Private ruling: Income tax – capital vs revenue
Date of advice: 8 February 2018
Published: June 2018
Ruling period: 1 July 2012 to 30 June 2020

Ruling: Q1: Will the sale of an apartment by the Taxpayer occur in the course of carrying on a business? If yes, on what date did the Taxpayer commence to carry on that business? | A1: Yes. The Taxpayer commenced business from the date of the declaration of Trust. | Q2: Will the sale of an apartment by the Taxpayer upon completion of the development, without that apartment having been used by the Taxpayer to produce rental income or made available for occupancy by a related party, occur in the course of carrying out a transaction entered into for a profit-making purpose? | A2: Yes, and as the apartments are trading stock of the Taxpayer, the gross proceeds will be ordinary income under 6-5 of the Income Tax Assessment Act 1997 .

Relevant facts and circumstances: A1 Trust (the Trust) is a discretionary trust. The trustee of the Trust is A1 Pty Ltd (the Taxpayer). The beneficiaries of the Trust include Mr. X, Mrs. X, and members of their wider family group. Mr. X is the sole director and shareholder of the Taxpayer and is the co-founder of an Australian building and construction company. Mr X (and entities within the wider family group) have previously held interests in property development projects, including: ● An interest in a $X billion development of land ● An interest in the acquisition, subdivision and development of two townhouses ● An interest in land acquired for the purpose of a hotel development ● An interest in land in overseas acquired for the purpose of a hotel development. The trustee of the Trust has certain powers vested upon it by the trust deed (the Deed), including the power: ● To apply or invest the whole or any part of the Trust Fund available to be invested in any investment of any kind or nature and upon any terms or conditions as the Trustee in its absolute discretion thinks fit. ● To apply or invest money of the Trust Fund available to be invested: ● In the acquisition of real or personal property; and ● In developing and turning to account real or personal property. The Deed also vests the trustee with general powers, including the power: ● To acquire, dispose of, exchange, mortgage, sub-mortgage, lease, sub-lease, let, grant, release or vary any right or easement, or otherwise deal with real property or any interest therein; ● To lease and let property forming part of the Trust Fund; ● To subdivide property; ● To enter into property development contracts, agreements or arrangements; and ● To acquire, establish or carry on a business. The Taxpayer entered into a contract for the purchase of a property (Y Street). A number of apartments were situated on the Y Street property. Y Street was acquired by the Taxpayer via a discretionary trust for asset protection purposes. The intended use of the land was initially to construct a new home for Mr. X and Mrs. X. To this end, prior to settlement of the Y Street purchase, concept drawings were provided for the design of a new residence for Mr. X and Mrs. X. From the date of settlement of Y Street, the Taxpayer derived rental income from the tenancy of the existing apartments. However, Mr. X and Mrs. X later decided that instead of building a new residence for themselves on Y Street, they would instead construct Z apartments (the apartments) for their Z children. The apartments were to be owned by the Trust, while each child was to have the benefit of one apartment each (either to live in or for investment purposes). The Taxpayer lodged a planning application for Y Street with the local council. The planning application was initially rejected; however, the Taxpayer successfully appealed the decision before the relevant State Civil and Administrative Tribunal (CAT). The planning permit was ultimately granted. The existing apartments on Y Street were later demolished. Following a decision by Mr. X and Mrs. X to assist their children to purchase houses in addition to the apartments and the receipt of a construction cost estimate for the apartments that was larger than anticipated, they concluded that their previous plan to retain the apartments was no longer feasible. To mitigate the risk of a downturn in the property market, the Taxpayer considered selling Y Street as unsubdivided vacant land (with the existing planning permit for the apartments). However, it was ultimately decided that the Taxpayer would proceed with the construction of the apartments, selling some as completed dwellings to cover their overall construction costs, and retaining the remaining apartments as investment properties. It is anticipated that this will require the sale of at least half of the apartments. It is also intended that the apartments be sold upon their completion, rather than off-the-plan, as the Taxpayer considers it advantageous for the marketing of the apartments that they be completed. The construction contract provides that the Taxpayer will pay $X,XXX,XXX plus GST for the construction of the apartments. To finance this, the Taxpayer has borrowed money from entities within Mr. X’s family group. The amounts owing by the Taxpayer to entities within Mr. X's family group were: Amount owed Entity Providing Finance Loan Terms $X,XXX,XXX A2 Pty Ltd Division 7A loan terms $XXX,XXX A2 Pty Ltd Division 7A loan terms $XXX,XXX Mrs. X Interest-free, repayable on demand $X,XXX,XXX A2 Trust Division 7A loan terms $X,XXX,XXX A3 Trust Division 7A loan terms $XX,XXX Mr. X Interest-free, repayable on demand $XXX,XXX A3 Pty Ltd Division 7A loan terms $XXX,XXX A4 Trust Interest at Division 7A rate, but repayments on demand The Taxpayer also has access to a $XX.XX million bank facility from one of these entities. The security provided to the bank for this facility includes a mortgage over Y Street. The mortgagor is the Taxpayer. The mortgagee has valued Y Street at land value only (and other properties within the family group make up the remainder of the security). It is intended that all future funding will be provided by way of a related entity drawing upon this bank facility then lending to the Taxpayer.