Private ruling: Carrying on a business
Published: May 2013
Ruling period: Year ending 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Is the trust carrying on a business of land development? | A1: Yes

Relevant facts and circumstances: Some years ago persons associated with the trust purchased a parcel of land zoned 'Future Urban'. Approximately X years ago the trust (you) purchased some of this land including the initial stages of a development estate. In the same year you made a 'Material Change of Use' application to the local council for development approval of the initial stages of a development estate consisting of a numbered lot subdivision. The development application was approved by the council and development commenced. After this approval a new planning scheme was introduced and another portion of the land was zoned to Residential A - the balance was zoned Rural. Another application was made to the council for further stages of lots of land. These stages were also approved. Construction works drawings were lodged to the council for one of these stages and construction is Y% completed. Copies of approvals for the various development stages are provided. A related building services company is contracted out by the trust to do the following: 1) majority of the earthworks 2) trenches and pipe laying for dry sewerage and electricity 3) all pit installations 4) preparation of roads ready for bitumen, kerb and channel 5) site clean-up, lot levelling 6) any works required to pass final council inspection 7) supply of workers for various stages. Over $x million has been spent on the cost of the land and construction costs to date. A net profit before tax has been made. The trust has been carrying on property development since 200Z, including multiple land development stages. All business records are professionally produced and outsourced to your accountant and kept in the trustee's home office. You do not have a site office. The trustees have had many years' experience in lodging development and construction grants, subdividing and selling land lots.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 995-1

Reasons for decision: Summary: Section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) defines a business as including any profession, trade, employment, vocation or calling, but does not include occupation as an employee. The question of whether you are carrying on a business is a question of fact and degree. There are no rigid rules for determining whether the activity amounts to the carrying on of a business. The facts of each case must be examined. In Martin v. Federal Commissioner of Taxation (1953) 90 CLR 470 at 474; 5 AITR 548 at 551, Webb J said: The test is both subjective and objective; it is made by regarding the nature and extent of the activities under review, as well as the purpose of the individual engaging in them, and, as counsel for the taxpayer put it, the determination is eventually based on the large or general impression gained. However, the courts have developed a series of indicators that can be applied to your circumstances to determine whether you are carrying on a business. Taxation Ruling TR 97/11 outlines the factors that need to be considered to determine if someone is carrying on a business. These are as follows: · whether the activity has a significant commercial purpose or character; · whether the taxpayer has more than just an intention to engage in business; · whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity; · whether there is repetition and regularity of the activity; · whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business; · whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit; · the size, scale and permanency of the activity. In your circumstances; · the purchase of the property and the intended subdivision and sale of land lots to unrelated entities show that the activity has a significant commercial purpose or character; · The trust has purchased the property, engaged a related construction company to commence construction of the subdivision and has obtained signed contracts for the sale of lots. The trust therefore has more than just an intention to engage in business; · the sale of the lots to unrelated entities at market value shows the trust has a purpose of profit as well as a prospect of profit from the activity; · repetition and regularity of the activity is evident in the previous activity of the trust's trustee having managed the construction of several properties previously and the trust's engagement in staged land releases; · the practice of holding development property in trusts is a widely accepted method within the property development industry; · The trust has planned, organised and carried out the purchase, and then the construction of the subdivision in a businesslike manner such that it is directed at making a profit. The large and general impression gained after examining the activity in the light of all of the business indicators is that the activity of the trust amounts to the carrying on of a business of property development. Therefore, the assessable income earned from the business will be assessable under section 6-5 of the ITAA 1997 as business income.