Private ruling: Am I in business trading land
Published: March 2013
Ruling period: Year ended 30 June 2012.
Date scheme commenced: 1 July 2011.

Ruling: Q1: Did your single purchase of vacant land (the property) constitute the carrying on of a business since the time of its purchase? | A1: No. | Q2: Was the property trading stock? | A2: No. | Q3: Is the loss from the property sale deductible? | A3: No. | Q4: Is the loss incurred on the disposal of the property a capital loss and subject to the CGT provisions? | A4: Yes.

Relevant facts and circumstances: You (a company) were established about seven years ago. You usually trade shares on the Australian Stock Exchange and you carry on a business of share trading. Sometime in the year 200X, you purchased a vacant block of land (the property) for a certain amount. Some seven months later the property was placed on the market with an initial asking price of about $Y higher than the purchase price. Due to the market conditions at that time, you were not able to sell the property. The property was sold sometime during the relevant year, for substantially less than its purchase price. You have stated that it was your intention to commence carrying on a business of trading in land. No company minutes were prepared by you in relation to the purchase or sale of the property. The property was not included as part of the closing stock in the financial statements or income tax returns lodged by you for the years ended 30 June 200X to 30 June 200Z inclusive. You have stated that the property was not included as closing stock in the relevant years because of a miscommunication between your sole director and your accountants. The property was treated by you as a capital investment in the accounts and the interest costs were capitalized. Your sole director has stated that they realised the error in the tax treatment of the property, only after the property was sold and instructed your current accountant to correct the error. Your accountant has, on your behalf requested this private binding ruling to clarify the Australian Taxation Office view of the arrangement. The following documents are to be read with and form part of the scheme for the purposes of the private binding ruling: · Contract for sale of land, date stamped by State Revenue dept for the property. · Covering letter from the real estate agent regarding the selling agency agreement for the property. · Copy of the Selling Agency Agreement verifying the initial listing price dated some seven months after the original purchase. · Financial statements for you for the year ended 30 June 20TT. · Notes to the financial statements for you for the year ended 30 June 20TT. · Balance sheet for you for the year ended 30 June 20TT. · Profit and loss statement for you for the year ended 30 June 20TT. · Your overview including financial information for 200V, 200W & 20TT. · Financial statements for you for the year ended 30 June 20ZZ. · Notes to the financial statements for you for the year ended 30 June 20ZZ · Balance sheet for you for the year ended 30 June 20ZZ. · Profit and loss statement for you for the year ended 30 June 20ZZ. · Your overview including financial information for 200W, 20TT & 20ZZ.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5, | Income Tax Assessment Act 1997 Section 8-1, | Income Tax Assessment Act 1997 Section 70-10, | Income Tax Assessment Act 1997 Section 104-10 and | Income Tax Assessment Act 1997 Section 995-1.

Reasons for decision: Summary: Your single purchase of vacant land (the property) does not constitute the carrying on of a business since sometime in 200X. | Detailed Reasoning - Detailed reasoning: You initially treated and then continued to treat the property as a capital asset from the time of its purchase until the time of its sale. There does not exist any company minutes regarding the purchase of the property. There was no written strategy or business plan in place regarding any proposal or intention by you to trade in land. All of the evidence supports the fact, that the property was held on capital account. You cannot re-characterise the property from that of a capital asset to trading stock after it is sold for two reasons; 1. you are not in the business of trading land; and 2. for income tax purposes you have treated the property as a capital asset from the time of its purchase to its disposal. There has been no material change in the nature of the investment (the property) held. | Detailed Reasoning - Carrying on a business of trading in land: Section 995 of the ITAA 1997 states the term 'business' includes any profession, trade, employment, vocation or calling, but does not include occupation as an employee. To determine whether an activity, or series of activities, amounts to a business, the activity needs to be considered against the indicators of a business established by case law. In the High Court of Australia case of Hope v. Bathurst City Council (1980) 144 CLR 1; (1980) 29 ALR 577; (1980) 80 ATC 4386; [1980] HCA 16, a business was described in the following ways: It is the words "carrying on'' which imply the repetition of acts and activities which possess something of a permanent character. …activities engaged in for the purpose of profit on a continuous and repetitive basis. Transactions were entered into on a continuous and repetitive basis for the purpose of making a profit…manifested the essential characteristics required of a business. Taxation Ruling TR 97/11 discusses the main indicators of carrying on a business. Based on that discussion some indicators are: § a significant commercial activity; § a purpose and intention of the taxpayer to engage in commercial activity; § an intention to make a profit from the activity; § the activity is or will be profitable; § the recurrent or regular nature of the activity; § the activity is carried on in a similar manner to that of other businesses in the same or similar trade; § activity is systematic, organised and carried on in a businesslike manner and records are kept; § the activities are of a reasonable size and scale; § a business plan exists; § commercial sales of product; and § the entity has relevant knowledge or skill. 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 flavour. | Detailed Reasoning - Application to your circumstances: You initially treated and then continued to treat the property as a capital asset from the time of its purchase until the time of its sale. All of the evidence supports this fact, that the property was held on capital account. When considering the indicators of business listed above, your single purchase and sale of the property fails to meet the factors of business. One of the main reasons is the lack of trading in land, (transactions entered into on a continuous and repetitive basis). | Summary: The property was not trading stock. | Detailed Reasoning - Detailed reasoning: Section 70-10 of the ITAA 1997 defines trading stock as anything produced, manufactured or acquired that is held for purposes of manufacture, sale or exchange in the ordinary course of business. Land can only be treated as trading stock if a business of trading in land is actively being carried on. There must be present the continuity of activity which characterises a business. | Detailed Reasoning - Question 3 and Question 4: The loss from the property sale is not deductible because you are not in the business of trading land. The loss incurred on the disposal of the property is a capital loss and is subject to the CGT provisions.