Private ruling: Property development
Date of advice: 23 December 2015
Published: February 2016
Ruling period: Year ended 30 June 2016 | Year ended 30 June 2017 | Year ended 30 June 2018 | Year ended 30 June 2019 | Year ended 30 June 2020
Date scheme commenced: 1 July 2015

Ruling: Q1: Will the proceeds from the off the plan sale of the units be assessable on revenue account under section 6-5 of the ITAA 1997? | A1: Yes. | Q2: Are the proceeds from the off the plan sale of the units assessable when the transaction is completed? | A2: Yes.

Relevant facts and circumstances: You purchased a property. The property has been used as a rental property for several years. Due to a change in zoning the property now has the ability to be developed into an apartment site. Ideally you would like to keep all the units in your portfolio for the long-term however the bank is forcing pre-sale of some of the units in order to gain the finance. You will hold as many units as possible as investment properties. You have never undertaken anything like this before. You are engaging independent, experienced professionals to undertake the planning and building of the development.

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

Reasons for decision: Summary: There are three ways profits from property sales can be treated for taxation purposes: (1) As ordinary income under section 6-5 of the ITAA 1997, on revenue account, as a result of carrying on a business of property development, involving the sale of property as trading stock. (2) As ordinary income under section 6-5 of the ITAA 1997, on revenue account, as a result of an isolated business transaction entered into by a non-business taxpayer or outside the ordinary course of business of a taxpayer carrying on a business, which is the commercial exploitation of an asset for a profit making purpose. (3) As statutory income under the CGT legislation, (sections 10-5 and 102-5 of the ITAA 1997), on the basis that a mere realisation of a capital asset has occurred. In your situation, the Commissioner is satisfied you are not carrying on a business of property development. The repetition, scale and volume of your activity is not of the same nature, as is ordinarily carried on by a property developer that is carrying on a business. Profits arising from an isolated business or commercial transaction will be ordinary income if the taxpayer's purpose or intention in entering into the transaction is to make a profit, even though the transaction may not be part of the ordinary activities of the taxpayer's business ( FC of T v. Myer Emporium Ltd 1987 163 CLR 199; 87 ATC 4363; 18 ATR 693) (Myer Emporium). Taxation Ruling TR 92/3 considers the principles outlined in the Myer Emporium case and provides guidance in determining whether profits from isolated transactions are assessable under section 6-5 of the ITAA 1997 as ordinary income. TR 92/3 defines the term 'isolated transactions' as: • transactions outside the ordinary course of business of a taxpayer carrying on a business; and • transactions entered into by non-business taxpayers. 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. If a transaction or operation involves the sale of property it is not necessary that the taxpayer has the purpose of profit-making at the time of acquiring the property. This is demonstrated in the High Court decisions White v. FC of T (1968) 120 CLR 191; 15 ATD 173 and Federal Commissioner of Taxation v. Whitfords Beach Pty Ltd (1982) 150 CLR 355; 82 ATC 4044; (1982) 12 ATR 707. Therefore if a taxpayer acquires an asset with the intention of using it for a certain purpose they can later decide to use the asset for a different purpose. If he uses the asset in a business operation or commercial transaction the profit from the activity is income even though the taxpayer did not have that purpose in mind at the time of acquiring the asset. If a taxpayer makes a profit from a transaction or operation, that profit is income if the transaction or operation is not in the course of the taxpayer's business but: • the intention or purpose of the taxpayer in entering into the profit-making transaction or operation was to make a profit or gain, and • the transaction or operation was entered into, and the profit was made, in carrying out a business operation or commercial transaction. Whether an isolated transaction is business or commercial in character will depend on the circumstances of each case. Where a taxpayer's activities have become a separate business operation or commercial transaction, the profits on the sale of subdivided land can be assessed as ordinary income within section 6-5 of the ITAA 1997. TR 92/3 lists the following factors to be considered: 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. | Detailed Reasoning - Application to your circumstances: In your case, although you would like to keep all the units in your portfolio, you have entered the transaction with the intention to sell a number of units as the bank requires them to be pre-sold. We consider that you are going above and beyond what would be required to realise the value of the land. Instead, the project has the characteristics of a commercial transaction. Consequently, the development will constitute an isolated profit-making scheme. Therefore, the profits from the pre-sale of the units will be considered ordinary income under section 6-5 of the ITAA 1997. Any profit or loss from an isolated transaction is computed at the completion of the scheme. Therefore, the profit or loss from the development will be assessable in the income year when the units are sold and the profit or loss from the sale of each of the units is able to be determined.