Private ruling: Capital gains tax - Main residence - construction of dwelling - property development - disposal
Published: March 2013
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Are the proceeds from the property development considered assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes.


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

Reasons for decision: Summary: Taxation Ruling TR 92/3(TR 92/3) sets out the Commissioner's view on whether profits made from isolated transactions are ordinary income. 'Isolated transactions' refers to: · those transactions outside the ordinary course of business of a taxpayer carrying on a business; and · those transactions entered into by non-business taxpayers. Whether a profit from an isolated transaction is income according to ordinary concepts depends very much on the circumstances of the case. However, where a taxpayer who does not carry on a business makes a profit from an isolated transaction, that profit is income if: (a) the intention or purpose of the taxpayer in entering into the profit-making transaction or operation was to make a profit or gain; and (b) the transaction or operation was entered into, and the profit was made, in carrying out a business operation or commercial transaction. | Detailed Reasoning - Intention or purpose: 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. It is not necessary that the intention or purpose of profit-making be the sole or dominant intention or purpose for entering into the transaction. It is sufficient if profit-making is a significant purpose. The taxpayer must have the requisite purpose at the time of entering into the relevant transaction or operation. Where a transaction or operation involves the sale of property, it is usually, but not always, necessary that the taxpayer has the purpose of profit-making at the time of acquiring the land or property. | Detailed Reasoning - Making a profit or gain: The term 'profit or gain' is not defined and consequently it takes its ordinary meaning. It refers to concepts commonly used in the commercial world and can encompass a 'profit or gain' of an income or capital nature. ( Paragraph 385 of Miscellaneous Taxation MT 2006/1)(MT 2006/1). | Detailed Reasoning - Carrying out a commercial transaction: For a transaction to be characterised as a business operation or a commercial transaction, it is sufficient if the transaction is business or commercial in character. Paragraph 13 of TR 92/3 lists factors which may be relevant in considering whether an isolated transaction amounts to a business operation or commercial transaction. Relevant factors include: · 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; · if the transaction involves the acquisition and disposal of property, the nature of that property; and · the timing of the transaction or the various steps in the transaction. In addition to the above factors, for the purposes of determining whether the activities undertaken in relation to real property and development equate to a profit-making undertaking or scheme, Miscellaneous Taxation Ruling MT 2006/1 aligns itself with TR 92/3 and provides a list of factors which, if present may be an indication that a business or profit-making undertaking or scheme is being carried on. If several of these 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. No single factor is determinative; rather it will be a combination of factors that will lead to a conclusion as to the character of the activities. Paragraph 270 of MT 2006/1 states that in isolated transactions, where land is sold that was purchased with the intention of resale at a profit (which would be ordinary income) the Commissioner considers these activities to be an enterprise. This would be so whether the land was sold as it was when it was purchased or whether it was subdivided before sale. An enterprise would be carried on in this situation because the activities are business activities or activities in the conduct of a profit making undertaking or scheme and therefore an adventure or concern in the nature of trade. We have determined that the profit from your unit sales is assessable as income from isolated transactions. Applying TR 92/3 , for your profit to be assessable you must have intended to make a profit when you entered into the transactions and made the profits in carrying out business operations or commercial transactions. You intended to make a profit when you started the developments. You entered the property market to make a profit. You developed X separate projects around the same time and you were intimately involved in the construction. You obtained finance to fund the development and we consider that your property development constitutes business operations or commercial transactions. We considered all of your relevant factors and have concluded that the transactions are commercial in nature and assessable as ordinary income.

Relevant facts: You recently sold your business. Since this time you have been employed casually. You recently purchased a property jointly with your partner (property A). | The property consisted of an older style house. | Your intention in purchasing property A was to demolish the existing house and construct X dwellings. | You would live in one house and rent the other house. | You, as an owner/ builder engaged subcontractor's who constructed X dwellings on the property. | Around this time you purchased a block of land located in a neighbouring suburb (property B). | Construction of the house was completed after a period of time and you moved into the property a short time later. | The design of property B did not comply with Local Council regulations which delayed the Council issuing the appropriate building approval. | You did not have any building contracts for the property developments as you were the owner/ builder. | You engaged subcontractor's who undertook most of the building work. | You borrowed funds from a financial institution to finance the property developments. | You planned to sell property B and move into one of the properties at property A. | Due to cost over runs and a down turn in the property market, you have sold the properties located at property A and have made a capital gain. | You have supplied a number of documents which form part of and should be read in conjunction with this private ruling.