and develop the Property. You state that at this point you ceased to hold the Property as trading stock and began to treat it as a capital asset. The financial statement for the year ended 30 June 2012 shows an asset Land and buildings . You have not provided any details of whether you have acquired other land or buildings. You engaged an associated development management company to obtain development approval (DA) for the Property to improve its anticipated price on sale. One of the primary beneficiaries is the sole shareholder and director of the company. DA was obtained for development of the Property as a multi storey residential development. You played no part in obtaining the DA. You engaged real estate agents to sell the Property on your behalf. You have entered into a contract to sell the Property. The DA is the sole improvement to the property and there has been no physical improvement to the property.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 Income Tax Assessment Act 1997 Section 70-10 Income Tax Assessment Act 1997 Section 995-1 Reasons for decision | Summary | Your activity of purchasing and selling the Property is considered to be an isolated transaction carried on in a commercial manner. Any profit made on the sale of the Property is assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997). Detailed reasoning | You have entered into a contract to sell the Property and will make a gain on the completed contract. | A gain made from the sale of a property will form part of your assessable income where it: | · is a profit made in the ordinary course of carrying on a business | · can be best described as an isolated transaction, or | · is an assessable capital gain. | Profit made in the ordinary course of carrying on a business | Section 995-1 of the ITAA 1997 defines 'business' as including any profession, trade, employment, vocation or calling, but not occupation as an employee. | The question of whether a business is being carried on is a question of fact and degree. The courts have developed a series of indicators that are applied to determine the matter on the facts provided. | Taxation Ruling TR 97/11 provides the Commissioner's view of the factors used to determine if you are in business for tax purposes. | In the Commissioner's view, the factors that are considered important in determining the question of business activity 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 there is regularity and repetition of the activity | · whether the activity is of the same kind and carried on in a similar manner to that of ordinary trade in that line of business | · whether the activity is planned, organised and carried out in a businesslike manner such that it is described as 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. | No one indicator is decisive. The indicators must be considered in combination and as a whole. Whether a 'business' is carried on depends on the large or general impression. | In your case, there is no indication that you had anything more than an intention to engage in business. The purchase and sale of the Property appears to be a one-off activity and not part of a larger commercial operation. | It is considered that you were not carrying on a business of property development. As such, the Property has been a capital asset for the entire time you have held it. We do not consider the Property was trading stock at any time as it does not meet the definition of trading stock. Section 70-10 of the ITAA 1997 defines trading stock to include anything produced, manufactured or acquired that is held for the purposes of manufacture, sale or exchange in the ordinary course of a business. | As you were not carrying on a business, any gain made from the sale of the Property will not be assessable as a profit made in the ordinary course of carrying on a business. | Profits from an isolated transaction | Taxation Ruling TR 92/3 discusses the treatment of profits and losses resulting from isolated transactions. | An isolated transaction refers to those transactions outside the ordinary course of business of a taxpayer carrying on a business and those transactions entered into by non-business taxpayers. | A profit from an isolated transaction is income according to ordinary concepts when both of the following elements are present: | (a) in entering into the transaction the taxpayer intended to expected to derive a profit which would have been assessable income, and | (b) the transaction was entered into in the course of carrying on a business or in carrying out a business operation or a commercial transaction. | 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 transaction or operation involves the sale of property, it is usually, but not always, necessary that the taxpayer has the purpose of profit-making at the time of acquiring the property. | For a transaction to be characterised as a business operation or a commercial transaction, it is sufficient if the transaction is business or commercial in character ( Federal Commissioner of Taxation v. Whitfords Beach Pty Ltd (1982) 150 CLR 355; 82 ATC 4031; 12 ATR 692). Whether a particular transaction has a business or commercial character depends on the circumstances of the transaction. | In determining whether an isolated transaction amounts to a business operation or commercial transaction, paragraph 13 of TR 92/3 outlines a number of factors that must be considered, as follows: | · the nature of the entity undertaking the operation or transaction. For example, if the taxpayer is a corporation with substantial assets rather than an individual, that may be an indication that the operation or transaction was commercial in nature | · the nature and scale of other activities undertaken by the taxpayer | · the amount of money