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 8-1 | Income Tax Assessment Act 1997 subsection 70-5(2) | Income Tax Assessment Act 1997 section 70-10 | Income Tax Assessment Act 1997 section 995-1

Reasons for decision: Detailed Reasoning - Question 1: Will the sale of an apartment by the Taxpayer occur in the course of carrying on a business? If yes, on what date did the Taxpayer commence to carry on that business? | Summary: Yes. The sale of an apartment by the Taxpayer will occur in the course of carrying on a business as the indicia of carrying on a business have been satisfied. The apartments will be trading stock of the Taxpayer’s business. The gross proceeds from the sale of apartments by the Taxpayer will be assessable as ordinary income. The Taxpayer will have commenced carrying on a business from the date of the declaration of Trust. | Detailed Reasoning - Detailed reasoning: By virtue of section 70-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) and the definition of ‘trading stock’ under section 70-10 of the ITAA 1997, the gross outgoings and gross proceeds from the sale of an asset are deductible and assessable under section 8-1 and section 6-5 of the ITAA 1997 respectively where: a) The taxpayer is carrying on a business; and b) The asset is trading stock under section 70-10 of the ITAA 1997. Therefore, if the above two criteria are met in the present case, the gross proceeds from the sale of apartments by the Taxpayer will be treated as ordinary income under section 6-5 of the ITAA 1997. | Detailed Reasoning - Is the taxpayer carrying on a business?: Section 995-1 ITAA 1997 defines ‘business’ as ‘including any profession, trade, employment, vocation or calling, but not 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. Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? (TR 97/11) provides the Commissioner’s view on the factors relevant to determining whether a taxpayer is carrying on a business for income tax purposes, which include: ● Whether the activity has a significant commercial purpose or character ● Whether the taxpayer has more than a mere intention to engage in business ● Whether there is an intention to make a profit or a genuine belief that a profit will be made ● Whether there is repetition and regularity in the activity ● Whether the activity is of the same kind and carried on in a similar way to that of the ordinary trade in that line of business ● Whether the activity is organised in a businesslike manner ● The size and scale of the activity ● Whether the activity is better described as a hobby or a form of recreation. These factors, as well as their application to the facts presented by the Taxpayer, will be discussed in turn. No one factor is determinative of the existence of a business as each case will turn on its own particular facts. Whether the activity has a significant commercial purpose or character The following factors, outlined in TR 97/11, indicate that there is a significant commercial purpose or character associated with the construction of the apartments: a) The controlling mind of the Taxpayer (Mr. X) is an expert in the field of property and construction. The Full Federal Court in Grollo Nominees Pty Ltd v Commissioner of Taxation (1997) 73 FCR 452; [1997] FCA 659; 1997 ATC 4585; (1997) 36 ATR 424 ( Grollo Nominees ) held that where an entity is part of a wider group of entities, it is not correct to treat the activities of a single member of the group in isolation to the activities of the wider group. The actions of the controlling mind and the wider group are relevant. Here, the controlling mind of the Taxpayer is Mr. X, as he is the sole director and shareholder of the company. Mr. X is the co-founder of a building and construction company. He has decades of experience in the field of property and construction and extensive relationships with industry experts. Mr. X (and entities within his group) have previously held interests in property development projects, including: ● An interest in a $X billion development of land ● An interest in the acquisition, subdivision and development of two townhouses ● An interest in land acquired for the purpose of a hotel development ● An interest in land in overseas acquired for the purpose of a hotel development. The fact that the controlling mind of the Taxpayer is an expert in the property and construction field supports the commercial nature of the transaction. b) The Taxpayer has carefully considered whether there is a market for the development of the apartments. Paragraph 30 of TR 97/11 provides that the taxpayer is more likely to be regarded as carrying on a business if he/she sells in a commercial market Here, although the Taxpayer considered selling the property as unsubdivided vacant land, and despite