Private ruling: Property - development - Am I in business? - isolated transaction - mere realisation
Date of advice: 4 August 2016
Published: September 2016
Ruling period: Income year ending 30 June 2016; and | Income year ending 30 June 2017.
Date scheme commenced: 1 July 2015.

Ruling: Q1: Will the profit from the sale of the dwelling be treated as ordinary income under section 6 -5 of the Income Tax Assessment Act 1997 (ITAA 1997) as a result of the taxpayer carrying on a business of property development? | A1: No. | Q2: Will the profit from the sale of the dwelling be treated as ordinary income under section 6-5 ITAA 1997 as a result of an "isolated transaction" carried out for profit and commercial in character? | A2: Yes. | Q3: Will the whole of the profit from the sale of the dwelling be treated as statutory income under the capital gains tax provisions in Parts 3-1 and 3-3 of the ITAA 1997? | A3: No.

Relevant facts and circumstances: Information and documentation has been provided with this private ruling which should be read in conjunction with, and forms part of, this ruling. The Three Individuals, being Persons A, Band C, have been long-time friends and colleagues. The Three Individuals have jointly held investment properties together during a period of that time, with some being held for long-term investment and not for sale as follows: • Property A, purchased after 20 September 1985, which is still owned jointly by the Three Individuals • Property B, which was land on which three dwellings were constructed after 20 September 1985 with: • One dwelling being still held jointly by the three individuals • One dwelling is held by Persons A and B; and • One dwelling was held by Person C until it was transferred to their relatives a number of years later; and • Property C, purchased after 20 September 1985, which was land on which the Three Individuals constructed two dwellings, being Dwelling A and B. Dwelling A was sold less than 16 months after the construction of the dwellings had commenced. Dwelling B was retained in joint names of the Three Individuals. As a result of financial hardship, Person C sold their half share in Dwelling B to Persons A and B over five years after the dwelling was constructed. Company A is a related entity of Person C's spouse, Person D. For a period of time loan facilities (the Facilities) were advanced in various amounts to Company A by a bank (the Bank) totalling $X,XXX,X00. The following guarantees were made in relation to the obligations of Company A under the Facilities: Person A guaranteed the obligations for a limit of $XX0,000, plus interest, fees and charges • Company B guaranteed the obligations for a limit $X,X00,000, plus interest, fees and charges • Person D guaranteed the obligations for a limit of $X,X00,000, plus interest, fees and charges. Person C also provided the mortgage for Property X as secured property to the Bank. Company A defaulted on the terms of the Facilities and the Bank issued the notices of demand to Company A a number of years after the Facilities had been provided, with a notice being issued to Person C pursuant to section 76 of the Transfer of Land Act 1958 (Vic) . A number of months after the notices were issued, the Bank commenced proceedings against Persons C and D, and related entities being Company A and B, seeking repayment of the amount owing to it and the possession from Person C of the secured property, being Property X. Despite the commencement of the legal proceedings, Person C continued to operate separately with Persons A and B, as they had previously done, irrespective of Person D's business, or their joint business interests with Person D. The Three Individuals commenced looking for potential properties to purchase and determining how to structure their arrangement. Around this time, the Three Individuals began to investigate a number of potential properties to purchase. Around three months after the legal proceedings had commenced, a meeting was held by the Three Individuals and Person D. Meeting Notes prepared outlined the following: Overall objective : To develop a portfolio of positive cash flow properties. These properties will be divided between individual family ownership, for family wealth building and joint family wealth building for accelerated wealth creation. Property K Objective: 1. Keep properties if possible 2. Split properties between three entities: (a) Trust (b) Person C (or trust in name of) (c) Persons A and B (or trust in name of) 3. Subdivide the land and then build two at a time. Shortly after the meeting, the Three Individuals made contact with a bank in relation to the funding for the Project, being the construction of two dwellings on the Property Y (the Property). On the same date, Person D and Companies A and B filed a counterclaim against the Bank. A couple of months later, the Trust was established with the beneficiaries being Persons A, B and C (the Beneficiaries). The Trust is a discretionary trust. The Trust structure was adopted for the purpose of allowing Trust income earned from properties to be distributed to the Beneficiaries each year in accordance with their ownership interests. The Trustee of the Trust (You) were registered to be used in relation to the purchasing of a property and for possible future investments. You are registered for Goods and Services Tax (GST) and have claimed GST credits of around $XX,XXX from around 18 months after the Property was purchased until recently. Around the time that the Trust was created the Three Individuals were sent an email from Bank B outlining that an in principle loan for the amount of $XX,000 