Private ruling: CGT - Income or capital
Published: January 2014
Ruling period: Year ended 30 June 2014 | Year ended 30 June 2015 | Year ended 30 June 2016 | Year ended 30 June 2017
Date scheme commenced: 1 July 2013

Ruling: Q1: Will the proceeds from the sale of the land be capital proceeds from the disposal of an asset? | A1: Yes. | Q2: Will the proceeds from the sale of the land held by the executor be assessable income? | A2: No. | Q3: Is the land trading stock? | A3: No.

Relevant facts and circumstances: The Deceased died in 20XX. The Deceased owned a property which has been in the family for several generations and has been used for various primary production purposes by different family members. The Deceased used the property to carry on a business in primary production. The Deceased also diversified into other more minor primary production activities. The executor continued to carry on the primary production business for a number of years after the Deceased passed away. The primary production business was discontinued as it was highly skilled, labour intensive and did not provide sufficient income for the work and economic risk. The more minor primary production activity is continuing but may not be sufficiently viable to justify keeping the land. The executor has considered further primary production uses for the land but it has not been possible. The Deceased was able to perform a lot of the work themselves but the executor has been unable to do so and the cost of labour is expensive compared to the likely income from primary production. The associated costs make it difficult to economically carry on the primary production business. The proposed future planned road and rail developments may divide the property, making it more difficult to work and separating water from pasture. Although the property is currently zoned rural, a significant portion of the property has been designated residential under the Town Plan. The executor has not sought rezoning or subdivision approval. The property is unserviced and even with an urban designation there are a great number of complex issues to be resolved before any future development may occur. The long term nature of any future urban development together with the inherent uncertainty connected with such a project adversely impacts the potential market value of the property. The sale of all or part of the property now will not maximise the sale proceeds compared to the sale of the property later when these issues are clearer. The Deceased and now consequently the executor, hold 50% of the units in a private unit trust, which carries on a business of land development. The other unit holder, The Company, carries on a business of land development and directly or indirectly through other entities manages the unit trust and the investment syndicates which carry on the business of land development. The executor is not involved in the day to day operations of the Trust or its investments, derives no salary from it and treats it as a passive investment. The executor has no equity investment in The Company and derives no salary from it.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 102-20 | Income Tax Assessment Act 1997 Division 104 | Income Tax Assessment Act 1997 section 118-20

Reasons for decision: Summary: You make a capital gain or capital loss when a CGT event happens to a CGT asset. CGT event A1 happens when a taxpayer disposes of a CGT asset. In this case, a CGT event A1 will occur when you sell the property. The amount of money you receive from the sale of the property will be capital proceeds. If the amount you receive in capital proceeds is greater than the cost base of the asset you will make a capital gain. Section 118-20 of the ITAA 1997 primarily exists to ensure that amounts which are assessable income outside of the CGT provisions are not also taxed as capital gains. In the absence of such a provision, it is conceivable that a receipt properly characterised as ordinary income and which has also been derived as a result of a CGT event could result in the receipt being taxed twice. Therefore, whilst CGT event A1 will occur when the property is sold, any capital gain will be disregarded to the extent of any amount already included as ordinary assessable income under section 6-5 of the ITAA 1997. Section 6-5 of the ITAA 1997 provides that your assessable income includes income according to ordinary concepts. The legislation does not provide any guidance on what is meant by income according to ordinary concepts. However, a substantial body of case law has evolved over time that identifies various factors that are taken into account in determining when an amount is 'income according to ordinary concepts'. Ordinary income includes income that arises in the normal scope of a taxpayer's business. In addition, in limited circumstances, gains not within the ordinary scope of the taxpayer's business may form part of ordinary income. Taxation Ruling TR 97/11 incorporates the general factors that are considered important in determining the question of whether a business activity is being carried on: · 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 regularity and repetition of the activity · whether the activity is of the same kind and carried on in a similar manner to that of ordinary trade in that line of business · whether the activity is planned, organised and carried on in a businesslike manner such that it is described as 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 sporting activity. In this case, the Commissioner is satisfied you are not carrying on a business activity. The repetition, scale and volume of your activity are not of the same nature of someone conducting a business of buying and selling property. However, whilst you are not carrying on a business, the proceeds from the sale of your property may still be assessable as ordinary income, if those proceeds are considered to be from an isolated business 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. 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 sale of subdivided land can be assessed as ordinary income within section 6-5 of the ITAA 1997. TR 92/3 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. In this case, the property has been held in the family for many generations for the purpose of various primary production activities. When the deceased passed away the Executor continued to run the primary production activities from the property. However, it was discontinued as it was highly skilled, labour intensive and did not provide sufficient income for the work and economic risk. Consequently the Executor wants to sell the property and distribute the proceeds amongst the beneficiaries. The Commissioner is satisfied the proceeds from the sale of your property will not be those from an isolated business transaction and will not be assessable as ordinary income under section 6-5 of the ITAA 1997. As established above you are not in the business of buying and selling property and therefore, the property is not considered to be trading stock. The proceeds are therefore not ordinary income and are not assessable under section 6-5 of the ITAA 1997. The proceeds represent a mere realisation of capital assets and will fall for consideration under the CGT provisions.