acknowledging the risk of a potential downturn in the property market, the decision was ultimately made to sell the apartments in a commercial market. Furthermore, the fact that the Taxpayer intends to sell the apartments upon their completion (rather than off-the-plan) as the Taxpayer considers it advantageous for their marketing to do so, suggests that it has turned its mind to the marketing of the apartments. As the marketing of apartments is imperative in selling in a commercial market, this gives further weight to the commerciality of the transaction. Therefore, the facts suggest that the Taxpayer actively considered whether there was a market for sale of the apartments and concluded that commercial sale would yield the most profitable return for the Taxpayer. c) The Taxpayer has investigated the capital requirement of the development, and has a plan that shows how that capital will be obtained and used. The Taxpayer has entered into a construction contract for the development of the apartments which contains the contract sum of the project’s significant cost. In Abeles v FCT [1991] FCA 394; 91 ATC 4756; 22 ATR 504, the Federal Court held that the fact that a property development is heavily financed may indicate that a business is being carried on. Here, the Taxpayer has entered into a series of complex loan agreements to finance the development of the apartments, comprising of inter-entity Division 7A loans, interest-free loans, and a $XX.XX million bank facility. As such, it is evident that the development of the apartments is heavily financed in the present case, lending support to the fact that a business is being carried on by the Taxpayer. d) The Taxpayer actively complied with the legal requirements associated with the development. The Taxpayer took all steps necessary to obtain the council planning permits and approvals for the construction of the apartments as soon as the idea was conceived. Significant costs and effort were also incurred by the Taxpayer (i.e. engaging Queen’s Counsel and private legal representation) in appealing the Council’s initial refusal of the relevant approvals. This behaviour suggests that the Taxpayer recognised the profitability of the development and pursued the development at a large expense and at length. When considered objectively, the above factors give substantial weight to the conclusion that there is a significant commercial purpose or character associated with the construction of the apartments by the Taxpayer. Whether the taxpayer has more than a mere intention to engage in business Paragraph 39 of TR 97/11 states that a mere intention to carry on a business is not enough – there must be an activity. In August v FCT [2013] FCAFC 85; 2013 ATC 20-406 ( August’s case ), the Full Federal Court held 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. Here, the Taxpayer actively sought the relevant council approvals for construction of the Y Street apartments as soon as the idea was conceived. Additionally, the Taxpayer entered into contracts for both the design and construction of the apartments. Complex financing arrangements have also been executed to finance the development of the apartments. These activities go beyond mere preparatory or preliminary activities. Furthermore, the provisions of the Deed explicitly empower the Taxpayer to acquire and deal with real property, carry on a business, and enter into property development contracts. This demonstrates that a property development business was very much within the scope of the powers of the Trustee and was carefully considered at the Trust’s inception. Therefore, an objective consideration of the facts and circumstances of the present case suggests that the activities of the Taxpayer have gone beyond a mere intention to engage in business. Rather, the Taxpayer has taken deliberate and systematic steps to proceed with the development of the apartments. Whether there is an intention to profit or a genuine belief that a profit will be made Where a commercial transaction or operation involves the sale of land, it is not always necessary that the taxpayer has the purpose of profit-making at the time of acquiring the property, as the purpose of the taxpayer can change ( Federal Commissioner of Taxation v Whitfords Beach Pty Ltd (1982) 150 CLR 355; (1982) 39 ALR 521; (1982) 82 ATC 4031; 12 ATR 692 ( Whitfords Beach)) . Here, the Taxpayer contends that Y Street was initially acquired to construct a new family home for Mr. X and Mrs. X. This intention later changed and it was envisaged that the apartments would be constructed for each of their children. However, it is not the subjective intention of the taxpayer which is relevant in determining whether there is a profit-making intention. Rather, it is the objective intention which must be considered ( August’s case ). The actions of the Taxpayer in the present case suggest that there was either an intention to make a profit from the construction of the apartments or a genuine belief that a profit will be made. More specifically, the Taxpayer made the conscious decision to market the apartment buildings post-completion (rather than selling them off-the-plan). This indicates that the Taxpayer intended to maximise the potential profit from the sale of the apartments. The Taxpayer also decided to sell the apartments commercially despite acknowledging a risk of a downturn in the market. Furthermore, the Taxpayer went to great lengths to obtain the relevant