for the deposit on the Property had been approved. The loan was for a long period of time, with security for the loan being Property A and Dwellings A and B. Shortly after the Trust was created a Trust meeting was held during which the following was discussed: • The progress of setting up the Trust and company structure • Person A would set up a new bank account for the Trust • Person C would co-ordinate preparation to rent out the Property • Person D would arrange a meeting with rental and selling agents to determine current design strategy is the best to proceed with and to confirm the outcome of discussions. A meeting was held by Person D with a town planner (the Town Planner) shortly after you were registered about the options available to the Three Individuals in relation to the development of the Property. Person D emailed the Three Individuals on the same day as the meeting about their meeting with the Town Planner, outlining the development of the Property options discussed during the meeting as follows: Notes from the meeting with the Town Planner: … 2. Two 'quality' X bedroom dwellings on site would realise between $X.Xm and $X.Xm each 3. Good X bedroom dwellings on X Road (perhaps a good benchmark?) bring 'low to mid $Xm' … 7. The rental income for the X bedroom dwellings would be around $X,X per week… The scenarios discussed with Person A: • Build X and sell one • Build X and sell X • Build X and sell X; or • Build X and keep X, and gear from the equity. During the month after the Trust was created a meeting was held between the Three Individuals and Person D to discuss Person D's email sent to them days earlier in relation to the town planning meeting about the development of the Property. A number of days after the meeting, Person A sent an email to Persons B, C and D which outlined the notes of the discussion held a couple of days previously between the Three Individuals in response to Person D's email. Person A's email outlined the following: 1. All agree that whatever option is finally chosen, that it is a good idea to sell one to raise cash to fund future projects. Around six weeks after the Trust was created, you acquired the Property using funds provided by the Three Individuals and funds from the loan obtained from Bank B. On the same day that the Property was acquired, you obtained an Investment Home Loan from Bank B for the amount of $XXX,X00. In the month after the Property was acquired, the services of Company X were engaged to prepare a fee proposal for the demolition of the House, and the construction of the specified dwellings on the Property. Also during that month you engaged the services of Company Y (the Developer). The House was rented out from when it was acquired for around six months, after which it remained vacant until it was demolished. Multiple discussions were held with the planners at the Council due to the Heritage Overlay of the Property. The final planning application was lodged with the Council around 11 months after the Property was purchased Person C filed a Further Amended Defence against the Bank over 12 months after the Property was purchased. Around 20 months after the Property was purchased, a planning committee meeting was held by the Council, which recommended that a notice of decision to grant a permit be issued for the demolition of the House and the construction of the specified dwellings and fencing at the Property. Around the same time, Person D's guarantee to the Bank totalled $X,XXX,XXX.XX. Local residents challenged the Councils decision at the Relevant Tribunal. You had plans drawn up to demolish the House and to develop the specified dwellings on the Property. Over 20 months after the Property was purchased, a Deed of Settlement occurred in relation to the legal action brought against Persons C and D and Companies A and B by the Bank. As a result of the settlement, the following occurred • Paid the following cheques: • The Bank -$XXX,XXX.XX • Legal representative - $X0,000 • Legal representative - $X,XXX • Received the following: • Certificate of Title for Property X • Discharge of mortgage for Property X Under the Deed of Settlement: • Person C agreed to pay to the Band the amount of $XXX,XXX.XX and the Bank would discharge the mortgage over Property X • Person D agreed to; • pay the Bank the amount of $X0,000 • have the Bank appoint an investigative accountant to investigate his financial position and the financial position of Company B • provide a sworn statement of assets and liabilities; and • provide a certificate of occupancy for the property, Property Y within a specified period. Person C incurred $X0,000 for legal expenses in relation to the court proceedings with the Bank. Over two years after the Property was purchased, the planning permit was endorsed by the Council for the construction of the specified dwellings. You lodged an application for an additional loan with Bank B to finance the development of the Property and the construction of the specified dwellings. Bank B approved a loan application lodged by you for the amount of $X,XXX,X00 over a long term. Security for the loan was the mortgages over Property A and the Property. Also, the Three Individuals were listed as the guarantors for the loan. Over three years after the Property was purchases, the House was demolished and construction work on the specified dwellings commenced. Around the same time that the House was demolished, Person D was declared bankrupt. During the month following the demolition of the House, Person C sent an email to their mortgage broker of their and Person D's intention to move from Property X and rent