Private ruling: Trading stock
Date of advice: 8 May 2017
Published: September 2017
Ruling period: The income year ending 30 June 2015 | The income year ending 30 June 2016
Date scheme commenced: 1 July 2014

Ruling: Q1: Does the underlying property constitute trading stock for the purposes of section 70-10 of the ITAA 1997? | A1: Yes | Q2: Is the gross proceeds from the sales of land, income under section 6-5 of the ITAA 1997 on the basis that the trustee is carrying on a business? | A2: Yes | Q3: Is the net profit from the sales of land ordinary income under section 6-5 of the ITAA 1997 on the basis that the taxpayer is involved in a profit-making undertaking? | A3: Yes | Q4: Do the sales of land constitute a disposal of a CGT asset for the purpose of Part 3-1 of the ITAA 1997? | A4: No

Relevant facts and circumstances: The Trust is part of a larger group of entities (the Group) involved in the acquisition, development and sale of property. The Trust purchased a number of properties. Where possible, the Trust would develop each property and lease the developed property to receive rental income. The Trustee would review investments of the Trust. Where the Trust could not lease a property, or investment returns were not satisfactory, the Trust would consider selling a property. The Trust sold X properties.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 70-10 | Income Tax Assessment Act 1997 Part 3-1

Reasons for decision: Detailed Reasoning - Question 1 and 2: Generally, the proceeds of the sale of land will be taxed in one of three ways: (1) As ordinary income, where the land is held as trading stock and sold as part of a business. (2) As ordinary income, where the land is not trading stock and is sold as part of an isolated profit making scheme or undertaking; or (3) On capital account, where the proceeds of sale are a mere realisation of a capital asset. Trading stock Subsection 70-10(1) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that trading stock includes: (a) anything produced, manufactured or acquired that is held for purposes of manufacture, sale or exchange in the ordinary course of a business; and (b) livestock The High Court has accepted that land can be trading stock (see Federal Commissioner of Taxation v St Hubert's Island Pty Ltd (1978) 138 CLR 210 which considered the meaning of “trading stock” in the Income Tax Assessment Act 1936 ). The Commissioners view on when land is trading stock is provided in Taxation Determination TD 92/124 Income tax: property development: in what circumstances is land treated as 'trading stock'? , which provides: 1. Land is treated as trading stock for income tax purposes if: ● it is held for the purpose of resale; and ● A business activity which involves dealing in land has commenced. 2. Both the required purpose and the business activity must be present before land is treated as trading stock… Held for the purpose of sale In R and D Holdings Pty Ltd v Deputy Federal Commissioner of Taxation 2006 ATC 4472 Finn J after identifying the St Hubert's Island case as the seminal case on whether land can be trading stock, made the following comments about the decision in St Hubert's Island (at 4480): 46. The significance of this case for present purposes is that it is authority for the propositions that (i) land acquired for the purpose of development, subdivision (or strata division) and sale by allotments (or lots) can constitute trading stock of a business having that purpose irrespective of whether the land has been so developed and subdivided; and (ii) that business will be carried on for so long as the taxpayer engaged in the effectuation of the purpose of development, etc of the land. The emphasis in St Hubert's Island on the need to have the relevant intention of sale at the time of acquisition of the property in question is, though' without significance for s 70-10 purposes which as I have earlier noted links the intention or purpose of sale with the purpose (or purposes) for which the property is held. (emphasis in the original) Finn J went on to discuss the High Court decision in John v Federal Commissioner of Taxation (1989) 166 CLR 417, which also considered the meaning of “trading stock” in the 1936 Act, and made the following comments about purpose (at 4481): 50. …, there is one aspect of John which is of present assistance. It was indicated in the joint judgement (at 430) that the s 6(1) definition of “trading stock was predicated on the prescribed purpose (i.e. of manufacture, sale or exchange) attending the acquisition of the item in question”. However, it was indicated that the definition did not require that the relevant purpose be the sole or dominant purpose”. I can see no reason why a like view should not be taken to the like purpose requirement for which the relevant property is held in the s 70-10 definition of the 1997 Act. The significance of this for present purposes is that I have found below that R and D Holdings held the Bulletin Place property at the relevant time for the dual purposes of sale or lease of subdivided lots. These two purposes clearly are not “contrary or inconsistent”… To be “trading stock”, land must be held for the purpose of development and sale, but the purpose of sale need not be the main purpose for the holding of the land. In CMI Services Pty Ltd v Federal Commissioner of Taxation 90 ATC 4428, the full federal court considered whether the profit from the sale of properties was gross income under former section 25 of the 1936 Act. Lockhart J (with whom Jenkinson J and Gummow J agreed) made the following comments in determining that the sale of property was an