Private ruling: Realisation of an asset
Date of advice: 28 November 2022
Published: 9 January 2023
Ruling period: Year ending 30 June 20XX | Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Will the sale proceeds of a rezoned property (the Property) be treated as income according to ordinary concepts and assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. | Q2: Will proceeds from the disposal of the Property be subject to the capital gains tax provisions contained in Part 3-1 of the ITAA 1997? | A2: Yes.

Relevant facts and circumstances: 1. You purchased the Property in 19XX. The Property was a vacant block at the time with a rural zoning. 2. The purchase of the Property was made with the intention of constructing a main residence on it. 3. You have never been engaged in property development in your personal capacity. 4. Primary production business has been conducted on the Property by a related entity. 5. You sought to have the Property rezoned and incurred expenses undertaking this process. It took many years to get a partial rezoning of the Property. 6. You are considering selling the property. You propose to sell the Property as an unsubdivided block to an unrelated entity and have engaged real estate agents and property lawyers to assist with the sale.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 Part 3-1 | Income Tax Assessment Act 1997 section 102-20 | Income Tax Assessment Act 1997 subsection 104-10(1) | Income Tax Assessment Act 1997 subsection 104-10(2) | Income Tax Assessment Act 1997 subsection 104-10(3) | Income Tax Assessment Act 1997 subsection 104-10(4) | Income Tax Assessment Act 1997 section 108-5