it out for $XX0 per week. Person C also queried whether they needed to sell Property A. Person C emailed their mortgage broker a few days later querying whether selling Property A and Dwelling A would assist their and Person D's situation. Person C's mortgage broker sent a response email on the same day in which they advised that selling both Property A and Dwelling A would not assist with their and Person D's financial issues. Persons A and B have been covering Person C's share of the contributions and loan payments arising in relation to this Project. It is anticipated that construction of the specified dwellings will be completed over twelve months after the construction had commenced. You are contemplating putting one of the dwellings up for sale (the Sale Dwelling) so that you can distribute 100% of the expected sale proceeds to Person C in their capacity as a beneficiary, which would allow them to repay debts that have arisen due to Person D's bankruptcy that are in Person C's name. It is anticipated that the proceeds from the sale of the Sale Dwelling will be expected to cover the following amounts owed by Person C: Description Amount Share of loan for the Property $ XXX,XXX.XX Builder's costs $ XXX,XXX.XX Amount owing to friends and family members $ XXX,XXX.XX Amounts owing on credit cards $ XX,XXX.XX Amount owing in relation to Person D's bankruptcy $ XX,XXX.XX Home loan $ XXX,XXX.XX TOTAL $X,XXX,XXX.XX The Financial Reports for the Trust provide that the Three Individuals have the following unsecured loans Loans - unsecured 2012 Income year 2013 Income year 2014 Income year 2014 Income year Persons A and B XX,XXX XX,XXX XX,XXX XXX,XXX Person C XX,XXX XX,XXX XX,XXX XXX,XXX Totals XX,XXX XXX,XXX XXX,XXX XXX,XXX For the purposes of this private ruling the following will occur: • On completion of the construction of the specified dwelling, one dwelling will be sold (the Dwelling) • The proceeds from the sale of the Sale Dwelling will be distributed to Person C; and • The remaining dwelling/s will be held by you as a long-term investment property.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 8-1 | Income Tax Assessment Act 1997 Section 118-20 | Income Tax Assessment Act 1997 Section 995-1 | Income Tax Assessment Act 1997 Part 3-1 | Income Tax Assessment Act 1997 Part 3-3

Reasons for decision: Summary: Summary You are not carrying on a business of property development because your activities do not display the salient indicator of a business, which are transactions entered into on a continuous and repetitive basis. However, any profit or loss from the sale of the Sale Dwelling will still be accounted for on revenue account as an isolated commercial transaction because you are subdividing the Property and constructing the Sale Dwelling for the primary purpose of making a profit on its sale. Detailed reasoning Legislative references referred to herein are from the ITAA 1997 . | Detailed Reasoning - Taxation treatment of property sales: There are three ways profits from property sales can be treated for taxation purposes: 1. As ordinary income under section 6-5, on revenue account, as a result of carrying on a business of property development, involving the sale of land as trading stock; or 2. As ordinary income under section 6-5, on revenue account, as a result of an isolated business transaction entered into by a non-business taxpayer, or outside the ordinary course of business of a taxpayer carrying on a business, which is the commercial exploitation of an asset acquired for a profit making purpose; or 3. As statutory income under the capital gains tax (CGT) legislation on the basis that a mere realisation of a capital asset has occurred. Whether the proceeds are treated as income or capital depends on the situation and circumstances of each particular case. We will consider each of the ways you can make a profit as outlined above in relation to the gain made on the sale of the dwelling as follows: | Detailed Reasoning - Carrying on a business of property development: Section 995-1 states the term 'business' includes any profession, trade, employment, vocation or calling, but does not include occupation as an employee. To determine whether an activity, or series of activities, amounts to a business, the activity needs to be considered against the indicators of a business established by case law. In the High Court of Australia case of Hope v. Bathurst City Council (1980) 144 CLR 1; (1980) 29 ALR 577; (1980) 80 ATC 4386; [1980] HCA 16, a business was described in the following ways: It is the words "carrying on'' which imply the repetition of acts and activities which possess something of a permanent character. …activities engaged in for the purpose of profit on a continuous and repetitive basis. Transactions were entered into on a continuous and repetitive basis for the purpose of making a profit…manifested the essential characteristics required of a business. The Commissioner's view on whether a taxpayer is carrying on a business is found in Taxation Ruling TR 97/11 (TR 97/11) which uses the following indicators to determine whether a taxpayer is carrying on a business: • whether the activity has a significant commercial purpose or character; • 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; and • whether the activity is better described as a hobby, a form of recreation or a sporting activity. In determining whether a taxpayer is carrying on a business, no one indicator will be decisive. The indicators must be considered in combination and as a whole. Whether a business is being carried on depends on the large or general impressions gained