planning permits and approvals, expending significant costs in seeking legal representation and appealing the matter before CAT over a considerable period of time. This profit-making intention is evidenced further by the fact that the Taxpayer went to notable lengths to secure finance for the development – entering into numerous inter-entity loan agreements. Thus, an objective consideration of the facts indicates that the Taxpayer would not have engaged in these activities without an intention to make a profit or without a genuine belief that a profit will be made. Whether there is repetition and regularity in the activity Paragraph 55 of TR 97/11 provides that it is often a feature of a business that similar sorts of activities are repeated on a regular basis. The repetition of activities by the same person over a period of time on a regular basis helps to determine whether there is the 'carrying on' of a business. Importantly, the Full Federal Court in Grollo Nominees held that where an entity is part of a wider group of entities, it is not correct to treat the activities of a single member of the group in isolation to the activities of the wider group. The actions of the controlling mind and the wider group are also relevant. Therefore, although the apartment development is a once-off development for the Taxpayer in the present case, this does not lead to the conclusion that the taxpayer is not carrying on a business. Rather, the activities of its controlling mind (i.e. the sole director of the Taxpayer, Mr. X) must also be considered. On the facts presented, it is evident that Mr. X has been involved in similar activities in the past, including: ● An interest in a $X billion development of land ● An interest in the acquisition, subdivision and development of two townhouses ● An interest in land acquired for a hotel development ● An interest in land overseas acquired for the purpose of a hotel development. Evidently, Mr. X and entities associated with him have had a long history of both commercial and residential property development and construction. Therefore, the construction and sale of the apartments in the present case is not an isolated event. Rather, the activities of the Taxpayer’s wider group suggest that there is an element of repetition and regularity in the Taxpayer’s activities. Notwithstanding the above, in Federal Commissioner of Taxation v St Hubert’s Island Pty Ltd (In Liq) (1978) 138 CLR 210; [1978] HCA 10; 78 ATC 4104; (1978) 8 ATR 452 ( St Hubert’s Island ), the High Court held that repeated acts of buying and selling are not an essential feature of trading. That is, the one-off development of one specific property for sale can still constitute a property development business ( St Hubert’s Island ; R&D Holdings Pty Ltd v Deputy Commissioner of Taxation [2006] FCA 981; 2006 ATC 4472; (2006) 64 ATR 71 ( R&D Holdings ). In relation to property or land development, Taxation Determination TD 92/124 Income Tax: property development: in what circumstances is land treated as trading stock (TD 92/124) recognises that repetitive buying and selling of property is not necessary to establish that a business of property acquisition, development and sale is being carried on. If a ‘definite and continuous cycle of operations’ has been initiated, a business of property development has commenced. Therefore, the sale of a single apartment by the Taxpayer in the present case may still constitute a business, notwithstanding that there is no repeated act of buying and selling per se. Nevertheless, the fact that the Taxpayer envisages the sale half of at least half of the apartments lends further support to the conclusion that the taxpayer is carrying on a business. Whether the activity is of the same kind and carried on in a similar way to that of the ordinary trade in that line of business Under paragraph 63 of TR 97/11, an activity is more likely to be a business when it is carried on in a manner similar to that in which other participants in the same industry carry on their activities. In considering this indicator, paragraph 64 of TR 97/11 provides that the following factors may be compared with the characteristics of others engaged in the same type of business: ● The volume of sales ● The types of customers the taxpayer sells his/her product to ● The sort of expenses incurred by the taxpayer ● The amount invested in capital items ● Previous experience of the taxpayer In considering these factors, the Taxpayer in the present case intends to sell at least half of its completed apartments and to make a profit from their sale. The apartments are being sold to the general public at large, and will be marketed as such once the development is completed. Furthermore, the expenses incurred by the Taxpayer (i.e. engaging architects and builders, seeking complex financing arrangements, and applying for the relevant council permits and approvals) are expenses typically incurred in any other property development. As the co-founder of a building and construction company, the controlling mind of the Taxpayer (Mr. X) also has extensive experience in the property and construction industry, and has been involved in similar developments in the past. Evidently, per paragraph 65 of TR 97/11, the Taxpayer’s activities in the present case are in distinct contrast to a keen amateur with no knowledge or experience and who does not seek advice or conduct research. Therefore, the above factors suggest that the activities of