Private ruling: Assessable income - isolated transactions
Date of advice: 11 October 2021
Published: December 2021
Ruling period: Income years ending 30 June 20XX and 30 June 20XX

Ruling: Q1: Assuming that the proceeds received by the trustee for Sub-scheme X on the sale of the Land exceed the cost base of the Land, will the sale of the Land give rise to a capital gain for Sub-scheme X under Part 3-1 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes, however the anti-overlap provision in section 118-20 of the ITAA 1997 will apply to reduce that capital gain to the extent that, as a result of the sale, an amount is included in the net income of Sub-scheme X as assessable income under section 6-5 of the ITAA 1997 (see Question 2). | Q2: Will any 'net profit' on the sale of the Land constitute a profit from an isolated transaction and be included in the net income of Sub-scheme X as assessable income under section 6-5 of the ITAA 1997? | A2: Yes. | Q3: Will any 'net loss' on the sale of the Land constitute a loss from an isolated transaction and be deducted from the calculation of the net income of Sub-scheme X pursuant to section 8-1 of the ITAA 1997? | A3: Yes. | Q4: Will the sale of the Land be assessed as a sale of trading stock under Division 70 of the ITAA 1997? | A4: No. | Q5: If the answer to Question 2 or Question 3 is affirmative, will the 'net profit' or 'net loss' of Sub-scheme X be calculated as the proceeds from the sale of the Land less the purchase price, 'acquisition costs', 'holding costs' and 'development costs'? | A5: Yes. | Q6: If the answer to Question 4 is affirmative, will the purchase price, 'acquisition costs', 'holding costs' and 'development costs' form part of the cost of the trading stock of Sub-scheme X, or will these amounts be deductible under section 8-1 of the ITAA 1997 in the income years in which they were incurred? | A6: Not necessary to answer given our answer to Question 4. | Q7: Is Sub-scheme X a public trading trust for the purposes of Division 6C of Part III of the Income Tax Assessment Act 1936 (ITAA 1936)? | A7: No.

Relevant facts and circumstances: The Fund is an unlisted property fund comprising of multiple individual sub-schemes, registered as a managed investment scheme under the Corporations Act 2001 and managed by a Responsible Entity (RE). The Fund is governed by the terms of its Constitution. The Fund is established as an umbrella property investment scheme for the purpose of holding property. The RE allocates a property to each sub-scheme. The assets of sub-scheme are not pooled with those of other sub-schemes. Sub-scheme properties operate independently and separately from all other sub-scheme properties. With the exception of the Land held by Sub-scheme X, all sub-scheme properties are sourced by the RE in accordance with its property investment criteria on an ongoing basis within the following property categories: • commercial office buildings • retail properties comprising of retail premises or small shopping centres • industrial properties comprising factories and warehouses, and • residential properties comprising properties used for domestic purposes. The Fund is for a term of XX years and each sub-scheme under the Fund, with the exception of Sub-scheme X, will typically have a term of 5 to 7 years, maturing when the sub-scheme property is due to be sold. Income in the form of rental returns is generated by each sub-scheme (other than Sub-scheme X) from the letting of the sub-scheme property. Each sub-scheme is treated as a separate trust for tax purposes. Sub-scheme X The RE initially held a parcel of vacant land (Parcel A) as trustee of Fund 2 in the capacity of mortgagee in possession and intended to sell Parcel A to satisfy the debt owing to it from an unrelated borrower. Following a number of unsuccessful attempts to sell Parcel A at a public auction for the amount required to fully satisfy the debt owing to it, and having identified that Parcel A could be sold to a developer at a significant profit if a planning permit was successfully obtained. The RE made the decision to acquire Parcel A in its capacity as trustee of Sub-scheme X. Sub-scheme X was established on the date on which the trustee for Sub-scheme X acquired Parcel A. The trustee for Sub-scheme X then purchased Parcel B, a parcel of vacant land abutting Parcel A. Only existing members of Sub-scheme X were able to make further contributions to the costs associated with the purchase of Parcel B. Such further contributions were in the same proportions as the members' respective original contribution amounts into Sub-scheme X. In September 20XX, the trustee for Sub-scheme X entered negotiations