involved in the operation or transaction and the magnitude of profit sought or obtained | · the manner in which the operation or transaction was entered into or carried out | · the nature of any connection between the relevant taxpayer and any other party to the operation or transaction | · if the transaction involves the acquisition and disposal of property, the nature of that property, and | · the timing of the transaction or the various steps in the transaction. For example, if the relevant transaction consists of the acquisition and disposal of property, the holding of the property for many years may indicate that the transaction was not business or commercial in nature. | It is not necessary that a profit be obtained by a means specifically contemplated (either on its own or as one of several possible means) when the taxpayer enters into the transaction. It is sufficient that the taxpayer enters into the transaction with the purpose of making a profit in the most advantageous way and that a profit is later obtained by any means which implements the initial profit-making purpose. It is also sufficient if a taxpayer enters into the transaction with the purpose of making a profit by one particular means but actually obtains the profit by a different means. | Application to your circumstances | The following is an examination of the factors contained within TR 92/3 with regard to your circumstances. | (a) Intent to make a profit | It was your intention when you entered the transactions to purchase the lots to commence a business of property development as part of a joint venture. The joint venture would develop the Property which would then be sold for a profit. | As you did not carry on a business of property development the Property was never trading stock and was always a capital asset of the Trust. The disposal of the capital asset will result in a profit (or gain) even though it is not by the means originally intended by you. | Thus, even though the original intended use of the Property from there, the means by which a profit was made upon its disposal, the change of intention does not prevent the profit from being assessable under section 6-5 of the ITAA 1997. | (b) Nature of the entity undertaking the operation or transaction | You are a trust. Your purposes are that of your trustee. Your primary beneficiaries are also the directors and shareholders of your trustee. Both have experience in property development construction and project management. It appears that the trust was formed for the purpose of undertaking this project. | (c) Nature and scale of other activities undertaken by the entity | This appears to be a one-off activity for the Trust. | (d) Amount of money involved | You have not provided details of the purchase price of the Property. The financial statement for the year ended 30 June 2012 records the book value of the asset Land and buildings . You have not advised of any other land or building purchases. You have sold the Property for more than the book value. | (e) The nature, scale and complexity of the operation or transaction | The Property was acquired for the purpose of development and subsequent sale. The nature, scale and complexity of the proposed arrangement were significant as it involved the negotiations of a joint venture, the actual property development and subsequent sale. | You entered into negotiations with a major property developer. When these failed you arranged for an associated company to obtain development approval for a multi storey residential building as this would enhance the sale value of the Property. You engaged real estate agents to sell the Property on your behalf. | (f) The manner in which the operation or transaction was entered into or carried out | The lots comprising the Property were purchased. | The beneficiaries entered into negotiations regarding a joint venture for the property development. | A development approval application was prepared and lodged. | A real estate agent sold the property. | (g) The nature of any connection between the relevant taxpayer and any other party to the operation or transaction | Whilst the associated company is not a beneficiary of yours, its' sole shareholder and director is one of your primary beneficiaries as well as the director of your corporate trustee.. | (h) If the transaction involves the acquisition and disposal of property, the nature of that property | The Property purchased consisted of adjacent blocks of land which have been rented at various times. | (i) Timing of the transaction or the various steps in the transaction | As full details of the timing of steps taken to develop the property have not been provided, we are unable to determine if they were carried out in a timely manner. | Summary | Although none of the factors are determinative on their own, it is considered that an isolated transaction was entered into, and the profit was made, in carrying out a commercial transaction for the following reasons: | · you acquired the Property with the intent to develop and sell at a profit | · you employed a professional development management to obtain the development approval to enhance the sale value of the Property | · the Property was never trading stock as you did not carry on a business at any stage | · you sold the Property at a profit, even though the profit was not obtained via the original means envisaged. | The sale of the Property does not represent the mere realisation of an asset to its best advantage, but rather has the characterisation of a commercial transaction. Therefore the sale proceeds will be assessable income pursuant to section 6-5 of the ITAA 1997. | As it has been determined that the profit is from an isolated transaction, it is not necessary to determine if an assessable capital gain exists.