Private ruling: Sale of land
Published: June 2012
Ruling period: Year ended 30 June 2011 Year ended 30 June 2012
Date scheme commenced: 1 July 2010

Ruling: Q1: Are you carrying on a business of property development? | A1: No. | Q2: Is any profit on the sale of your property assessable as ordinary income? | A2: No. | Q3: Is any profit on the sale of your property assessable as part of a profit making scheme or profit making by resale? | A3: No. | Q4: Will the capital gains tax (CGT) provisions apply to the sale of the property? | A4: No. | Q5: Can you claim a deduction for the holding costs on your property from the house demolition date to the decision to sell date? | A5: Yes

Relevant facts and circumstances: You are joint tenants of a property which you purchased prior to 20 September 1985 with the intention of using it for rental investment purposes. The property was rented out until 2010. A number of years ago you were approached to enter into a joint venture to build units spanning two properties. No agreement was ever reached on a joint venture agreement and no formal joint venture agreement was ever made. You have no history of any properties being sold by you over the considerable number of years that you have held properties. You have no prior history of land development. You are not licensed builders. You and another obtained a joint development approval to construct units on the two properties. If no development had commenced by mid 2010 the approval would lapse. In mid 2010 your tenant moved out of your property and the house was demolished for safety reasons. The two properties were then vacant and you considered commencing construction of the units as approved. However, prior to commencing the development further investigation revealed that there were issues that would lead to an increase in development costs. To avoid the increase in costs an amendment to the original development approval was lodged in mid 2010 that included reducing the number of units. You had no rental income from your property since mid 2010 and you were now incurring significant holding costs. You decided to market the two vacant properties for sale with the development approval attached. The amendments were finally approved by the council in late 2011 however financing the project proved difficult especially for the other party and no development of the units commenced. In early 2012 you exchanged a contract for the sale of your vacant land.

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 104-10(5)

Reasons for decision: Summary: We do not consider that you are carrying on a business of property development or that your activities amount to an isolated profit-making transaction. The sale of your land is a mere realisation of a capital asset. The sale of land will attract no capital gains tax as the asset is a pre CGT asset. The holding costs from the date of demolition of the house to the date when the decision to sell the land was made is allowable as an expense incurred in gaining assessable income. | Detailed Reasoning - Detailed reasoning: Carrying on a business Taxation Ruling TR 97/11 outlines the relevant indicators in determining whether a person is carrying on a business. There is no indication in your case that you are carrying on any property development business. This was a one-off proposed development and as there is no repetition and regularity, you are not carrying on a business in relation to the development. Ordinary income and profit making scheme Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) includes in a taxpayer's assessable income, where the taxpayer is an Australian resident, all ordinary income derived by the taxpayer both in and out of Australia during an income year. Ordinary income is defined as income according to ordinary concepts. Paragraph 6 of Taxation Ruling TR 92/3 explains that a profit from an isolated transaction is generally income when both of the following elements are present: · the intention or purpose of the taxpayer 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 on a business or in carrying out a business operation or commercial transaction. Paragraph 9 of TR 92/3 states that 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 necessary that the taxpayer has the purpose of profit-making at the time of acquiring the property. In your case the land had a residential house on it and your intention when acquiring the property was to use it for rental investment purposes. You rented the property until mid 2010. Therefore when you first acquired the property your intention was not to demolish the house and sell the land at a profit but rather to derive an income stream from the rental income. The fact that circumstances occurred that resulted in the house being demolished and the vacant land being contracted for sale does not change your original intention. Profits on the sale of land can be income according to ordinary concepts, or a profit making undertaking or plan, if your activities become a separate business operation or commercial transaction. In determining whether a transaction amounts to a business operation or commercial transaction, the Commissioner's guidelines are set out in paragraph 13 of Taxation Ruling 92/3. These include: (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. The factors are related to your case as follows: · there is not a complex structure involved · the land was purchased for a long term rental investment · you had not previously undertaken any other property subdivisions or developments · you have held it for a long period of time as an investment property · development approval has been obtained for a number of units on the land · no development activities have been carried out other than to obtain the development approval · the land will be sold as a vacant lot. In consideration of the factors from TR 92/3 it could not be concluded that you are carrying out a business operation or commercial transaction. | Detailed Reasoning - Conclusion: We have concluded that you are not carrying on a business of property development and your activity as described does not amount to an isolated profit making transaction. As a result the proceeds are not considered to be ordinary income and not assessable under section 6-5 of the ITAA 1997. They represent a realisation of a capital asset which will fall for consideration under the CGT provisions in Part 3-1 of the ITAA 1997. The sale the vacant land will give rise to CGT event A1. If you were to sell the land any capital gain or capital loss you make will be disregarded in accordance with subsection 104-10(5) of the ITAA 1997 as it was acquired before 20 September 1985. Holding costs Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income, except where the outgoings are of a capital, private or domestic nature. Taxation Ruling TR 2004/4 in considering the decision of the High Court in Steele v. Deputy Commissioner of Taxation (1999) 197 CLR 459; 99 ATC 4242; (1999) 41 ATR 139 (Steele's Case) concludes that interest incurred in a period prior to the derivation of relevant assessable income will be incurred in gaining or producing the assessable income in the following circumstances: · the interest is not incurred 'too soon', is not preliminary to the income earning activities and is not a prelude to those activities; · the interest is not private or domestic; · the period of interest outgoings prior to the derivation of relevant assessable income is not so long, taking into account the kind of income earning activities involved, that the necessary connection between outgoings and assessable income is lost; · the interest is incurred with one end in view, the gaining or producing of assessable income; and · continuing efforts are undertaken in pursuit of that end. While Steele's Case deals with the issue of interest, the principles can be applied to other types of expenditure including local council, water and sewage rates, land taxes and emergency services levies. In your case you have incurred holding costs for your rental property while it was demolished and awaiting for a development application to be approved. The land was kept with the intention of building another income producing rental property. Continuing efforts had been undertaken in pursuit of that end until you decided to sell the property. Therefore the holding expenses are allowable deductions under section 8-1 of the ITAA 1997 from the date the house was demolished until you decided to sell the property.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.