with the local council to acquire the air rights above the laneway that separates Parcel A (Air Rights). In March 20XX, the local council decided not to proceed with the sale of the Air Rights. The trustee for Sub-scheme X lodged an amended planning permit application with the local council in July 20XX. The application process to approve the amended planning permit ended in June 2021 when the local council approved a large scale residential development comprising apartments, retail/office space and resident amenities on the Land. The trustee for Sub-scheme X has engaged a real estate agent to sell the Land under a single contract to a developer with the planning permit in place. The estimated selling price of the Land is between $Xm and $Xm. The Land held by Sub-scheme X (consisting of Parcels A and B) is vacant and therefore does not fall within the typical property investment criteria of the Fund. Members of Sub-scheme X have been regularly updated by the trustee for Sub-scheme X in relation to the progress with the Land. Since the acquisition of Parcel A, it has always been the intention of the trustee for Sub-scheme X to sell the Land under a single contract to a developer after obtaining a planning permit to allow construction of a mixed use building on the Land. The trustee for Sub-scheme X has never had an intention to undertake a subdivision or any construction on the Land and has only undertaken the steps that are necessary for the local Council to grant the planning permit. The trustee for Sub-scheme X expects to sell the Land in late 20XX with a settlement date of between 60 to 90 days from the sale. Sub-scheme X will be wound up following settlement. The trustee for Sub-scheme X has incurred, and will incur, costs ('development costs') in relation to obtaining the planning permit from the Council. This includes architects, land surveyors, town planners, sustainability design consultants, traffic assessment consultants, wind assessment consultants, waste management consultants, landscape designers and legal advisors. The trustee for Sub-scheme X has incurred costs ('acquisition costs') relating to the acquisition of the Land, namely acquisition and due diligence fees, a contribution fee and project management fees charged by the RE and stamp duty. The acquisition and due diligence fees, the contribution fee and the project management fees incurred by the trustee for Sub-scheme X are funded by Sub-scheme X from the members' contributions to the sub-scheme. Additionally, the trustee for Sub-scheme X has incurred, and will incur, costs ('holding costs') relating to the holding of the Land such as land tax, legal fees, interest on borrowings, council rates and costs in relation to marketing and selling the Land. For the purpose of attracting investors to Sub-scheme X, no public invitations or offers were made and no advertising was undertaken. Invitations to invest in Sub-scheme X was only extended to existing members of other sub-schemes under the Fund or in other managed investment schemes operated by the RE and financial planners/intermediaries that had existing relationships with the RE. On the sale of the Land a management fee, performance fee and sale fee will be charged by the RE to the trustee of Sub-scheme X. These fees will not be on-charged to the members. The distribution the members will receive following the sale of the Land will instead be reduced to account for these fees, as charged to Sub-scheme X. The RE has not, in its capacity as trustee of Sub-scheme X, made an election to have Division 230 of the ITAA 1997 apply to its financial arrangements.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 95 | Income Tax Assessment Act 1936 Division 6C of Part III | Income Tax Assessment Act 1936 section 102M | Income Tax Assessment Act 1936 section 102N | Income Tax Assessment Act 1936 subsection 102N(1) | Income Tax Assessment Act 1936 section 102R | Income Tax Assessment Act 1936 paragraph 102R(1)(b) | Income Tax Assessment Act 1936 subparagraph 102R(1)(b)(ii) | Income Tax Assessment Act 1936 section 102S | Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 8-1 | Income Tax Assessment Act 1997 Division 70 | Income Tax Assessment Act 1997 section 70-10 | Income Tax Assessment Act 1997 Part 3-1 | Income Tax Assessment Act 1997 section 102-5 | Income Tax Assessment Act 1997 section 104-10 | Income Tax Assessment Act 1997 subsection 104-10(3) | Income Tax Assessment Act 1997 subsection 104-10(4) | Income Tax Assessment Act 1997 section 108-5 | Income Tax Assessment Act 1997 section 118-20 | Income Tax Assessment Act 1997 subsection 118-20(2) | Income Tax Assessment Act 1997 Division 230

