Private ruling: Property
Date of advice: 9 June 2016
Published: July 2016
Ruling period: 1 July 2015 to 30 June 2016 | 1 July 2016 to 30 June 2017 | 1 July 2017 to 30 June 2018 | 1 July 2018 to 30 June 2019 | 1 July 2019 to 30 June 2020
Date scheme commenced: 1 July 2015

Ruling: Q1: Will the profit from the sale of the property be treated as ordinary income under section 6 -5 of the Income Tax Assessment Act 1997 (ITAA 1997) as a result of the taxpayer carrying on a business of property development? | A1: No. | Q2: Will the profit from the sale of the property located be treated as ordinary income under section 6-5 ITAA 1997 as a result of an "isolated transaction" carried out for profit and commercial in character? | A2: No. | Q3: Will the profit from the sale of the property be treated as statutory income under the capital gains tax provisions in Parts 3-1 and 3-3 of the ITAA 1997? | A3: Yes.

Relevant facts and circumstances: Information and documentation has been provided with this private ruling application which should be read in conjunction with, and forms part of the scheme of the ruling decision. In 20XX, you and your spouse signed the contract to jointly purchase a vacant block of land (the Property) for the purpose of building your main residence. The land area of the Property is over two hectares. In 20XX, settlement on the purchase of the Property occurred. From 20XX, you and your spouse incurred expenses in relation to construction of a dwelling on the Property. In 20XX, you and your spouse sold your main residence to help fund the construction costs of the new dwelling on the Property. In late 20XX, your circumstances changed due to medical issues and you relocated to another area and the construction of the dwelling on the Property was put on hold, with construction to recommence in the future. In 20XX, you and your spouse bought a new house which is your main residence. In 20XX, a planning scheme (the Scheme) for the area in which the Property is located was issued via a media release by a Government Minister. In 20XX, the Scheme was finalised. You and your spouse determined that the property was too large for you to look after given your medical issues and that you only wanted to keep a smaller property. You and your spouse commissioned a feasibility investigation into the Property to assess the opportunity to utilise the unused land on the Property. As a result of the feasibility investigation, you and your spouse have decided to maximise the value of the Property and it should be subdivided into multiple lots. You and your spouse are the Trustee which is the trustee of the Trust. The Trust is a discretionary trust of which you and your spouse are the primary beneficiaries, and your children are the secondary beneficiaries. As there is a potential risk with subdividing the Property, you and your spouse intend disposing of your ownership interest in the Property to the Trust to undertake the subdivision of the Property. The Property will be disposed of to the Trust for its market value Valuations of the Property have been obtained which indicate that the current market value of the Property is $XX0,000 to $XX0,000. A Council rates notice issued for the income year ending 30 June 2016, outlines that the valuation for the Property land only is $XX0,000. You and your spouse have not undertaken any similar activities in the past and will not undertake any similar activities in the future. For the purposes of this ruling the following will occur: • You and your spouse will dispose of your ownership interests in the Property to the Trust for its market value during the period covered by this ruling • You and your spouse will not undertake any activities in relation to the subdivision and sale of the subdivided lots.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 15-15 | Income Tax Assessment Act 1997 Section 102-20 | Income Tax Assessment Act 1997 Section 104-10 | Income Tax Assessment Act 1997 Subsection 104-10(3) | Income Tax Assessment Act 1997 Section 112-25 | Income Tax Assessment Act 1997 Section 995-1 | Income Tax Assessment Act 1997 Part 3-1 | Income Tax Assessment Act 1997 Part 3-3