Reasons for decision: Summary: There was no profit-making intention in originally acquiring the Property. The rezoning of the Property and related costs do not have the character of business operations or commercial transactions. The proceeds ultimately received will not be assessable as ordinary income under section 6-5. | Detailed Reasoning - Detailed reasoning: 1. Under section 6-5 your assessable income includes the ordinary income you derived directly or indirectly from all sources, during the income year. 2. If the proceeds from the sale of the rezoned Property are ordinary income, the proceeds will be assessable under section 6-5. 3. Although neither of the Income Tax Assessment Acts provide specific guidance on what is meant by 'income according to ordinary concepts', a substantial body of case law has evolved to identify various factors that indicate whether an amount is income according to ordinary concepts. 4. The principle has been established in the Australian courts that profit arising from an isolated business or commercial transaction will be ordinary income if the taxpayer's purpose or intention in entering into the transaction is to make a profit, even though the transaction may not be part of the ordinary activities of the taxpayer's business ( FCT v. Myer Emporium Ltd 87ATC 4363; 1987 163 CLR 199; 18 ATR 693 ( Myer Emporium )). 5. The Commissioner's view on the application of the principles outlined in Full High Court of Australia decision in Myer Emporium is set out in Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income. This ruling state that profits on an isolated transaction may be income. Profit from an isolated transaction will be ordinary income when both: (a) the intention or purpose of a taxpayer in entering into the transaction was to make a profit or gain, and (b) the transaction was entered into, and the profit was made, in the course of carrying on a business or in carrying on a business operation or commercial transaction. | Detailed Reasoning - Intention or purpose: 6. Paragraph 9 in TR 92/3 states: The taxpayer must have the requisite purpose at the time of entering into the relevant transaction or operation. 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. 7. The decision in Casimaty v. FC of T 97 ATC 5135; (1997) 37 ATR 358 ( Casimaty ) demonstrates that in circumstances where there is an absence of profit-making intention when land is acquired, the likelihood of any profit made on the eventual sale of land being income according to ordinary concepts is greatly diminished. Casimaty considered the sale of farming land. The proceeds were held to not be income according to ordinary concepts, but rather constituted the mere realisation of a capital asset, carried out in an enterprising way so as to secure the best price. Consequently, the profit derived from the subdivision and sale of the land by the taxpayer was not assessable income under section 6-5. 8. Similarly, in FC of T v. Williams 72 ATC 4188; (1972) 127 CLR 226 ( Williams ), the High Court considered that development carried out on land to be subdivided, such as grading, levelling, road building and provision for water and power, was to enable the owner to secure the best price for the land and did not amount to carrying out a profit making scheme. The proceeds resulted from the mere realisation of a capital asset and were not income. 9. In this case the Property was acquired in 19XX with the intention to use it as a main residence. 10. As per Casimaty and Williams ,the intention in acquiring the Property was not one of a profit-making purpose. The intention was to use the Property as a main residence. It is considered that by going through the rezoning process you were able to secure the best price and did not amount to carrying out of a profit making scheme. That is, any sales proceeds to be received from the sale of the Property will be considered a mere realisation of a capital asset. | Detailed Reasoning - Business operation or commercial transaction: 11. For a transaction to be characterised as a business operation or a commercial transaction, it is sufficient that the transaction is business or commercial in character (see Whitfords Beach at 150 CLR 379; 82 ATC 4044; 12 ATR 707). 12. Some of the factors to consider when looking at whether an isolated transaction amounts to a business operation or commercial transaction are listed at paragraph 13 in TR 92/3. They are: (a) the nature of the entity undertaking the operation or transaction; (b) the nature and scale of other activities undertaken by the taxpayer; (c) the amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained; (d) the nature, scale and complexity of the operation or transaction; (e) the manner in which the operation or transaction was entered into or carried out; (f) the nature of any connection between the relevant taxpayer and any other party to the operation or transaction; (g) if the transaction involves the acquisition and disposal of property, the nature of that property; and (h) the timing of the transaction or the various steps in the transaction. 13. The points above are expanded upon at paragraph 49 in TR 92/3. The factors at (a) and (h) are of particular relevance to this case: (a) the nature of the entity undertaking the operation or transaction ( Ruhamah Property Co. Ltd. v. F C of T (1928) 41 CLR 148 at 154; Hobart Bridge Co. Ltd. v. FC of T (1951) 82 CLR 372 at 383; FC of T v. Radnor Pty Ltd 91 ATC 4689; 22 ATR 344). 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 . However, if the taxpayer acts in the capacity of trustee of a family trust, the inference that the transaction was commercial or business in nature may not be drawn so readily [emphasis added]; (h) the timing of the transaction or the various steps in the transaction ( Ruhamah Property 41 CLR at 154). 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. [emphasis added] 14. You hold the Property in your personal capacity as an individual. As per (a) and (h) above, these factors indicate the rezoning and potential sale of the Property was not commercial in nature, but more securing the best price in merely realising the sale of the Property. 15. The remaining factors listed at paragraph 13 of TR 92/3 are examined below. | Detailed Reasoning - (b) the nature and scale of other activities undertaken by the taxpayer: 16. You have not undertaken any activities of this kind in your individual capacity. | Detailed Reasoning - (c) the amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained: 17. A profit is expected to be made on sale of the Property. | Detailed Reasoning - (d) the nature, scale and complexity of the operation or transaction: 18. It is proposed to sell the Property in its current state, that is, as one property. 19. There is nothing to indicate any additional complexity is likely to be involved in the sale of the Property, beyond what would normally be expected of disposing of a block with a dwelling attached. | Detailed Reasoning - (e) the manner in which the operation or transaction was entered into or carried out: 20. The Property was acquired in 19XX for use as a main residence. At this time the land was zoned rural. The subsequent rezoning is considered to have been to secure the best sale price and not in the character of a business operation. | Detailed Reasoning - (f) the nature of any connection between the relevant taxpayer and any other party to the operation or transaction: 21. The Property is intended to be sold in an arm's length transaction to an unrelated party. You have not accepted any offer, but there has been correspondence between prospective purchasers. That is, there is no relevant connection between you and any prospective purchaser. | Detailed Reasoning - (g) if the transaction involves the acquisition and disposal of property, the nature of that property: 22. You intended to stay on the property. Due to changed circumstances you are seeking to enter a transaction in which you will sell the Property. 23. It is clear the Property was purchased with the intention to live on it as your main. That is, the Property was not acquired as part of a trade and was not to be disposed of as part of a trade. | Detailed Reasoning - Conclusion: 24. The sale of the Property is intended to be an isolated transaction. None of the factors described in TR 92/3 indicate that profits from an isolated transaction may be income, are present. That is, the original intention for the purchase of the Property was to use it as a main residence. There was no profit-making purpose. Moreover. the factors listed at paragraph 9 of TR 92/3 strongly indicate a lack of business or commercial character. Consequently, the proceeds ultimately received will not be treated as ordinary income and will not be assessable under section 6-5. | Detailed Reasoning - Question 2: Will proceeds from the disposal of a rezoned property be subject to the CGT provisions contained in Part 3-1? | Summary: It has been established that the proposed sale of the Property will be merely a realisation of a capital asset. Any capital gain made from the sale of the Property will be subject to the CGT provisions contained in Part 3-1. | Detailed Reasoning - Detailed reasoning: 25. You make a capital gain or capital loss if a CGT event happens to a CGT asset. [1] Property is considered to be a CGT asset. [2] 26. CGT event A1 happens if you dispose of your ownership interest in a CGT asset. [3] 27. As you are proposing to sell the Property, CGT event A1 will happen at the time a contract is entered into. A capital gain will be if the capital proceeds from the disposal are more than the Property's cost base. [4] | Detailed Reasoning - Other relevant comments: The application of the main residence provisions contained in Subdivision 118-B have not been considered as part of this ruling. [1] Section 102-20 [2] Section 108-5 [3] Subsection 104-10(1) [4] Subsections 104-10(2) to (4)

Reasons for Decision: All legislative references are to the ITAA 1997 unless otherwise stated. | Question 1: Will the sale proceeds of a rezoned property be treated as income according to ordinary concepts and assessable under section 6-5?