Private ruling: Assessability of income
Date of advice: 27 June 2018
Published: September 2018
Ruling period: Year ending 30 June 20xx | Year ending 30 June 20xx
Date scheme commenced: 1 July 20xx

Ruling: Q1: Will the proceeds received from the Property be assessable pursuant to section 6-5 of the ITAA 1997 as an isolated profit making transaction? | A1: Yes.

Relevant facts and circumstances: You purchased a property that was approximately 25 acres in size. The property has been subdivided and portions have been sold. When the properties have been sold, it has been treated as an income event rather than a capital event. You retained ownership of two portions of the property at as you intended to use then as income producing assets. You sold one portion of the property due to health reasons. You had intended to keep an investment in the development of the block, but you changed your mind due to the health issues. You intended to develop a second portion (the lot) and invested money to develop the block including having letters of intent completed. Due to health reasons, you have now decided to list the lot for sale prior to any development going ahead. You have incurred costs in relation to the lot, including engineering costs, architectural costs, drawn plans, and have moved towards a development application/complying development application.

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

Reasons for decision: Summary: The proceeds received from the sale of the remaining lot on the property, will be assessable as ordinary income from an isolated profit making transaction. | Detailed Reasoning - Detailed reasoning: Proceeds from the sale of property for tax purposes are treated as either: ● income according to ordinary concepts under section 6-5 derived: 1. in the course of carrying on a business, or 2. from an isolated transaction for the purpose of profit making, or ● subject to capital gains tax. Whether the proceeds are treated as income or capital depends on the situation and circumstances of each particular case. | Detailed Reasoning - Carrying on a business: You have stated that your concern is in relation to the sale of the portion of the property you retained. As this is the sole remaining portion of the property that you acquired, we have not considered whether you are carrying on a business. If you have been conducting a business of property development, then any profits would be considered income. | Detailed Reasoning - Isolated profit making transaction: 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 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 taxpayers 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. The taxpayer must have the requisite purpose at the time of entering into the relevant transaction or operation. If a transaction or operation involves the sale of property, it is usually necessary that the taxpayer has the purpose of profit-making at the time of acquiring the property. 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 asset can be assessed as ordinary income within section 6-5 of the ITAA 1997. We also consider that an assessable profit arises if a taxpayer enters into a transaction or operation with a purpose of making a profit by one particular means but actually obtains the profit by a different means. In your case, you purchased a parcel of land for the initial purpose of subdividing and selling the land. You have one Lot remaining and you are no longer subdividing this portion. Your intention has changed and you intend to sell the property at a profit with no further improvements. As stated above, it is not necessary that the sole or dominant intention or purpose for entering into the transaction is to make a profit, providing it is a significant purpose. A significant purpose of what you have undertaken for the lot was to sell it at a profit, through the development applications and the subdivision of the remaining portion of the property. Therefore, the proceeds from the sale of the lot will assessable under section 6-5 of the ITAA 1997 as ordinary income from an isolated profit making transaction.