Private ruling: Income or capital
Published: June 2012
Ruling period: Year ending 30 June 2013 | Year ending 30 June 2014 | Year ending 30 June 2015 | Year ending 30 June 2016 | Year ending 30 June 2017
Date scheme commenced: 1 July 2012

Ruling: Q1: 1. If the property sale comprises of the three lots and the existing building in one contract, will the transaction be taxed as an isolated profit making transaction under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A4: Yes.


Relevant legislative provisions: Income Tax Assessment Act 1997 - Section 6-5. | Income Tax Assessment Act 1997 - Section 104-10. | Income Tax Assessment Act 1997 - Subsection 104-10(5).

Reasons for decision: Summary: Under section 6-5 of the ITAA 1997, your assessable income includes the ordinary income you derived directly or indirectly from all sources, during the income year. Although the legislation does not define income according to ordinary concepts, a substantial body of case law has evolved to identify various factors that indicate the nature of ordinary income. In FC of T v The Myer Emporium (1987) 163 CLR 199; 87 ATC 4363; (1987) 18 ATR 693 ( Myer Emporium ), the Full High Court expressed the view that profits made by a taxpayer who enters into an isolated transaction with a profit making purpose can be assessable income. Taxation Ruling TR 92/3 considers the assessability of profits on isolated transactions in light of the principles outlined in Myer Emporium . According to Paragraph 1 of TR 92/3, the term 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. Paragraph 6 of TR 92/3 provides that a profit from an isolated transaction will generally be income when both the following elements are present: · your 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 on a business or in carrying out a business operation or commercial transaction. Some of the factors to consider when looking at whether an isolated transaction amounts to a business operation or commercial transaction are listed at paragraph 13 of TR 92/3. They are: (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. Profits on the sale of subdivided land can therefore be income according to ordinary concepts within section 6-5 of the ITAA 1997 if the taxpayer's subdivisional activities have become a separate business operation or commercial transaction, or an isolated profit making venture. In contrast, paragraph 36 of TR 92/3 notes that the courts have often said that a profit on the mere realisation of an investment is not income, even if the taxpayer goes about the realisation in an enterprising way. However, if a transaction satisfies the elements set out above it is generally not a mere realisation of an investment. In this case, the Trust purchased the property to lease and the Trust does not have any enterprise other than leasing and is not in the business of land development. The activities undertaken by the Trust, to obtain approval to demolish the existing building and to gain development approval for a quality freehold residence on each of the three lots, were no more than the minimum required. Therefore, the proceeds from the sale of the property, in its current state and in the one transaction, with the development approval in place, would not be ordinary income and not assessable under sections 6-5 of the ITAA 1997. This would be the case even if the Trust was to choose to demolish the building and carry out the land contamination remediation work required and sold the blocks separately. In both cases, the proceeds of the sale would represent a mere realisation of a capital asset which will fall for consideration under the CGT provisions in Part 3-1 of the ITAA 1997.

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. | 2. If the property sale comprises of the three lots and the existing building in one contract, will the transaction be taxed as an isolated profit making transaction under the CGT provisions in part 3-1 and 3-3 ITAA 1997? | 3. If the building is demolished and the property is sold as three separate lots of vacant land, will the transaction be taxed as an isolated profit making transaction under section 6-5 of the ITAA 1997? | 4. If the building is demolished and the property is sold as three separate lots of vacant land, will the transaction be taxed as an isolated profit making transaction the CGT provisions in part 3-1 and 3-3 ITAA 1997? | Relevant facts: The Trust owns a commercial/residential building constructed on three separately titled allotments. | In anticipation of a sale, the property is currently untenanted. | The purchase of the property | The property was purchased after 1 January 2004. | The Trust borrowed the majority of the funds from a commercial lender. This borrowing has been renewed annually as part of an overall review of facilities. The balance of the funds was lent to the Trust by a related entity. | After 1 January 2008, an additional funding was obtained from the commercial lender in the form of a commercial loan. | Following the Global Financial Crisis, the commercial lender changed the focus of their lending and sought to reduce lending for commercial property. As a result, there has been increased difficulty in obtaining continuing renewals on the loan facility for the property. | New titles included increased land area | Subsequent to the purchase of the property the Trust made an application to the local council to identify the rear boundary of each of the three lots. The lots were re-surveyed and new titles were issued for the property. | At the time of purchase, each of the three lots was zoned industrial. | After 1 January 2006, the Trust made an application to obtain approval to demolish the existing building and to gain development approval for a quality freehold residence on each of the three lots. | The Trust engaged the services of a town planner, architect, engineer, solicitor and other contractors to obtain the development approvals. | The approvals were granted but have since lapsed. | In 2010, the Trust lodged a new development application for approval to construct three small lot houses. The new development application was substantially the same as that approved in after1 January 2006 with the exception of changes required by the authority under the current building and town planning requirements. | The council did not make a decision on the application during the required time and as such the application was deemed to be refused by the Council. | The Trust lodged a notice of appeal against the deemed refusal and the development application was approved. The approvals will be valid for four years but it is unlikely that approval would be granted again once the current approvals expire. | Again the services of a town planner, architect, solicitor and other contractors were engaged to lodge the development application and the appeal in relation to the application. | The land contamination and remediation consultancy services have been significant and this level of expenditure was not envisaged when the property was purchased. | Proposed sale: The property is currently being considered for sale. A real estate agency will provide marketing service. | The property can be sold under either option: | · The first option is to sell the property in its current state i.e. all three lots including the building sold in one transaction with the current development approval in place. To date there has been no interest in the sale of the property as a whole, or | · The second option: the existing building will be demolished. The intention would be then to sell the property as three lots of vacant land. The Trust does not intend to undertake any further work on the property other than the demolition of the building and land contamination remediation work required in relation to the land. Any building works would be undertaken by the purchaser.