from looking at all the indicators and whether these indicators provide the operations with a commercial flavour. Application to your situation In this case, the Three Individuals purchased properties together as follows: • Property A, used as an investment property until the present time • Property B, which was land on which dwellings were constructed of which the Three Individuals hold one dwelling jointly (Dwelling X), a specified number are held by Persons A and B and Person C held a specified number which they transferred to their parents. • Property C, which was land on which a number of dwellings were constructed. One of the dwellings (Dwelling A) was sold and the remaining dwelling (Dwelling B) was held by the Three Individuals until Person C sold their share in the dwelling to Persons A and B. The Three Individuals set up a company, you, and trust arrangement ostensibly to provide a structure for all new and ongoing investments to enable the Three Individuals to receive distributed income earned from properties held by you to them. The Property was purchased about a month after you and the Trust were created, and was rented out shortly after it was purchased for around six months. It remained vacant until it was demolished. The demolition of the existing house located on the Property was undertaken over three years after the Property was purchased, with the construction of the specified dwellings commencing shortly afterwards. Completion of the specified dwellings is expected to occur more than four years after the Property was purchased, and you will sell one of the completed dwellings (the Sale Dwelling). After reviewing the information and documentation provided, it is the Commissioner's view that the activities involved with the buying of the Property, the demolition of the existing house, the construction of the dwellings and the sale of the Sale Dwelling are not those of an entity carrying on a business of developing property. The activities undertaken do not display the salient indicator of a business, which are transactions entered into on a continuous and repetitive basis. The building of the dwellings will be undertaken by other party/ies engaged by you. The activity is in relation to a relatively small one off project that was not carried on in a manner similar to other property development businesses. Based on the information provided, there is nothing to suggest that the purchase of the Property, construction of the dwellings and sale of the Sale Dwelling will be the beginning of a continuing business of property development. Therefore, any gain made on the disposal of the Sale Dwelling will not be assessable income under section 6-5 as ordinary income from the carrying on of a business. | Detailed Reasoning - Isolated business transactions: Profits from isolated transactions will be assessable as ordinary income where the intention or purpose in entering into the transaction was to make a profit or gain and the transaction was entered into and the profit was made in the course of carrying out a business operation or commercial transaction Taxation Ruling TR 92/3 (TR 92/3) sets out the Commissioner's view of the general principles and factors that have been considered in determining whether an isolated transaction is of a revenue nature. Paragraph 1 of TR 92/3 outlines that isolated transactions are: a) those transactions outside the ordinary course of business of a taxpayer carrying on a business; and b) those transactions entered into by non-business taxpayers. The ruling outlines at paragraph 6 that whether a profit from an isolated transaction will be ordinary income will depend on the circumstances of the case, however a profit from an isolated transaction will be ordinary income when: 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 operation or commercial transaction. TR 92/3 outlines that the relevant intention or purpose of the taxpayer, of making a profit or gain, is not the subjective intention or purpose of the taxpayer. Rather, it is the taxpayer's intention or purpose discerned from an objective consideration of the facts and circumstances of the case. If a transaction or operation is outside the ordinary course of a taxpayer's business, the intention or purpose of profit-making must exist in relation to the transaction or operation in question. The transaction may take place in the course of carrying on a business even if the transaction is outside the ordinary course of the taxpayer's business. Paragraphs 41 and 42 of the ruling outline that where a taxpayer acquires an asset with the intention of using it for personal enjoyment but later decides to venture or commit the asset into a profit-making undertaking or scheme with the characteristics of a business operation or commercial transaction, the activity of the taxpayer constitutes the carrying on of a business operation or commercial transaction carrying out a profit-making scheme, as the case may be. Whether a particular transaction has a business or commercial character depends very much on the circumstances of the case. Paragraph 13 of the ruling outlines the following factors which may be relevant when considering whether an isolated transaction amounts to a business operation or commercial transaction: • the nature of the entity undertaking the operation or transaction • 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 the profit sought or obtained • the nature, scale and complexity of the operation or transaction • 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 the property, and • the timing of the transaction or the various steps in the transaction. The