ordinary operation of the taxpayers business of investing for profit: In one sense most investors in property, real or personal, who primarily seek satisfactory return of income on their investment, make their investment decisions with an eye to the possibility of resale if the income does not come up to expectation. Speaking generally, they do not carry on the business of buying and selling those assets. But if there activities are in real estate, in substantial sums and not inconsiderable in volume and are undertaken with the intention of reselling the properties if the income yield is not satisfactory the question becomes more complex. The answer depends on the facts of the particular case. … The fact that the taxpayer did not buy real estate for the purpose of selling it at a profit is an important consideration. But, as the primary Judge found, there was a pattern discernible in the policy of the taxpayer in investing in real estate which involved it being resold if its prospective returns from rental fell below acceptable levels. Although the taxpayer's business was to invest in real estate for the primary purpose of obtaining income by way of rental, the conduct of that investment business required that the real estate portfolio should be considered and monitored on a fairly regular basis and that real estate should be sold when its rental yield, measured in relation to market value, dropped to an unacceptable level. The purchase of the Belmont properties is the directly relevant example of the application of that policy. The taxpayer was carrying on the business of investing for the purpose of producing income; but the facts disclose that the buying and selling of real estate was done as part of that business of the taxpayer of investing for the purpose of producing income. The profits which were realised on the sale of the Belmont properties were profits of the business and income within ordinary usages and concepts... Although property speculation was not present in the minds of the board of the taxpayer or the board of CMI, the taxpayer was plainly aware of the desirability of selling properties which were performing distinctly below expectations and were not likely to improve. The taxpayer recognised that as its portfolio grew there would be cases where the expectations were not recognised and it would be necessary to sell the properties. The taxpayer's activities involved the quite frequent sale of properties, mostly at a substantial profit, for the purpose of protecting the rental yield of its portfolio of real estate investment. The sale of the properties was a normal operation in the course of carrying on the business of investing for profit. I respectfully agree with the primary Judge's conclusion that the purchases and sales of the Belmont properties were part of a pattern which involved ``the expectation and intention at the time of purchase that the properties in question would be resold, in the ordinary course of [the taxpayer's] business, if their prospective yields, in relation to current market values, made it prudent to do so''. For the purposes of section 6-5 of the ITAA 1997, where a taxpayer carries on a business, it is unnecessary to establish purpose in relation to the individual transactions comprised by that business. This is because:- ● Profits or gains made in the ordinary course of that business are invested with a profit making purpose ● Profits which arise as an ordinary incident of a business are invested with a profit making purpose. Therefore Land will be held for the purpose of sale where the sale of land is a normal operation in the course of carrying on a business This well settled principle of law was re-affirmed by the Full High Court in London Australia Investment Co Ltd v FCT (1977) 138 CLR 106. In that the court expressed the view that Californian Copper , and the many cases which have relied upon it, establish the principle that profit from a sale carried out in the course of a business is income according to ordinary concepts. In particular Jacobs J stated (at 127-128): It may first be stated that the activity of the taxpayer must be identified as a business activity. If, otherwise than as part of a business of so doing, a man purchases a particular item of property primarily in order to enjoy it in specie or to enjoy the income from it, but at the same time expecting and intending that he will at some time in the future, if and when an opportune occasion presents itself, sell the item of property at a profit, the profit will not be taxable under the first limb of s26 (a). But if the dominant purpose is that of sale, then it will be. If the acquisition and disposal of property is part of a business of so doing, the position is significantly different. There must still be a purpose of resale because resale is part of the description of the relevant business, and, since business has in it the notion of profit-making rather than loss-making, there must not be a sole purpose or the primary or dominant purpose, as is the case under the first limb of s.26 (a). It need only be one of the purposes. And in this context the word “purpose” is hardly if at all distinguishable from intention or expectation. The dominant or primary purpose may be to obtain income from the items of property acquire but if there is a purpose or intention or expectation of selling at a profit if and when a suitable occasion arises then one condition of carrying on a business of buying and selling at a profit is satisfied. If a man makes a business of acquiring property with a dual purpose of enjoying it or its profits and of reselling it eventually at a