Reasons for decision: Summary: The sale of the Land constitutes an isolated transaction from which any net profit realised by Sub-scheme X on the sale of the Land will be assessable under section 6-5 of the Income Tax Assessment Act 1997 [1] and included in the calculation of the net income of Sub-scheme X pursuant to section 95 of the ITAA 1936. Any capital gain derived by Sub-scheme X from the sale of the Land will also be included in the calculation of its net income, but only to the extent the amount of that gain (if any) isn't included as ordinary income. Any net loss realised by Sub-scheme X on the sale of the Land will be deductible under section 8-1 and included in the calculation of the net income of Sub-scheme X pursuant to section 95 of the ITAA 1936. | Detailed Reasoning - Detailed reasoning: Profits from the sale of real property can be assessable on revenue account as ordinary income under section 6-5: Gains from the sale of real property (other than a main residence) can be assessable on capital account as statutory income under the capital gains tax (CGT) regime (section 102-5) on the basis that a mere realisation of a capital asset has occurred. | Detailed Reasoning - Trading stock: The term 'trading stock' is defined in section 70-10 as including anything produced, manufactured or acquired that is held for the purposes of manufacture, sale or exchange in the ordinary course of a business. Taxation Determination TD 92/124 [2] provides that 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. Both the required purpose of resale and the business activity must be present before land is treated as trading stock. For these purposes, the business activity is taken to have commenced when a taxpayer embarks on a definite and continuous cycle of operation designed to lead to the sale of the land. The Commissioner's view on whether a taxpayer is carrying on a business is set out in Taxation Ruling TR 97/11 [3] . TR 97/11 identifies the following indicators for consideration to determine whether a taxpayer is carrying on a business: • whether the activity has a significant commercial purpose or character • whether the taxpayer has more than just an intention to engage in business • whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity • whether there is repetition and regularity of the activity • 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 • whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit • the size, scale and permanency of the activity, and • whether the activity is better described as a hobby, a form of recreation or a sporting 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 flavour. In this case, the Commissioner is satisfied that Sub-scheme X is not carrying on a business involving dealing in land held for the purpose of resale, as primarily indicated by the following factors: • an absent intention on behalf of Sub-scheme X to engage in such (or any other type of) business • an absent intention on behalf of Sub-scheme X to sell by subdivision (or strata division), and the consequent absence of any repetition or regularity of any sort of activity undertaken by Sub-scheme X, and • a lack of any real permanency in the activities of Sub-scheme X. Based on the above, Sub-scheme X is not considered to be undertaking a business activity involving dealing in land. Therefore, whilst the trustee for Sub-scheme X acquired and is holding the Land for the purpose of sale, that is not in the ordinary course of a business. It follows that the Land does not constitute an item of trading stock as defined in section 70-10. | Detailed Reasoning - Profit from isolated transaction: In FC of T v The Myer Emporium (1987) 163 CLR 199; 87 ATC 4363; (1987) 18 ATR 693 ( Myer Emporium ), the Full High Court expressed the view that profits made by a taxpayer who enters into an isolated transaction with a profit making purpose can be assessable income. Taxation Ruling TR 92/3 [4] discusses profits on isolated transactions and the application of the principles outlined in Myer Emporium. According to TR 92/3 (at paragraph 1), 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. TR 92/3 (at paragraph 6) provides that a profit from an isolated transaction is generally assessable income when both of the following elements are present: (a) the intention or purpose of a 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. It is not necessary that the intention or purpose of profit-making, as discerned from an objective consideration of the facts and circumstances of the case, be the sole or dominant intention or purpose for entering the transaction. It is sufficient if profit-making is a significant purpose (paragraphs 7 and 8, TR 92/3). 