direction provided within TR 92/3 and case law indicates that profits in this context are more likely to be considered ordinary income if they are made in the ordinary course of carrying on a business. Further, ordinary income may be derived from an isolated transaction which becomes commercial in nature, or as a result of profits on a transaction in which the initial intention was to make a profit on sale. Miscellaneous Taxation Ruling MT 2006/1 provides a list of specific factors relevant to isolated transactions and sales of real property. If several of the factors are present, it may be an indication that a business or an adventure or concern in the nature of trade is being carried on. These factors are as follows: • there is a change of purpose for which the land is held; • additional land is acquired to be added to the original parcel of land; • the parcel of land is brought into account as a business asset; • there is a coherent plan for the subdivision of the land; • there is a business organisation - for example a manager, office and letterhead; • borrowed funds financed the acquisition or subdivision; • interest on money borrowed to defray subdivisional costs was claimed as a business expense; • there is a level of development of the land beyond that necessary to secure council approval for the subdivision; and • buildings have been erected on the land. In determining whether activities relating to isolated transactions are an enterprise or are the mere realisation of a capital asset, it is necessary to examine the facts and circumstances of each particular case. This may require a consideration of the factors outlined above; however there may also be other relevant factors that need to be weighed up as part of the process of reaching an overall conclusion. No single factor will be determinative; rather it will be a combination of factors that will lead to a conclusion as to the character of the activities. Application to your situation In this case, the Three Individuals commenced looking for potential properties to purchase a number of years ago, and held discussions on how they would structure their arrangement. The Three Individuals approached a bank in relation to funding for the Project, being the construction of a specified number of dwellings on the Property. The specific arrangement of you and the Trust began in the month prior to the acquisition of the Property. You were registered for the sole purpose of buying property/ies in the future. You purchased the Property a month after you and the Trust were created and lodged the final planning application with the Council for the Project around twelve months after the Trust was created. Over twelve months after the Property was purchased, it was recommended that a notice of decision to grant a permit for the Project at the planning committee meeting held by the Council. However, local residents challenged the Councils decision. More than two years after the Property was purchased the planning permit for the Project was approved by the Council and the existing house was demolished with construction work on the specified dwellings commencing. You have argued that the Commissioner should reach the following conclusions: • it had been considered that to be able to fund future projects there may be a need to sell one dwelling, however this was only if required to support the funding of future investments • Person C had gone guarantor for a number of loans taken out by Person D and is now experiencing financial difficulties due to the debts that they had guaranteed, and the significant legal fees they have incurred in relation to this issue • Person C's intention was to continue to operate separately with Persons A and B as they had previously done, irrespective of Person D's business, or their joint business interests with Person D • the sole reason for you considering the changing investment strategy is because of the adverse impact that Person D's bankruptcy has had on Person C's financial position; and • you will dispose of one of the dwellings so that all of the proceeds can be distributed to Person C. We have made the following observations: • Legal proceedings against Persons C and D and related entities, Companies A and B commenced months prior to the purchase of the Property • A Deed of Settlement was reached in relation to the legal action brought by the Bank against Persons A and B and Companies A and B more than two and a half years after the Property was purchased and around the time that the local residents were challenging the Council's decision to grant the planning permit for the Project • You had experienced an increase in costs due to the delay in being able to commence the Project due to the challenge by the local residents. Also, the Property did not earn any rental income from around six months after the Property was purchased, with the demolition of the House not occurring for more than three years after the Property was purchased • One of the dwellings constructed on Property C was sold by the Three Individuals shortly after construction was completed • Person C sold their half share in Dwelling B to Persons A and B around the time the House was demolished and the construction of the dwellings commenced • Persons A and B are currently covering Person C's share of the contributions and loan payments arising in relation to this Project. This is not likely to be sustainable in the long term • You are registered for GST and have claimed GST credits of around $XX,XXX from around one and a half years after the Property was purchased until a recent month. This would indicate that you