higher price than he paid for it, then not only the income from the property but also the profit on resale will be income in the ordinary sense of the term , and within the second limb of s26 (a). Another important principle of law which was re-affirmed in London Australia Investment Co Ltd v FCT was that, in determining whether a sale was a business operation carried out in the course of business of profit making rather than a mere realisation of a capital asset, it was necessary "to make both a wide survey and an exact scrutiny of the taxpayer's activities" (at 116). This principle of examining the entire context in which the transaction(s) took place is discussed in GRE insurance Limited v FCT; Unitraders Investments Pty Ltd v FCT 92 ATC 4089. The Full Federal Court (Northrop, Davies and Jenkinson JJ ) held that the profits made by Unitraders, a subsidiary of GRE, on disposal of securities it had acquired from GRE, were assessable under subsection 25(1) of the ITAA 1936 (the 1936 Act's equivalent of section 6-5 of the ITAA 1997). In reaching their decision the Court reasoned that the activities of Unitraders "were an integral part of the insurance business conducted by GRE...the equities indirectly formed part of the funds representing the insurance reserves and part of the circulating capital of the business " (at 4093). The Court observed that notwithstanding Unitraders was " a taxpayer in its own right " and its " activities should be so considered " (at 4094), the role which Unitraders played in the group was a relevant consideration when characterising its activities " the part which a subsidiary plays in the affairs which concern its holding company, or in the group in which both companies form a part, may throw light upon the character of the activities of the subsidiary ” (at 4094) . “ Unitraders was a separate entity from GRE but its activities reflected, indeed formed part of, the overall business in which GRE was engaged " (at pp 4094-4095). This principle of examining the entire context in which the transaction(s) took place is also discussed in AGC (Investments) Limited v FCT 91 ATC 4180 , Hill J. in the Federal Court observed that, "The fact that the applicant is a subsidiary of an insurance company and is administered as part of that company, and that its assets are regarded by the parent as part of a reserve fund... assists in the characterisation of the activities of the applicant as a business" (at 4190). On appeal the Full Federal Court ( AGC (Investments) Limited v FC of T 92 ATC 4239) did not disagree with Hill J's process of characterisation. The Full Federal Court looked at the part that the subsidiary played in the business of its parent as a step toward characterising its profit as income or capital. In this instant however the Court found that the profits were on capital account. They so decided by simply taking a different view of the facts of that case. It is therefore clear that when characterising the profit or loss made by a company, trust or other entity in an economic group, the part that an individual entity plays in the wider activities of the group is a relevant consideration. If the facts establish that a single business is being carried on by one or more related entities then the activities of each entity partake of a business character. Where profits from the disposal of assets ordinarily arise in the course of the broader group business, or where such profits are an ordinary incident of the carrying on of that business, then there is no need to establish a purpose of profit making by sale at the individual entity level. The requisite purpose is inferred from the part that the individual entity plays in the broader group business. This principle finds support in the decision of Grollo Nominees Pty Ltd v FC of T 97 ATC 4585, where the full Court of the Federal Court decided that it would not be correct to treat a single purpose entity's activities in isolation of those of the remainder of the Group. They said at 4633-4635: The solution to the problem lies in the correct characterisation of the moneys which came to Grollo Australia's credit to enable it to carry out the building work. … “The starting point for a consideration of the problem here is the fact that Grollo Australia was one of the Grollo Group of companies. The Group carried on business as substantial builders of commercial and industrial buildings. Over the years it had also engaged in construction work for public authorities. It had been in business for over ten years,that is at the time these transactions were entered into. Grollo Australia was a new member of the Group. It was the vehicle which was used for this project. It was the joint venturer for the Grollo interests and it entered into the arrangements with the other joint ventures, St Martins. Originally, it was not intended to be the builder; the builder was to be Grofam. It was only when problems were encountered as a consequence of that being the case that the structure of the arrangement was changed so that Grollo Australia became, at least nominally, the builder employing Grofam as a sub-builder to carry out the building work involved in the project. … Grollo Australia, at least up to the stage of this project, had not been engaged in the building industry in the sense of having carried out other building projects as had Grofam. But it would not be correct to treat its activities in isolation of those of the remainder of the Group. It was part of a group which was regularly carrying out building projects, whether for the Grollos themselves or for other persons. It is true that the project in question