Private ruling: Income tax ~~ Assessable income ~~ Income vs. capital
Published: February 2015
Ruling period: Income year ended 30 June 20WW
Date scheme commenced: 1 July 2013

Ruling: Q1: Is the profit from the sale of the Property by the Taxpayer assessable as ordinary income pursuant to section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No | Q2: If the answer to Question 1 is "No", is the profit from the sale of the Property by the Taxpayer assessable as statutory income pursuant to section 15-15 of the ITAA 1997? | A2: No

Relevant facts and circumstances: The Taxpayer has been involved with various property investment activities, including: • the acquisition, development and sale of real property, in particular the development of new residential apartments for sale, and • owning significant commercial office property for lease, which have the character of long term investments. In a previous private ruling, the Commissioner considered that The Taxpayer's ordinary business activities included the acquisition, development and sale of new residential apartments. In 20XX, the Taxpayer entered into a contract of sale to acquire the Property. The Taxpayer's initial intention was to make a profit from the Property via the development and sale of residential apartments. From 20XX to 20YY, the Property was in protracted planning and approval stages for residential development. During 20ZZ the Taxpayer changed its intention for the Property from one of profit-making from the development and sale of residential apartments, to not one of profit-making from the development and long term leasehold of commercial office space. There were various factors contributing to this decision, most notably most notably the limitations placed on the approval of the residential development application. Up to that point the Property was held as trading stock, however, thereafter it was no longer held as trading stock, and was recorded as a long term investment. Construction of the commercial offices at the Property commenced late 20ZZ and was completed in 20UU. The Property was then placed on the market with the intention of attracting long term tenancies. The first tenant entered into a long term lease at the Property in July 20UU and the Property was fully tenanted from October 20VV. In March 20WW, the Taxpayer entered into a contract of sale to dispose of the Property with settlement taking place soon after.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 15-15 | Income Tax Assessment Act 1997 Subsection 15-15(2) | Income Tax Assessment Act 1997 Section 70-110 | Income Tax Assessment Act 1997 Part 3-1 | Income Tax Assessment Act 1997 Section 104-10 | Income Tax Assessment Act 1997 Section 108-5 | Income Tax Assessment Act 1997 Section 118-20