the Taxpayer are of the same kind and carried on in a similar way to that of the ordinary trade in the property development and construction business. Whether the activity is planned, organised and carried out in a businesslike manner Paragraph 68 of TR 97/11 provides that a business is characteristically carried on in a systematic and organised manner rather than on an ad hoc basis. In Ferguson v Federal Commissioner of Taxation ( 1979) 37 FLR 310 at 325; 79 ATC 4261 at 4271; (1979) 9 ATR 873 at 884 ( Ferguson ), the Full Federal Court was influenced by the systematic and organised nature of the taxpayer’s activities, rather than haphazardly or in a disorganised way. Evidently, the nature of a taxpayer’s business, and whether there is a system of organisation in place, can be a strong indicator that a business is being carried out. Here, an analysis of the activities of the Taxpayer demonstrates that its activities were carried on in a systematic and businesslike manner. The Taxpayer first engaged architects and entered into agreements for the design of the apartments. The Taxpayer then applied for the relevant approvals and permits from the local council and pursued legal action to ensure that they were approved. Following this, the Taxpayer entered into a complex financing arrangement with related entities that, under the terms of the loans, would require interest to be paid and, necessarily, books of account to be kept to ensure the terms of the loans were abided by. Moreover, a series of contracts were directly entered with the relevant parties for the construction of the property (rather than having a development agreement with a third party who would take responsibility for all elements of the development). The Taxpayer also considered market factors and commerciality of the undertaking before deciding to embark on it. The above facts demonstrate that the activities of the Taxpayer were systematic, organised and carefully thought out. The activities were not conducted haphazardly or in a disorganised way, but rather in a planned, systematic and businesslike manner. The size or scale of the activity Paragraph 77 of TR 97/11 states that the larger the scale of the activity the more likely it will be that the taxpayer is carrying on a business. However, the size or scale of the activity is not a determinative test. For instance, in Federal Commissioner of Taxation v JR Walker (1985) 79 FLR 161; 85 ATC 4179; (1985) 16 ATR 331, the taxpayer was held to be carrying on a goat breeding business with trading stock of just five Angora goats. Although the scale of the taxpayer’s activities was small, there was a profit making purpose and repetition and regularity in the taxpayer’s activities. Importantly, when assessing the size and scale of the taxpayer’s activities, the actions of the wider group are looked at rather than the sole development ( Grollo Nominees ). Here, the size and scale of the proposed Apartment development is significant. The construction agreement provides that the estimated cost of construction is $X,XXX,XXX. To finance the construction, the Taxpayer has entered into complex financing arrangements involving inter-company loans between related entities. The Taxpayer has also demolished the existing apartments and has already subdivided the land. The apartments will also be marketed to the general public at large, rather than to friends or relatives. These factors, together with the fact that a number of luxury apartments of a significant scale are being constructed, suggest that the size and scale of the project are indicative of a business being carried on. Whether the activity is better described as a hobby or a form of recreation TR 97/11 states that money derived from the pursuit of a hobby is not regarded as income and therefore is not assessable. Paragraph 87 of TR 97/11 also states that often it will be the case that there is a hobby when: ● It is evident that the taxpayer does not intend to make a profit from the activity ● Losses are incurred and motivated by personal pleasure rather than to make a profit and there is no plan in place to show how a profit can be made ● The transaction is isolated and there is no repetition or regularity of sales ● Any activity is not carried on in the same manner as a normal, ordinary business activity ● There is no system to allow a profit to be produced from the activity ● The activity is carried on a small scale. As outlined in the above discussion, the Taxpayer in the present case has an intention to make a profit from the sale of the apartments. Losses have not been incurred, but rather, mitigated by selling the apartments commercially and marketing the apartments only upon their completion to maximise their profitability. The construction of the apartments is also carried out in the same manner as a normal property development business, as the appropriate construction and architectural agreements have been entered into, complex financing of the project has been arranged, and all relevant council approvals and permits have been obtained. As discussed above, there is also a system in place which allows the Taxpayer to profit from the sale of the apartments, and their construction and sale is being conducted on a relatively large scale. Therefore, upon consideration of the indicators of a hobby outlined in TR 97/11, the activities of the Taxpayer in the present case cannot be described as a hobby or form of recreation. | Detailed Reasoning - Are the apartments trading stock of the Taxpayer?: Section 70-10 of the ITAA 1997 provides that trading stock includes ‘anything produced, manufactured or acquired that is held for purposes of…sale…in the ordinary course of a business.’ In R&D Holdings , the Federal Court held that where property is held for the purpose of development and sale, the property will be trading stock if the intended sale is in the ordinary course of the business of the taxpayer. In the context of property development, TD 92/124 provides guidance on this issue. Paragraph one of TD 92/124 provides that land is treated as trading stock for income tax purposes if: ● It is held for the purposes of resale; and ● A business activity which involves dealing in land has commenced. As the above analysis indicates, an objective analysis of the facts and circumstances of the present case indicate that the Taxpayer has an intention to profit from the construction and sale of the apartments. The apartments will be constructed and held for the purposes of resale. Furthermore, as the indicia of carrying on a business outlined in TR 97/11 have been met, the Taxpayer has commenced a business activity which involves dealing in the apartments. Therefore, the apartments will constitute trading stock of the Taxpayer for the purposes of section 70-10 of the ITAA 1997. | Detailed Reasoning - Conclusion: An objective consideration of the facts and circumstances in the present case indicate that the Taxpayer’s activities satisfy the indicia of carrying on a business outlined in TR 97/11. Therefore, the Taxpayer will be carrying on a business for the purposes of section 995-1 of the ITAA 1997. By virtue of section 70-5(2) of the ITAA 1997, given the apartments also satisfy the definition of trading stock under section 70-10 of the ITAA 1997, the gross outgoings and gross proceeds from the sale of the apartments will be deductible and assessable as ordinary income under section 8-1 and section 6-5 of the ITAA 1997 respectively. | Detailed Reasoning - Commencement of the business: In Ferguson , it was held that the activities of a taxpayer must have a commercial character before they amount to the carrying on of a business. Furthermore, activities of a taxpayer carried on prior to the formal establishment of a business may, nevertheless, be of such a commercial nature that they themselves constitute a business. Therefore, it is the commercial character of a taxpayer’s activities which is indicative of whether a business is being carried out. In the present case, Y Street was settled via a discretionary trust structure whereby the Taxpayer was empowered, from its inception, to carry on a business of property development. The apartments are being constructed on the Y Street property from which the Taxpayer earned rental income from the date of the property’s settlement. The Taxpayer embarked on a significant development of the Y Street property, systematically engaging architects and builders for the design and construction of the development. The Taxpayer also entered into complex financing arrangements for the development, comprising inter-entity loans with entities within Mr. X’s group, necessitating books of account. Another relevant factor is that the sole director and controlling mind of the Taxpayer is an expert in the field of property and construction and has engaged in similar developments in the past using other related entities. Also, as determined above, the apartments are trading stock of the Taxpayer’s property development business. It must be noted that paragraph 128 of Miscellaneous Taxation Ruling MT 2006/1 The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number states the following: Activities undertaken to establish an entity, for example drawing up of a trust deed and the settlement of trust property, are not commencement activities. This is because the trust cannot commence activities until it is in existence. Accordingly, when considered holistically, the activities of the Taxpayer possessed a commercial character from the date that the Trust came into existence. Therefore, the Taxpayer will have been carrying on a business from the date of the declaration of Trust. | Detailed Reasoning - Question 2: Will the sale of an apartment by the Taxpayer upon completion of the development, without that apartment having been used by the Taxpayer to produce rental income or made available for occupancy by a related party, occur in the course of carrying out a transaction entered into for a profit-making purpose? | Summary: Yes. The sale of an apartment by the Taxpayer upon completion of the development, regardless of whether that apartment is used to produce rental income or made available for occupancy by a third party, will occur in the course of carrying on a business as the apartments are trading stock of the Taxpayer’s business. As such, the gross proceeds from the sale of an apartment by the Taxpayer will be assessable as ordinary income. | Detailed Reasoning - Detailed reasoning: Profits or gains made in the ordinary course of business Once it is established that there is a business, it then follows that the profits made in the ordinary course of carrying on that business constitute income. This principal was discussed in London Australia Investment Company Limited v Federal Commissioner of Taxation (1977) 138 CLR 106; [1977] HCA 50 (1977) 7 ATR 757; 77 ATC 4398 ( London Australia ), where Gibbs J stated: ‘…if the sale in question is a business operation, carried out in the course of the business of profit-making, the profit arising on the sale will be of an income character.’ This principal was also discussed in Federal Commissioner of Taxation v The Myer Emporium Ltd (1987) 163 CLR 199; (1987) 71 ALR 28; (1987) 18 ATR 693 (Myer), where the High Court stated that: ‘Because a business is carried on with a view to profit, a gain made in the ordinary course of carrying on the business is invested with the profit-making purpose, thereby stamping the profit with the character of income.’ In the present case, it has been established above that the Taxpayer is carrying on a business. Accordingly, as the apartments are being held for the purpose of resale, the apartments will be ‘trading stock’ of the Taxpayer’s business under the criteria outlined in paragraph one of TD 92/124. Therefore, any profits made from the sale of an apartment upon completion of the development will constitute income. Given the apartments will constitute trading stock, this conclusion will hold true regardless of whether the apartment is used to produce rental income or made available for occupancy by a third party. In either case, the sale of an apartment will still occur in the ordinary course of carrying on the Taxpayer’s business. Dual purpose There may be cases in which a taxpayer purchases an asset for more than one purpose. This was discussed in London Australia , where Jacobs J considered the question of whether profit from the acquisition and disposal of shares was income according to ordinary concepts or from the carrying out of a profit-making undertaking or scheme. He stated: ‘…the purpose of resale need not be the sole purpose or the primary or dominant purpose, as is the case under the first limb of sec. 26(a). It need only be one of the purposes…The dominant or primary purpose may be to obtain income from the items of property acquired but if there is a purpose or intention or expectation of selling at a profit if and when a suitable occasion arises then one condition of carrying on a business of buying and selling at a profit is satisfied. If a man makes a business of acquiring property with dual purposes of enjoying it or its profits and of reselling it eventually at a higher price than he paid for it, then not only the income from the property but also the profit on resale will be income in the ordinary sense of the term, and within the second limb of sec. 26(a).’ A similar conclusion was reached in CMI Services Pty Ltd v Federal Commissioner of Taxation (1990) 94 ALR 153; (1990) 90 ATC 4428; (1990) 21 ATR 445 (CMI Services), where the taxpayer company was incorporated to serve as a property investment company. Over a nineteen year period, the taxpayer had acquired 27 properties with the intention that they would be held for as long as they continued to provide a satisfactory rental return. However, at the time of the case’s hearing, the taxpayer had sold 16 properties and retained only 10. The Full Federal Court held that the purchases and sales of the properties were part of a pattern which involved the expectation and intention at the time of purchase that the properties in question would be re-sold in the ordinary course of the taxpayer’s business. Therefore, the profits which were realised on the sale of the properties were held to be profits of the business and therefore ordinary income under section 25 of the Income Tax Assessment Act 1936 . These cases demonstrate that where an asset is acquired in the course of carrying on a business, it is not necessary for a taxpayer to acquire the asset with the purpose of selling the asset at a profit. The fact that the asset was acquired in the course of carrying on that business is enough to suggest that the profits or gains made from the sale of that asset are ordinary income. In the present case, the Taxpayer acquired the land with the intention of constructing a personal residence on it; however, this intention changed to deriving a profit from the construction and sale of apartments. On an objective presentation of the facts, the business activities of the Taxpayer commenced upon the inception of the Trust. Therefore, regardless of whether an apartment is held by the Taxpayer for sale at some point in the future, or sold immediately upon its completion, the profits derived from the sale of the apartment will nevertheless be income for tax purposes. The fact that there may have been a dual purpose from the apartments of deriving rental income, holding for investment or selling at a profit is not inconsistent with the objective conclusion that the apartments are trading stock of the Taxpayer’s business and the profits will be income derived in the ordinary course of the Taxpayer’s business. Conclusion Having established that the Taxpayer is carrying on a business under section 995-1 of the ITAA 1997, and that the apartments constitute trading stock under section 70-10 of the ITAA 1997, it follows that the sale of an apartment by the Taxpayer upon completion of the development, regardless of whether that apartment is used to produce rental income or made available for occupancy by a third party, will occur in the course of carrying on a business. Therefore, by virtue of section 70-5(2) of the ITAA 1997, the gross outgoings and gross proceeds from the sale the apartments will be deductible and assessable as ordinary income under section 8-1 and section 6-5 of the ITAA 1997 respectively.