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 (paragraph 9, TR 92/3). For a transaction to be characterised as a business operation or a commercial transaction, it is sufficient if the transaction is business or commercial in character (paragraph 12, TR 92/3). Whether an isolated transaction amounts to a business operation or commercial transaction will depend on the circumstances of each case. TR 92/3 (at paragraph 13) 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. For reasons set out above in the context of the 'trading stock' analysis, the sale of the Land by the trustee for Sub-scheme X will not constitute a transaction in the ordinary course of a business or an isolated transaction outside the ordinary course of a business, but will constitute an isolated transaction entered into by a 'non-business taxpayer'. Based on the available facts and circumstances, the trustee for Sub-scheme X is considered to have acquired the Land with the sole or dominant intention to make a profit from its re-sale (with planning permit attached). It is also considered that the sale of the Land, and any profit from that sale, will arise in the course of carrying out a business operation or commercial transaction. Some of the relevant factors which indicate as such include: • the nature of Sub-scheme X, like all other sub-schemes established under the Fund, is one of a trust established for the purpose of acquiring a property for the financial benefit of its Members who have invested in the Fund, and subscribed for an interest in the sub-scheme, with a view to deriving a profit or gain on their investment • the magnitude of the profit sought to be obtained • the manner in which the transaction has been carried out, including the engagement of a range of consultants for the purpose of obtaining the planning permit, and • the relative short period of time over which the Land was intended to be held before being disposed of. Where there is an isolated transaction in the nature of trade or business that is not undertaken in the course of some other, wider business activity, then only the profit (the net amount) is income according to ordinary concepts (see Commercial and General Acceptance Ltd v. FC of T 77 ATC 4375; (1977) 7 ATR 716 ( Commercial and General Acceptance )). As such, any net profit made on the sale of the Land is considered to be ordinary income and included in the calculation of the net income of Sub-scheme X under section 95 of the ITAA 1936 as assessable income pursuant to section 6-5 in the year in which that profit is realised (i.e. when the Land is sold). | Detailed Reasoning - Loss from isolated transaction: Taxation Ruling TR 92/4 [5] discusses whether losses on isolated transactions are deductible under section 8-1. TR 92/4 (at paragraph 4) provides that a loss from an isolated transaction is generally deductible under section 8-1 if: As: any such loss from the sale of the Land will be deductible under section 8-1 and included in the calculation of the net income of Sub-scheme X pursuant to section 95 of the ITAA 1936. | Detailed Reasoning - Mere realisation of capital asset: Section 108-5 provides that a CGT asset is any kind of property, or a legal or equitable right that is not property. The Land owned by the trustee for Sub-scheme X is considered to be a CGT asset under this provision. CGT event A1 under section 104-10 happens if you dispose of a CGT asset. CGT event A1 will happen upon the sale of the Land and a capital gain will be made by Sub-scheme X pursuant to subsection 104-10(4) to the extent that the capital proceeds received on the sale exceed the cost base of the CGT asset. Subject to the operation of the anti-overlap provision of section 118-20, any capital gain derived by Sub-scheme X on the sale of the Land will form part of the net income of Sub-scheme X in the year in which the contract for the sale of the Land is entered into (subsection 104-10(3)). Section 118-20 provides that a capital gain made from a CGT event will be reduced if, because of the event, the amount is otherwise assessable under another provision of the ITAA (outside of Part 3-1). The gain will be reduced to zero if it doesn't exceed the amount included (subsection 118-20(2)). | Detailed Reasoning - Conclusion: 1. The Land is not held as an item of trading stock and its sale will therefore not be assessed as such. 2. The Land will be sold as part of an isolated transaction, the 'net profit' from which (if any) will be ordinary income under section 6-5 and included in the net income of Sub-scheme X in the year the net profit is realised. 