Private ruling: Assessable income - income vs capital
Date of advice: 21 November 2023
Published: 15 January 2024
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Is any portion of the proceeds from the sale of Property F assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No.

Relevant facts and circumstances: Person A (you) were born in Country A in 19XX and moved to City A, Country B some years later. Person B (your spouse) was born in Country A in 19XX and moved to Country B some years later. You and Person B were married in 20XX. In 20XX, you and Person B had a child (Child A). You are a health professional. You have owned and operated a healthcare clinic with an unrelated business partner since 20XX. Person B is a project manager in the building and construction industry. They have been working full time as a project manager since completion of their studies in 20XX. They are currently employed by Group A. Person B purchased Property A in 20XX. They initially occupied Property A. They later used it to earn assessable income and sold it in 20XX. Since arriving in Country B in 20XX, you have either directly or indirectly owned the following properties: Property B You purchased the property in 20XX and sold in 20XX. You occupied the property while completing your tertiary studies. You sold Property B in 20XX. Property C You purchased the property in 20XX and continuously occupied it while finalising your tertiary studies. You sold it in 20XX. Property D You purchased the property in 20XX and sold it in 20XX. You and Person B occupied the property from the time of purchase until sale. You financed the property with a loan from a mortgage broker secured over Property D and a loan from a company on standard commercial terms Property E This property was purchased in 20XX with the intention to undertake a multiple townhouse development. Shortly after development, you would either sell the developed townhouses for profit or hold them as rental properties for long-term investment. You financed the purchase and completion of the development with a loan from a financial services company and another loan on standard commercial terms. Shortly after purchasing Property E, for asset protection purposes you were advised to use a company to complete the purchase of the property. You were advised to enter into contracts with the relevant consultants through that special purpose company. Prior to settlement, you nominated Company A as substitute purchaser. Company A is a company of which you had at all relevant times been the sole director, secretary, and shareholder of. In 20XX, Company A settled on its purchase of Property A. Company A engaged Person B to complete the development on Company A's behalf and Company A remained wholly passive. Person B engaged Company B to prepare drawings and manage the town planning approval process for the development. Person B engaged Company B through Company C, a company of which they were a sole director until 20XX. The relevant council planning scheme issued endorsed plans for the development. From 20XX until the present, Company C has carried out the construction of the townhouses of the development as instructed to do so by Company A. As at the date of application for this private ruling, neither a Certificate of Occupancy nor a Statement of Compliance for the development has issued. For several years, the townhouses had been advertised for sale-off-the-plan. Due to lack of buyer interest, the townhouses were taken off the market for sale and made available for rent. Property F Person B entered into a contract to purchase the property in 20XX. Prior to settlement, Person B nominated you as substitute purchaser. You financed the property with a loan from a financial services provider secured over Property D and another loan on standard commercial terms. You and Person B intended to demolish the existing dwelling and construct a new dwelling. You planned to occupy the new dwelling as your main residence whilst the development of Property F was being undertaken. After you and Person B had relocated to the townhouse at Property F, you planned to either hold the property as an investment property or sell the property. Commencing in 20XX, Company C project managed the construction of a multi-storey dwelling with a basement, car park and retaining walls at the property on your behalf and you were registered as an owner builder. Construction of the new dwelling was completed in 20XX. In the year prior to completion of construction, you and Person B reached the conclusion that you would not be in a financial position to finalise construction of the new dwelling at the property and retain it as well as complete the private purposes development of Property F. In conjunction with your parents, you and Person B decided to sell the undeveloped Property F. You decided that you would continue living in Property D until such time that you could move into the new dwelling at Property E on a permanent basis. Property F You purchased the property in 20XX. You financed the property using funds from a bank loan and a company controlled by your parents. When you acquired the property, you intended to rent it out for the short to medium term to ensure interest repayments could be managed and properly serviced. You intended to eventually move into the property to occupy it as your main residence and potentially renovate it at a later stage. A short time after purchase, you leased Property F to unrelated tenants for a fixed term. The tenants continued to lease the property thereafter on a month-by-month basis for some years after. The year after purchase of Property F, your intentions regarding the property changed. You and Person B still intended to rent the property out for a few years and then occupy it as your main residence. However, in due course when you could afford to, you planned to construct several townhouses at the property. One of these townhouses would be occupied by yourself and Person B and the other would be occupied by your parents. That same year, Person B's company created a design brief for the construction of townhouses on the site of the property. This design was stated as being for a private purposes development. You and Person B planned to occupy one of the townhouses as their main residence and have your parents occupy the other townhouse as their main residence. The following year, you and Person B purchased Property E. You intended to construct a new dwelling on the site of the Property E to occupy as your main residence during which the period which the development of Property F was being undertaken. The following year, you leased Property F to other unrelated tenants for a fixed term. Several months later, a planning permit was obtained to enable a private purposes development to be undertaken at the site of Property F. A few years later, an extension to the planning permit was applied for. The extension was granted shortly after application. The extension required construction to commence by a specified date and be completed by a specified date. After renting out Property F for several years, you sought to terminate the month-to-month lease so you, Person B and Child A could move into Property F until such time that you could afford to build the townhouses. You applied to the relevant body to have the lease terminated. Your stated grounds for termination were that you and your dependants would be occupying the premises immediately after the termination date. The order to vacate was granted. After the tenants vacated, you and Person B inspected the property and determined it was not in a habitable condition. This was due to several issues, including damage to power outlets and water taps and general uncleanliness. Due to the condition of Property F, you and Person B decided not to