have previously held the position that this was a profit making undertaking and would be evidence in support of such a conclusion • The Bank B loan for $X,XXX,X00 was not obtained until a year after the Deed of Settlement had been reached in relation to the legal action that Persons C and D were involved in Due to Person C's change in circumstances, they have had to reconsider their involvement in this Project for the long-term and have been forced to consider withdrawing from this investment; and • The amount of money Person C still owes in relation to Person D's bankruptcy is $X0,000 out of the total of $X,XXX,XXX.XX that they owe in relation to the Bank B loan obtained to develop the Property and other debts. After reviewing the information and documentation provided, it is the Commissioner's view that the sale of the Sale Dwelling will be ordinary income from an isolated transaction. It is stated that your long term objective is to develop a portfolio of positive cash flow properties, however that would not be delivered immediately at the end of each project. It is anticipated that based on your projections that this Project should provide a positive cash flow immediately from the first year. The financial projection provided outlines the following amounts: • $X0,000 - Rental income for most of the income year ($XX0 per week for Dwelling 1 and $XX0 per week for Dwelling 2) • $XX,XXX - Total expenses which includes $XX,XXX for loan interest • $X,XXX - Net income; and • $XX,XXX - Depreciation. While the dwellings would be cash flow positive according to this projection, they would not create a positive net rental income amount for taxation purposes. Therefore, based on your projections, the dwellings would not be creating a cash flow that would warrant the investing in the Project given the small return on the amount of funds borrowed and the losses that were accumulated while the Property was being constructed. The following was stated in the email sent from Person A to Person D just prior to the Property being purchased: All agree that whatever option is finally chosen, that it is a good idea to sell one to raise cash to fund future projects. As outlined above, even where a taxpayer acquires an asset with the intention of using it for personal use, such as using it as an investment property, but later decides to commit the asset to a profit-making undertaking or scheme that is commercial in nature, then the activity will be viewed as a commercial transaction for the purpose of making a profit. Information and documentation provided supports that consideration had been given to various scenarios which included the construction of a number of dwellings, with one or more to be sold, or the building and keeping of a number of dwellings. The delay in obtaining the development permit approval due to the challenge make by the local residents caused an extended delay in the approval of the development permit. This added to the time you held the Property without any income being received in relation to the Property, with rental income ceasing to be received from around six months after the Property was purchased. The planning permit for the construction of the dwellings was not approved by council until more than two years after the Property had been purchased had passed. Given this added expense and delay, it would be considered reasonable that the Three Individuals would have assessed whether or not to proceed with the Project, or if they should take an alternative course of action. It is stated that due to Person C's change in circumstances, they have had to reconsider their involvement in this Project for the long-term and has been forced to consider withdrawing from this investment. As a result of Person C's situation, you are considering selling the Sale Dwelling due to the adverse impact Person D's bankruptcy has had on Person C. It is intended that 100% of the sale proceeds from the sale of the Sale Dwelling will be distributed to Person C due to their financial difficulties. However: • The Bank commenced legal action against Persons C and D and the related entities around six months prior to the Property being purchased • Person C filed a Further Amended Defence against the Bank after the Property had been purchased and the original Bank B loan had been obtained, but prior to the planning permit being submitted to the council • The Deed of Settlement occurred in relation to the legal proceedings which outlined Persons C and D's financial obligations arising as a result of the settlement. The Deed of Settlement was reached prior to the second Bank B loan being obtained being obtained around twelve months after the Deed of Settlement had occurred • The planning permit was granted for the construction of the dwellings around twelve months prior to the demolition of the House • In the same month that the House was demolished, Person D was declared bankrupt, Person C transferred their share in Dwelling B to Persons A and B due to financial hardship; and • Person C had sourced advice from their mortgage broker in relation to selling their ownership interest/s in a property/ies to help assist with their financial hardship more than two years after the Deed of Settlement had occurred and more than five years after the Property was purchased. Based on the information and documentation provided, it would be reasonable to expect that Person C would have reviewed their financial position prior to continuing with the Project after the Deed of Settlement had been reached. However, they had continued with the Project and the further borrowing of funds to finance the