3. In the event that the sale of the Land results in a 'net loss', the loss will be deductible under section 8-1 and included in the calculation of the net income of Sub-scheme X in the year the net loss is realised. 4. The anti-overlap provision in section 118-20 will apply to reduce any capital gain derived by Sub-scheme X under section 104-10 from the sale of the Land to the extent the amount is included in the net income of Sub-scheme X as ordinary income. | Summary: The purchase price of the Land, 'acquisition costs', 'holding costs' and 'development costs' incurred by the trustee for Sub-scheme X will be included in the calculation of the net profit or net loss derived by Sub-scheme X at the time the Land is sold. | Detailed Reasoning - Detailed reasoning: As it is the net profit or net loss made from an isolated business operation or commercial transaction undertaken for the purpose of profit-making which is assessable as ordinary income under section 6-5 or deductible under section 8-1 in the income year in which the property is sold (for inclusion in the calculation of a trust estate's net income), expenses incurred in relation to that isolated business operation or commercial transaction will be included in the calculation of the net profit or net loss derived (i.e. by being offset against the proceeds from the sale of the property). The deductibility of expenses on completion of the transaction in this way is supported by the High Court decision in Commercial and General Acceptance . The 'acquisition costs', 'holding costs' and 'development costs' incurred by the trustee for Sub-scheme X in connection with its isolated business operation or commercial transaction will, in addition to the purchase price, be recouped as a cost when the profit or loss derived by Sub-scheme X is brought to account, and will not be deductible pursuant to section 8-1 when incurred. | Detailed Reasoning - Question 6: It is not necessary to answer this question given the Land is not an item of trading stock of Sub-scheme X. | Summary: Sub-scheme X is not a public trading trust for the purposes of Division 6C of Part III of the ITAA 1936 as it is not a trading trust under section 102N of the ITAA 1936. | Detailed Reasoning - Detailed reasoning: Division 6C of Part III of the ITAA 1936 treats certain trusts described as 'public trading trusts' as companies, by taxing the trustee of such trusts at the company tax rate (section 102S of the ITAA 1936). Paragraph 102R(1)(b) of the ITAA 1936 provides that a unit trust is a public trading trust in relation to a relevant year of income if: (i) the unit trust is a public unit trust in relation to the relevant year of income; (ii) the unit trust is a trading trust in relation to the relevant year of income; (iii) either of the following conditions is satisfied: (A) the unit trust is a resident unit trust in relation to the relevant year of income; (B) the unit trust was a public trading trust in relation to a year of income preceding the relevant year of income. | Detailed Reasoning - Is Sub-scheme X a unit trust?: For the purposes of determining whether a trust is a public trading trust as defined in section 102R of the ITAA 1936, that trust must be a unit trust. There is no legislative definition of a 'unit trust' for the purposes of Division 6C of Part III of the ITAA 1936. However, interpretative guidance is provided by ATO Interpretative Decision ATO ID 2010/57. [6] ATOID 2010/57 considered a trust (a managed investment scheme) in which each individual beneficial interest in the trust was expressed as a fraction of the beneficial interest of all such interests collectively in the whole beneficial interest, and in respect of which redemption of any individual unit in the trust was provided for in very limited circumstances. It was concluded that the trust was a unit trust because the beneficial interest in the trust was held in units, the common reference to fractions of the whole of an identified interest. ATOID 2010/57 states: The joint judgment of the High Court in CPT Custodians Pty Limited v. Commissioner of State Revenue [2005] HCA 53 at paragraph 15 stated, '"unit trust", like "discretionary trust", in the absence of an applicable statutory definition, does not have a constant, fixed normative meaning'. There is however a consistent approach to what constitutes a unit trust which can be found in authoritative works. This definition reiterates the concept that the beneficial interest of the trust is held in 'units'. Units are expressed and defined as part of the whole beneficial interest of the trust (or in some circumstances of the whole beneficial interest of a particular kind). Other than this 'unit trusts' are, like all other trusts, subject