was very large and was probably the largest project which the Group had on hand during the years of construction which began in 1981. But it was, nevertheless, but one more project. In this case, the Trust is part of a larger Group, and the Group has been extensively involved in property acquisition, development and sales in the past. The sale of the X properties was just another series of sales that cannot be separated from the remainder of the Group sales, it was but one more project of acquisition, development and sale. If the gain is held to be made in the ordinary course of the Groups wider property development business, then it will be assessable as revenue under section 6-5 of the ITAA 1997 as revenue, irrespective of the initial characterisation the taxpayer may have gave it. If the sales of the properties, are not considered to be part the Group (which the Commissioner does not concede), the Commissioner would nevertheless consider that even when the Trust is viewed in isolation, the sale of the properties would be part of the particular business of the Trust. Where possible, the Trust would develop property and lease the developed property to receive rental income. The Trustee would review the investments of the Trust. Where the Trust could not lease a property, or investment returns were not satisfactory, the Trust would consider selling the property. As highlighted in London Australia Investment Co Ltd (at 128) while “the dominant or primary purpose may be to obtain income” from the property in the form of rent “but if there is a purpose or intention or expectation of selling at a profit if and when a suitable occasion arises then one condition of carrying on a business of buying and selling at a profit is satisfied ”. Reviewing and maintaining rental yields is an ordinary operation of the activities of the Trust. Therefore the sale of property is an incident to that ordinary operation. It is considered that the property was held for the purpose of sale at the time of its disposal; the investment plan of the Trust includes the sale of land. The sale of land is an incident of the ordinary operation of the Trust (the ongoing review of investment), and is considered to be an ancillary purpose of holding the land. The land was held for the purpose of sale. Business activity has commenced Section 995-1 of the ITAA 1997 provides that “business” includes: Any profession, trade, employment, vocation or calling, but does not include occupation as an employee. Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? sets out the Commissioners view on when an entity is carrying on a business. The ruling specifically considers whether an entity is carrying on a business of primary production, but the indicators of business identified also apply to other areas: 26. From the judgments it is clear that the relevant indicators of whether a business of primary production is being carried on by a taxpayer are: ● does the activity have a significant commercial purpose or character? ● does the taxpayer have more than a mere intention to engage in business? ● is there an intention to make a profit or a genuine belief that a profit will be made? Will the activity be profitable? ● is there repetition and regularity in the activity? i.e., how often is the activity engaged in? How much time does the taxpayer spend on the activity? ● is the activity of the same kind and carried on in a similar way to that of the ordinary trade? ● is the activity organised in a businesslike manner? ● what is the size or scale of the activity? ● is the activity better described as a hobby, a form of recreation or a sporting activity? The Trust is part of a wider group of entities that operate in the property development industry. The Trust would develop property and lease the developed property to receive rental income. Where the Trust could not lease a property, the Trust would consider selling the property. The Trust sold 2 properties. The above shows that at the time of the disposal: ● The Trust had a significant commercial purpose; the controlling mind of the Trust has considerable knowledge of the property and construction industry and used that knowledge to acquire and manage property for the best possible rate of return. ● The Trust intended to profit from its investment activities, be it from rental yield or property sale where rental was no longer considered viable. ● There was repetition of activity, and the scale of the activity was significant. It is considered that the trust was carrying on an investment business at the time the Trust disposed the property. At the time each property was sold, no improvements had been made to the land. The Trust was looking to lease the properties, but the properties were not leased. As there was no agreement to lease, the Trust did not develop the land. In Federal Commissioner of Taxation v St Hubert's Island Pty Ltd (1978) 138 CLR 210, Jacobs J stated the following on whether land that has not been developed can be trading stock (at 235): Once it is concluded that land may be trading stock, then I can see no reason to limit the application of the words to land which is in the condition in which it is intended that it should be sold. I am inclined to the view that land acquired or purchased for purposes of sale falls within the words of the definition whether or not the land is in the condition in which it is proposed that it should be sold. (see also Mason J at 228-229) . It is considered that the sold properties were held for the purpose of sale in the ordinary course of a business in the relevant income years. The X properties were trading stock for the