move into the property but remain living at Property D. You intended to continue living at Property D until such time as you could move into the new dwelling at Property E. You and Person B decided to sell Property F rather than Property E. The construction of the new dwelling at Property E was on foot and the private purposes development at Property F had not commenced. Property E was also closer to your business and Person B's work. Property E was also closer to the schools which you and Person B wanted Child A to attend. You had purchased Property D with the intention of occupying it as you and Person Bs main residence for several years until you were in a better position to move into Property F. You cleaned Property F to a standard such that it was able to be re-let. You then leased it to an unrelated party for a fixed term. During your period of ownership of Property F, you did not undertake any improvements or renovations to the property. In mid-20XX, you and Person B reached the conclusion that you did not have the financial resources to construct the townhouses at Property F. You decided to sell the property and continue living in Property D. Apart from general maintenance, you and Person B made no improvements to Property D. In 20XX, you sold Property F.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 Part 3-1

Reasons for decision: Summary: No portion of the proceeds from the sale of Property F are assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997). All of the proceeds represent a mere realisation of a capital asset which will fall for consideration under the capital gains tax provisions in Part 3-1 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Under section 6-5 of the ITAA 1997, assessable income includes ordinary income. The ITAA 1997 defines ordinary income as income according to ordinary concepts. Examples of ordinary income include salary, wages, allowances received as employee, dividends and proceeds from carrying on a business. Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income provides guidance in determining whether profits from isolated transactions are income and therefore assessable. Paragraph 1 of TR 92/3 defines isolated transactions as those transactions outside the ordinary course of business of a taxpayer carrying on a business and those transactions entered into by non-business taxpayers. Paragraph 35 of TR 92/3 states that profit from an isolated transaction is generally assessable income when the intention of the taxpayer in entering into the transaction was to make a profit or gain and profit was made in carrying out a business operation or commercial transaction. Paragraph 14 of TR 92/3 lists some of the matters which may be relevant in considering whether an isolated transaction amounts to a commercial transaction. They include: § the nature of the entity undertaking the transaction; § the nature and scale of other activities undertaken by the taxpayer; § the amount of money involved in the transaction and the magnitude of the profit sought or obtained § the nature, scale, and complexity of the transaction § the manner in which the transaction was entered into or carried out; § the nature of any connection between the parties; § the nature of the property if the transaction involves the acquisition and disposal of a property; § the timing of the transaction or the various steps in the transaction. The above indicators must be considered in combination and as a whole. No one indicator is decisive. The case of FC of T v. Myer Emporium Ltd (1987) 163 CLR 199 ( Myer ) is one of the leading cases regarding intention of the taxpayer when entering into a transaction to acquire an asset. Myer is authority for the principle that a profit made by a taxpayer outside the ordinary course of carrying on a business, but which arises from a transaction entered into by that taxpayer with the intention or purpose of making a profit or gain, will constitute assessable income. This is the case even where the transaction is an isolated one "if the property generating the profit or gain was acquired in a business operation or commercial transaction for the purpose of profit-making by the means giving rise to the profit..." FC of T v. Myer Emporium Ltd (1987) 163 CLR 199 ( Myer ) at 209-210. As a general rule, a transaction will have the character of a business operation or commercial transaction if it would constitute the carrying on of a business. The difference between a transaction and carrying on of a business is that a transaction or operation does not have the elements of repetition or recurrence. An intention to make a profit does not need to be the sole or dominant purpose for entering into a transaction. It is sufficient if a profit-making intention is a significant purpose when entering into the transaction. To determine the relevant intention or purpose of a taxpayer when entering into a transaction, it is necessary to consider the facts and circumstances of a situation objectively. | Detailed Reasoning - Application to your circumstances: You acquired Property F in 20XX with the intention of using it to produce assessable income for several years to service the interest repayments. After several years, you planned to move into the property and potentially renovate it. The following year, you revised your intentions regarding Property F. You planned to rent out the property for a further few years and then demolish it and build two townhouses. You intended to occupy one of the newly built townhouses and your parents were going to occupy the other one. As a result of your financial circumstances, your intentions changed again. At this time, you realised that you would no longer able to redevelop Property F and finalise construction of the new dwelling at Property E. At this time, you made the decision to sell Property F and retain Property E. The reasons for retaining Property E included: § it was close to your place of employment § it was close to Person B's place of employment § it was close to a number of schools one of which you will choose to send your child to § Property E was constructed to a high level of finish and as a result, you believed that it was highly suitable for you and your family to occupy You continued to use Property F to earn assessable income until its sale, with the exception of a short period where the property was cleaned following the termination of the tenants' lease. During your ownership period of Property F, you did not undertake any improvements or renovations to the property, with the exception of obtaining a permit to allow for the private purposes development to build the townhouses. Your intention when purchasing Property F was not to make a profit or gain, but to eventually move into the property and occupy it with your family. As a result of a change in your intentions, your actual use of Property F was to earn assessable income. You sold Property F after owning it for a period of several years. The increase in value since the time of acquisition can be attributed to capital growth rather than as a result of a profit-making undertaking. After considering the facts of your situation and assessing the factors set out in TR 92/3, it is the Commissioner's view that the purchase and disposal of the Brighton property will not be considered commercial in nature but will be a mere realisation of a capital asset. On disposal of Property F, capital gains tax (CGT) event A1 occurred. No portion of the proceeds from the disposal will be assessable under section 6-5 of the ITAA 1997. Therefore, the proceeds will be accounted for under the CGT provisions in Parts 3-1 and Parts 3-3 of the ITAA 1997. If you meet the conditions for the 50% CGT discount to apply, you can reduce any capital gain made on the disposal of your ownership interest by 50%.