Reasons for decision: Summary: The profit from the sale of the Property by the Taxpayer is not assessable as ordinary income pursuant to section 6-5 of the ITAA 1997, as it will be assessable as capital gains pursuant to Part 3-1 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: With the Property being a CGT asset pursuant to section 108-5 of the ITAA 1997, the profit from the sale by the Taxpayer under CGT event A1 pursuant to section 104-10 of the ITAA 1997 will be one of the following: • Assessable as ordinary income pursuant to section 6-5 of the ITAA 1997 (where the capital gains under Part 3-1 of the ITAA 1997 are reduced to zero under section 118-20 of the ITAA 1997), resulting from either: - the sale of trading stock in a business of property development being carried on (see paragraph 15(a) of Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income ) - an isolated transaction in a business of property development being carried on, but not in the ordinary course of that business, that is entered into with a profit-making intention or purpose (see paragraph 15(b) of TR 92/3 and the High Court's decision in Federal Commissioner of Taxation v. The Myer Emporium (1987) 163 CLR ; 87 ATC 4363; 18 ATR 693 (' Myer ') - an isolated transaction outside of a business of property development being carried on, but is still carried out in a business or commercial manner, and that is entered into with a profit-making intention or purpose (see paragraph 15(c) of TR 92/3), or - an isolated transaction, where no business of property development is being carried on, but is still carried out in a business or commercial manner, and that is entered into with a profit-making intention or purpose (see paragraph 16 of TR 92/3). • Assessable as capital gains pursuant to Part 3-1 of the ITAA 1997, resulting from the mere realisation of an investment (see paragraph 36 of TR 92/3, which states that the expression 'mere realisation' is used to distinguish the profit-making business operation or commercial transaction referred to in Myer ). Therefore, to determine whether the profit from the sale of the Property by the Taxpayer will be assessable as ordinary income pursuant to section 6-5 of the ITAA 1997, and not assessable as capital gains pursuant to Part 3-1 of the ITAA 1997, the Commissioner will need to ask himself the following two questions: 1. Was the transaction within the course of a property development business being carried on by the Taxpayer, and if so, was it in the ordinary course of that business? 2. If the transaction was not in the ordinary course of a property development business being carried on by the Taxpayer, was the transaction entered into with the intention or purpose of making a profit? For the purposes of answering these two questions, the facts show that the transaction is not only the sale of the Property by the Taxpayer, but also the Property's acquisition and subsequent development into and leasing of commercial offices. 1. Was the transaction within the course of a property development business being carried on by the Taxpayer, and if so, was it in the ordinary course of that business? The facts show that the Taxpayer was carrying on a business of property development (whose ordinary business activities were the acquisition, development and sale of new residential apartments). Therefore, the Commissioner is of the view that whilst the acquisition, subsequent development into and leasing of commercial offices, and then final sale of the Property by the Taxpayer was in the course of the Taxpayer's business of property development, it was not within the ordinary course of that business (i.e. being the acquisition, development and sale of new residential apartments). 2. If the transaction was not in the ordinary course of The Trustee for Childers G Settlement's business, was the transaction entered into with the intention or purpose of making a profit? Paragraph 9 of TR 92/3 states that the taxpayer must have the requisite intention or purpose at the time of entering into the relevant transaction, and if that transaction involves the sale of property, it is usually, but not always, necessary that the taxpayer has the intention or purpose of profit-making at the time of acquiring the property. However, paragraphs 10 and 43 of TR 92/3 both state that if a transaction is outside the ordinary course of a taxpayer's business, the intention or purpose of profit-making must exist in relation to the transaction in question. This view is derived from the part of the Full Federal Court's decision in Federal Commissioner of Taxation v. Spedley Securities Limited 88 ATC 4126; 19 ATR 938 (' Spedley Securities ') which was distinguished from Myer . In Spedley Securities , the taxpayer was a merchant bank who entered into an agreement with Santos Limited to secure a $65 million loan in return for a 1¼% commission, but for various reasons the agreement was terminated and the taxpayer received a $200,000 lump sum. The Full Federal Court held that the lump sum paid to the taxpayer was capital, as it was in relation to the termination of the agreement, and not in relation to the commission the taxpayer had intended to make when it entered into the agreement. In this private ruling, the Taxpayer initially acquired the Property in 20XX with a profit-making intention or purpose, via the transaction of the development and sale of residential apartments. However, due to the various reasons provided in the facts (most notably the limitations placed on the approval of the residential development application, the Taxpayer: • substantially abandoned that initial transaction in 20ZZ, and • subsequently pursued, what was in effect, a new transaction with no profit-making intention or purpose, via the development of the Property into commercial office space and leasing it to tenants via long term leases. It was from this new transaction, with no profit-making intention or purpose (and not the initial transaction with a profit-making intention or purpose), that the Taxpayer: • held the Property as an investment (i.e. it had been subject to long term leases for over 4 ½ years before it was sold in March 20WW), and • the profit from the sale of the Property in March 20WW was from the mere realisation of that investment. Therefore, the Commissioner is of the view that the Taxpayer did not enter the transaction with a profit-making intention or purpose, and that the resulting profit is assessable as capital gains pursuant to Part 3-1 of the ITAA 1997. | Summary: The profit from the sale of the Property by the Taxpayer is not assessable as statutory income pursuant to section 15-15 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Subsection 15-15(2) of the ITAA 1997 states that section 15-15 does not apply to a profit that arises in respect of the sale of property acquired on or after 20 September 1985. The Taxpayer acquired the Property in February 20XX, which is after 20 September 1985. Therefore, section 15-15 does not apply to the profit that arose from the sale of the Property by the Taxpayer.