purposes of section 70-10 of the ITAA 1997. The gross proceeds from the sales of the X properties will be ordinary income and taxed under section 6-5 of the ITAA 1997 in the respective income years. Any capital gain or loss can be disregarded under section 118-25 of the ITAA 1997. | Detailed Reasoning - Question 3: In Federal Commissioner of Taxation v Myer Emporium Limited (1987) 163 CLR199 the High Court determined that profits made otherwise than in the ordinary course of a business are income where there is an intention or purpose to make a profit from the transaction: Although it is well settled that a profit or gain made in the ordinary course of carrying on a business constitutes income, it does not follow that a profit or gain made in a transaction entered into otherwise than in the ordinary course of carrying on the taxpayer's business is not income. Because a business is carried on with a view to profit, a gain made in the ordinary course of carrying on the business is invested with the profit-making purpose, thereby stamping the profit with the character of income. But a gain made otherwise than in the ordinary course of carrying on the business which nevertheless arises from a transaction entered into by the taxpayer with the intention or purpose of making a profit or gain may well constitute income. Whether it does depends very much on the circumstances of the case. Generally speaking, however, it may be said that if the circumstances are such as to give rise to the inference that the taxpayer's intention or purpose in entering into the transaction was to make a profit or gain, the profit or gain will be income, notwithstanding that the transaction was extraordinary judged by reference to the ordinary course of the taxpayer's business. Nor does the fact that a profit or gain is made as the result of an isolated venture or a “one-off” transaction preclude it from being properly characterized as income… The authorities establish that a profit or gain so made will constitute income if the property generating the profit or gain was acquired for the purpose of profit-making by the means giving rise to the profit. (at 209-210) The Court distinguished between profits from a realisation of capital, and profits from a profit making scheme or undertaking (at 213): … this Court… has accepted that profits derived in a business operation or commercial transaction carrying out a profit-making scheme are income, whereas the proceeds of a mere realization or change of investment or from an enhancement of capital are not income… The proposition that a mere realization or change of investment is not income requires some elaboration. First, the emphasis is on the adjective “mere”… Secondly, profits made on a realization or change of investments may constitute income if the investments were initially acquired as part of a business with the intention or purpose that they be realized subsequently in order to capture the profit arising from their expected increase in value… It is one thing if the decision to sell an asset is taken after its acquisition, there having been no intention or purpose to sell at the time of acquisition of acquiring for the purpose of profit-making by sale. Then, if the asset be not a revenue asset on other grounds, the profit made is capital because it proceeds from a mere realization. But it is quite another thing if the decision to sell is taken by way of implementation of an intention or purpose, existing at the time of acquisition, of profit-making by sale, at least in the context of carrying on business or carrying out a business operation or commercial transaction. In Westfield Ltd v Federal Commissioner of Taxation 21 ATR 1398 Hill J made the following comments about the purpose of profit-making: When in Myer the High Court spoke of profits made in the ordinary course of business, their Honours were not speaking in a temporal sense. Rather, …, it is necessary that the purpose of profit-making must exist in relation to the particular operation. In a case where the transaction, which gives rise to the profit, is itself a part of the ordinary business (eg a profit on the sale of shares made by a share trader), the identification of the business activity itself will stamp the transaction as one having a profit-making purpose. Similarly, where the transaction is an ordinary incident of the business activity of the taxpayer, albeit not directly its main business activity, the same can be said. The profit making purpose can be inferred from the association of the transaction of purchase and sale with that business activity… Once it is clear that the activity of buying and selling, which generated the profit, was not an activity in the ordinary course of business, or, for that matter, an ordinary incident of some other business activity, the profit in question will only form part of the assessable income of the appellant, by virtue of its being income in accordance with the ordinary concepts of mankind, if the appellant had a purpose of profit -making at the time of acquisition. What is meant by “ profit-making ” in this context? … where a transaction falls outside the ordinary scope of the business, so as not to be a part of that business, there must exist, in my opinion, a purpose of profit-making by the very means by which the profit was in fact made. So much is implicit in the decision of the High Court in Myer . There may be a case, the present is not one, where the evidence establishes that the taxpayer has the purpose or intention of making a profit by turning an asset to account, although the means to be adopted to generate that profits have