Private ruling: Sale of property – on income or capital account?
Date of advice: 10 August 2017
Published: November 2017
Ruling period: Year ended 30 June 201C
Date scheme commenced: 1 July 201B

Ruling: Q1: Are the proceeds from the sale of the property ordinary income of the taxpayer under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) or any other provisions of the Tax Acts? | A1: No | Q2: Does the sale of the property constitute the mere realisation of a capital asset? | A2: Yes | Q3: Would any net capital gain made on the sale of the property be included in the taxpayer’s assessable income under section 102-5 of the ITAA 1997? | A3: Yes

Relevant facts and circumstances: Group Structure and Activities The A Group is a private group of Australian resident entities associated with A and AB. The A Group owns significant real estate assets in a state in Australia, which have the following broad uses: a) Held for use as part of the farming and agricultural related activities of the group; b) Held to derive rental income; or c) Held for the purposes of deriving a profit from future sale and/or redevelopment of the asset. One of the entities within the A Group, A Nominees Pty Ltd as trustee for the A Family Trust (the taxpayer), holds various investments including farming and residential properties in Australia and listed shares. Specific activities of the A Family Trust (the taxpayer) The A Family Trust was established by way of Trust Deed prior to 20 September 1985. This Family Trust currently has a large portfolio of Australian real estate assets. Specifically, the assets owned by the trust, in addition to the property in question, are: ● Other properties, both are rural land zoned for residential development and were acquired for development purposes and to make a profit. The taxpayer is currently developing the land jointly with a land development entity. ● Several other properties are either deriving rental income or are vacant properties. Circumstances and intent surrounding the acquisition of the property A first became aware the property was for sale on or around 200F, through for sale signs on the land. The aggregated lots for sale came up for sale at the same time. At the date of acquisition the land was zoned general rural by the local government authority. A’s purpose and intent in acquiring the property was for the land to be used for a storage facility. In or around 200F, the taxpayer engaged an engineering firm to prepare a plan for storage facilities on the property and to assess its feasibility. The property was acquired by the taxpayer for about $2 million GST inclusive via contract dated in 200F and settlement sometime later in 200F. The lots were original acquired as vacant land. In the interim period following acquisition whilst plans were being sought, the property was fenced and used for farming. The farming activities included the grazing of sheep and the storage of substantial farming materials including fencing, pipes and water irrigation materials. At various intervals the taxpayer reviewed its strategy to determine the economic viability of using the property as a storage facility. Around the 200G year, an assessment was completed to determine whether the storage facilities could be located at the property or at another property also owned by the A group. The results of this assessment determined that establishing such a storage facility was problematic As a result of this assessment, additional grain storage facilities were ultimately constructed on the other farm property. Disposal of property In or around 201A A was approached by a purchaser seeking to acquire the property. The property was not advertised for sale at this time. Later in 201A, the taxpayer entered into a call option deed for the purchase of property. The call option was exercised in 201B. Following exercise, in accordance with the call option, the parties entered into a sale contract for the disposal of the property. The entry into the contract and the settlement of the property both occurred in the year ended 30 June 201B. The taxpayer continues to hold the balance of the aggregated lots.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 102-5 Summary | The proceeds from the sale of the property are not ordinary income of the taxpayer under section 6-5 of the Income Tax Assessment Act 1997 or any other provisions of the Tax Acts. Detailed reasoning | The profits on sale of the property will give rise to ordinary income under section 6-5 of the ITAA 1997 if the intention or purpose (objective) of the taxpayer in entering into the transaction or operation was to make a profit or gain. | We have concluded that the taxpayer did not acquire the land for the purpose of profit making by sale. | We consider that the taxpayer’s intent when acquiring the property was to use it as a storage facility for its farming activities. There was never any intention to sell it as part of a profit making scheme. | Question 2 | Summary | The sale of the property constitutes the mere realisation of a capital asset. | Detailed reasoning | The taxpayer’s intent when acquiring the property was to use it as a storage facility for its farming activities. | The taxpayer did not acquire the property with a profit making intent. Nor did the taxpayer intend to sell the land as part of a profit-making scheme. | Although the taxpayer is involved in property development and resale activities in respect of other properties in its portfolio, the clear purpose of acquiring this particular property was for use in farming activities. | The present circumstances can be clearly distinguished from the decision in FCT v. Whitfords Beach Pty Ltd (1982) 150 CLR 355, which established that a profit making intent does not always need to exist at the date of acquisition of a property in order for an isolated transaction to be ordinary income. | In that case although no profit making intent existed initially, following the sale of the taxpayer to a larger group, extensive business like activities were later carried out in respect of the development. No such activities were carried out to complete the sale in the taxpayer’s case. The property was merely sold “as is” after the taxpayer was approached by an interested buyer | Question 3 | The net capital gain made on the sale of the property should be included in the taxpayer’s assessable income under section 102-5 of the ITAA 1997. | Detailed reasoning | Section 102-5 of the ITAA 1997 includes in assessable income an amount that is a net capital gain. Under section 102-20 of the ITAA 1997, a person makes a capital gain if a CGT event happens. | CGT event A1 happens when a person disposes of a CGT asset to someone else, for example if you sell a property, and there is a change in ownership from you to another entity (section 104-10 of the ITAA 1997). The gain or loss is made when you enter into the contract for disposal.