Reasons for decision: Summary: Legislative references referred to herein are from the ITAA 1997 . The sale of the Property by you and your spouse to the Trust will not be ordinary income and will not be assessable under section 6-5. The Property was acquired and held for a purpose other than to be sold at a profit, and no works have been undertaken to increase its value. You and your spouse will sell the whole Property for its market value to the Trust. Accordingly, the proceeds will be assessed under the capital gains tax provisions contained in Part 3-1. | Detailed Reasoning - Income or capital: As a general principle, profits from property sales will either be assessable as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) or statutory income under the capital gains tax (CGT) provisions of the ITAA 1997. Where the profit has been made as a result of a taxpayer carrying on a business of property development or as a result of a taxpayer entering into an isolated business transaction, the profit will be assessable as ordinary income. However, where the profit is a mere realisation of a capital asset, the profit will be assessable under the CGT provisions of the ITAA 1997. The term 'business' ordinarily refers to trade engaged in on a regular or continuous basis. To be engaged in a business of selling property, a taxpayer would need to be buying land and selling property on a regular basis. Whether a business is being carried on is a question of fact and degree. The courts have developed a series of indicators that are applied to determine the matter on the particular facts. Taxation Ruling 97/11 (TR 97/11) outlines the Commissioner's view on whether a taxpayer is carrying on a business. Ultimately, the question of whether the activities of a taxpayer amount to a business is decided on the facts of each case. The Commissioner and the courts consider that the following matters are relevant in determining whether a taxpayer is conducting a business of acquiring property for the purpose of making a profit on its subsequent sale: 1. whether the activity has a significant commercial purpose or character 2. whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity 3. whether there is repetition and regularity of the activity 4. whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business 5. the volume of the operations and the amount of capital employed 6. whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit, and 7. the size, scale and permanency of the activity. In determining whether a taxpayer is carrying on a business, no one indicator will be decisive. The indicators must be considered in combination and as a whole. Whether a business is being carried on depends on the large or general impressions gained from looking at all the indicators and whether these indicators provide the operations with a commercial profile. The Commissioner's view on whether profits from isolated transactions are assessable as ordinary income is found in Taxation Ruling TR 92/3 (TR 92/3). 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 states that profits on an isolated transaction will be ordinary income when: • the intention or purpose of a 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 operation or commercial transaction. A transaction that is commercial in nature will be a 'business or commercial transaction'. Broadly, a commercial transaction is one that will constitute carrying on a business except that there are no recurring transactions. Further, an isolated transaction refers to a transaction that is outside the ordinary course of business of a taxpayer carrying on a business and those transactions entered into by non-business taxpayers. In general, whether a profit from an isolated transaction is income according to ordinary concepts depends very much on the individual circumstances of the case. Matters listed in TR 92/3, which are relevant in considering whether an isolated transaction amounts to a business operation or commercial transaction 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 • the nature of any connection between the relevant taxpayer and any other party to the operation or transaction • 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. | Detailed Reasoning - Application to your situation: In this case, you and your spouse purchased the Property, with settlement occurring in 20XX. You and your spouse commenced activities in relation to the construction of a dwelling on the Property a number of years later, however the dwelling was not completed due to health issues. You and your spouse have made the decision to sell the Property to the Trust for its market value. You and your spouse will not make any improvements to the Property prior to it being sold. Based on the information provided, there is nothing to suggest that the sale of the Property was the beginning of a continuing business of property sales. Your activities do not display the salient indicator of a business, being transactions entered into on a continuous and repetitive basis. Therefore, it is the Commissioner's view that your activities in relation to the sale of the Property are not those of an entity carrying on a business of buying and selling land. Making an overall assessment on the factors set out in TR 93/2, it is the Commissioner's view that the sale of the Property will not be considered commercial in nature, being a long-held privately owned property. In conclusion, the activities involved in the sale of the Property will not amount to carrying on a business. The transactions will not have the character of business operations or commercial transactions. There is no indication that your activities will become a separate business operation or commercial transaction, or that you will be carrying on, or carrying out a profit-making undertaking or plan. Therefore, as it is not viewed that you are carrying on a business, or that the activities will be an isolated transaction, any profit arising from the sale of the Property, but that it will be a mere realisation of your Property which will be accounted for under the capital gains tax provisions in Part 3-1. | Detailed Reasoning - Capital gains tax: The capital gains tax (CGT) provisions are contained in Part 3-1. Broadly, the provisions include in your assessable income any assessable gain or loss made when a CGT event happens to a CGT asset that you own. CGT event A1 happens if you dispose a CGT asset. A CGT asset is any kind of property or a legal or equitable right that is not property. You will make a capital gain if the capital proceeds received for the asset are more than the asset's cost base. You will make a capital loss if the capital proceeds received for the asset are less than the asset's cost base. | Detailed Reasoning - Application to your situation: A CGT event A1 will occur when the Property is sold to the Trust. As the gain made on the sale of the Property will not be assessable as ordinary income under section 6-5, it will be assessable under the CGT provisions. Therefore, any capital gain or capital loss made on the disposal of your ownership interest in the Property will be calculated under the CGT provisions. Note: If the conditions under Division 115 are met, the capital gain can be reduced by applying the 50% CGT discount.