not been determined… While a profit-making scheme may lack specificity of detail, the mode of achieving that profit must be one contemplated by the taxpayer as at least one of the alternatives by which the profit could be realised … But, even if that go too far, it is difficult to conceive of a case where a taxpayer would be said to have made a profit from the carrying on, or carrying out, of a profit-making scheme, where, in the case of a scheme involving the acquisition and resale of land, there was, at the time of acquisition, no purpose of resale of land, but only the possibility (present, one may observe, in the case of every acquisition of land) that the land may be resold. (at 1407-1408) Where a business is carried on, the profit-making purpose must exist in relation to the transaction. Where the transaction is part of, or incidental to, the ordinary operation of the business, the transaction will have a profit-making purpose. Where there is no business carried on, there must be a purpose to profit by the means that the profit was made; the profit-making transaction must be contemplated as a means of making the profit. The Commissioner's view on whether a transaction has a profit-making purpose is set out in Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income , which states the following: 6. Whether a profit from an isolated transaction is income according to the ordinary concepts and usages of mankind depends very much on the circumstances of the case. However, a profit from an isolated transaction is generally income when both of the following elements are present: (a) the intention or purpose of the taxpayer in entering into the transaction was to make a profit or gain; and (b) 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. 7. The relevant intention or purpose of the taxpayer (of making a profit or gain) is not the subjective intention or purpose of the taxpayer. Rather, it is the taxpayer's intention or purpose discerned from an objective consideration of the facts and circumstances of the case. 8. 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. 9. 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, but not always, necessary that the taxpayer has the purpose of profit-making at the time of acquiring the property. 10. If a transaction or operation is outside the ordinary course of a taxpayer's business, the intention or purpose of profit-making must exist in relation to the transaction or operation in question. … 14. It is not necessary that the profit be obtained by a means specifically contemplated (either on its own or as one of several possible means) when the taxpayer enters into the transaction. It is sufficient that the taxpayer enters into the transaction with the purpose of making a profit in the most advantageous way and that a profit is later obtained by any means which implements the initial profit-making purpose. It is also sufficient if a taxpayer enters into the transaction with the purpose of making a profit by one particular means but actually obtains the profit by a different means. The relevant property was acquired by the Trust to carry out the ordinary operation of its investment business. The Trust made efforts to lease the X properties. The Trust decided to sell the X properties. As part of the ordinary operation of its investment business, the Trust reviews its investments. Where rental yields fall below an acceptable rate of return, and the market is favourable, the Trust will consider disposing of an asset. It is considered that the transactions (the purchase and sale of the X properties) were part of a profit-making purpose. The Trust acquired the properties as a part of its investment business. An operation of that business is the review of investments. Disposal of property is considered where rental yields fall below an acceptable rate of return, and the market is favourable. The sale of property is an ordinary incident of the business operation of the Trust. The property sales, are both considered to be part of an isolated profit making scheme or undertaking. Proceeds from the sales will be ordinary income and taxed under section 6-5 of the ITAA 1997 in the respective income years. | Detailed Reasoning - Question 4: Section 102-5 of the ITAA 1997 provides that your assessable income includes your net capital gain for the income year. Section 100-20 of the ITAA 1997 provides that you can only make a capital gain if a capital gains tax (CGT) event happens. The CGT events are provided in Division 104 of the ITAA 1997. Most CGT events involve a CGT asset (section 100-25 of the ITAA 1997). CGT event A1 covers the disposal of a CGT Asset. The meaning of CGT asset is provided in section 108-5 of the ITAA, which states that a CGT asset is any kind of property, or a legal or equitable right that is not property (subsection 108-5(1)), and includes land and buildings (Note 1 to section 108-5). The X properties will be CGT assets. Section 100-30 of the ITAA 1997 provides that a capital gain can be disregarded if there is an exception or exemption that allows it to be disregarded. Subsection 100-30(2) provides four categories of exemptions, and includes exempt assets. Most exemptions are provided in Division 118 of the ITAA 1997. Section 118-25 of the ITAA 1997 states that a capital gain made from a CGT asset is disregarded if at the time of the CGT event the CGT asset is trading stock. Since the X properties are considered to be trading stock of the Trust at the time of each sale, any capital gains made will be disregarded. Proceeds from the sales will be ordinary income and taxed under section 6-5 of the ITAA 1997.