to the terms of the impressed or stated trust and to the application of the law of trusts ... ... Accordingly, where beneficiaries are made entitled to a share of a beneficial interest under a trust, such as an interest in the income and capital, or in either one of these, and which entitlement is measured by reference to a fixed standard of measurement howsoever described (for example a percentage or a fraction or a fixed formula), then whether or not the deed itself labels the interests 'units' the beneficial interest have been unitised and the trust would be a 'unit trust' for the purpose of considering the application of Division 6C of the ITAA 1936. As one example where the phrase 'pro-rata' is used in specifying the relative interests of beneficiaries then this will mean the interest of the beneficiary of the trust will be identified as a proportion of, or share of, the whole of a beneficial interest (or class of interest) and in most occasions of this nature the holder of the beneficial interest will be a unit holder and the trust will be a unit trust. Sub-scheme X has not been settled as a 'unit trust'. However, based on the terms of the Constitution each member will have a beneficial interest in all of Sub-scheme X's property having regard to their proportionate contribution to Sub-scheme X's funds, and Sub-scheme X is considered to be a unit trust for the purposes of Division 6C of Part III of the ITAA 1936. | Detailed Reasoning - Is Sub-scheme X a trading trust?: Subsection 102N(1) of the ITAA 1936 provides that a unit trust is a trading trust for the purposes of Division 6C of Part III of the ITAA 1936 if at any time during the relevant year of income, the trustee carried on a 'trading business' or was able to control directly or indirectly, the affairs or operations of another person in respect of the carrying on by that other person of a trading business. Section 102M of the ITAA 1936 defines a trading business to be a business that does not wholly consist of 'eligible investment business', also defined in section 102M of the ITAA 1936. As per the analysis above in response to Question 4 of this ruling, Sub-scheme X is not considered to be carrying on any type of business. As Sub-scheme X is not carrying on a business, it follows, for the purposes of determining whether it is carrying on a trading business as per section 102M of the ITAA 1936, that Sub-scheme X cannot be carrying on a business that does not consist wholly of eligible investment business. As Sub-scheme X is not carrying on a trading business, or controlling the affairs or operations of another person in respect of the carrying on by that other person of a trading business, it is not a trading trust under section 102N of the ITAA 1936. | Detailed Reasoning - Conclusion: Sub-scheme X is not a trading trust in relation to any relevant year of income under section 102N of the ITAA 1936. Accordingly, Sub-scheme X does not satisfy the requirement under subparagraph 102R(1)(b)(ii) of the ITAA 1936 and is not a public trading trust for the purposes of Division 6C of Part III of the ITAA 1936 in relation to a relevant year of income. [1] All legislative references are to the Income Tax Assessment Act 1997 unless otherwise stated. [2] Income tax: property development: in what circumstances is land treated as 'trading stock'? [3] Income tax: am I carrying on a business of primary production? [4] Income tax: whether profits on isolated transactions are income . [5] Income tax: whether losses on isolated transactions are deductible . [6] Income Tax: Entity specific matters: trusts - whether a Managed Investment Scheme is a Unit Trust for the purposes of Division 6C of Part III of the Income Tax Assessment Act 1936.

This ruling applies for the following periods: | as a result of carrying on a business involving the sale of land as trading stock, or | as a result of an isolated 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 acquired for a profit-making purpose. | in entering into the transaction the taxpayer expected to derive a profit which would have been assessable income under section 6-5, and | the transaction was entered into, and the loss was made, in the course of carrying on a business or in carrying out a business operation or commercial transaction. | the trustee for Sub-scheme X is considered to have acquired the Land with the sole or dominant intention to make a profit from its re-sale (with planning permit attached), and that profit (if realised) would have been assessable under section 6-5, and | the sale of the Land, and the loss (if any) will be realised in the course of carrying out a business operation or commercial transaction,