Project, with them having a share of the borrowed amount of $X,XXX,XXX, around twelve months after the Deed of Settlement had occurred. Given Person C's financial issues, and those of Person D leading up to the time the second loan was obtained, the Property could have been sold with the approved planning permit given that the planning approval had been granted prior to the loan for $X,XXX,XXX being obtained to fund the Project. It could reasonably be expected that selling the Property with an approved planning permit would generally have increased the value of the Property from its original purchase price. Another alternative would have been for Persons A and B to take over the Project, with Person C not participating in it given their situation. However, the Three Individuals decided to proceed with the Project knowing that Person C was experiencing financial hardship even before the construction of the dwellings commenced. As a result of financial hardship, Person C sold their share in Dwelling B which was jointly owned with Persons A and B in the same month that the House was demolished. Person C had not explored the option of selling their ownership in other properties to assist them to resolve their financial issue until more than two years after the House had been demolished and the construction of the dwellings commenced. . After reviewing the information and documentation provided, it is the Commissioner's view that the Sale Dwelling is not being sold as a result of Person C's financial hardship. Given that the Deed of Settlement had occurred prior to the Bank B loan for $X,XXX,XXX being obtained, it would be reasonable to expect that Person C would have determined that they were unable to continue with the Project at an earlier point given their and Person D's financial obligations arising as a result of the Deed of Settlement. The amount of money Person C owes in relation to the legal proceedings is a small percentage of the total amount they owe in relation to Bank B loan for the Property, Property related costs, and other personal debts. The option to sell the potential dwelling/s had been discussed by the Three Individuals as a way of funding their future investments long after the Deed of Settlement on the legal proceedings had been finalised. While we acknowledge that Person D's bankruptcy has caused Person C financial strain, based on the information and documentation provided it is not viewed that the sale of the Sale Dwelling will be as a result of Person C's financial issues which should have been identified at an earlier stage and not around the time the construction of the dwellings is complete. Accordingly, based on the facts of this situation the Project will have the characteristics of a commercial transaction and that you have constructed the Sale Dwelling for the purpose of making a profit from its sale. As you will be carrying out an isolated commercial transaction with a view to a profit, the profit made on the sale of the Sale Dwelling will be ordinary income under section 6-5. | Detailed Reasoning - Capital gains tax: The capital gains tax (CGT) provisions are contained in Part 3-1. Broadly, the provisions include in your assessable income any assessable gain or loss made when a CGT event happens to a CGT asset that you own. CGT event A1 under section 104-10 happens if you dispose a CGT asset. A CGT asset is any kind of property or a legal or equitable right that is not property. You make a capital gain or loss as a result of a CGT event happening to a CGT asset. CGT assets include real estate acquired on or after 20 September 1985. You make a capital gain if the capital proceeds from the sale of a CGT asset are greater than the cost base of that asset, for example, if you receive more for an asset than you paid for it. You make a capital loss if the reduced cost base of an asset is greater than the capital proceeds resulting from the sale of the asset, for example, if you receive less for an asset than you paid for it. Where an asset is split into 2 or more assets, and you are the owner of both the original asset and the 'new' asset or assets, section 112-25 provides that the split is not a CGT event and the cost base is apportioned to each 'new' asset in a reasonable way. The inclusion of the profit or gain on the sale of a CGT asset as ordinary income does not mean that a CGT event does not happen in relation to the asset. However, section 118-20 operates to ensure that amounts which are assessable income outside of the CGT provisions are not also taxed as capital gains. Therefore, while a CGT event will occur when an asset is sold (CGT event A1), any capital gain will be reduced by the amount included as ordinary assessable income under section 6-5. Application to your situation In your case, no CGT event will occur when the Property is subdivided, and the subdivided lots will be treated for CGT purposes as if they had been acquired when the Property was acquired. Making an overall assessment on the factors set out in TR 92/3, it is the Commissioner's view that the sale of the Sale Dwelling will not be a mere realisation of a capital asset. Therefore, as the disposal of the Sale Dwelling is viewed as a profit making scheme from an isolated transaction, any profit made on its sale will be included in your assessable income under section 6-5. CGT event A1 will occur on the sale of the Sale Dwelling. However, as the disposal of the Sale Dwelling is viewed as being a profit making undertaking as an isolated transaction, any capital gain arising from this CGT event will be reduced to nil as any profit will be assessable under section 6-5.