Private ruling: Assessable income - income vs capital
Date of advice: 16 September 2022
Published: December 2022
Ruling period: Financial year ending 30 June 20xx
Date scheme commenced: 1 July 20xx

Ruling: Q1: Is the taxpayer carrying on the business as a property developer in respect of the Land? | A1: Yes.

Relevant facts and circumstances: The taxpayer acquired the property some 4 years prior. The taxpayer has a business Plan that includes the following information: Executive Summary the taxpayer is a special purpose vehicle established for the development of the property Our aim is to obtain development approvals and sell the whole estate within x years of acquisition subject to demand. The taxpayer believes they purchased the site at the right time. Our competitive advantages are strong and underpin our confidence in achieving a successful outcome. We are confident that we can adapt to changing market conditions and produce a development that meets the needs of the market ... Our Purpose The sole purpose of the taxpayer is to acquire and develop the residential zoned broadacre property The design for the Land currently with Council is for approval of a subdivision in excess of 50 lots The business strategy is to progressively release the subdivided lots to the market in stages. The aim is to obtain development approvals and sell the whole estate within x years of acquisition, subject to demand The taxpayer has not carried out any other land development activities prior to acquiring the Land. It was an entity established for this sole purpose The Land was purchased solely for its development potential given the residential zoning. Numerous development options were explored including unit development, potential commercial uses and residential lot subdivision. The process evolved as the various opportunities were considered and has been influenced by Council planning responses, consultants' advice, community feedback and objections. Numerous design options were explored together with feasibility studies (where relevant) for each development option The taxpayer has undertaken investment feasibility analysis which shows the expected cash flows, expenses and return on investment in relation to the development. Expected sources of income include having dwellings on some lots (as house and land packages) and selling the balance of the estate after a staged subdivision. They expect to sell x lots per year and the whole estate in x years No part of the Land is used for private or domestic purposes and there is no domestic dwelling on the Land. The taxpayer has carried out various activities pursuant to developing the Land including: The taxpayer does not engage any employees but has engaged third-party consultants, including a land surveyor, civil engineer, town planners, bushfire consultant and traffic consultant. Various documents and reports have been obtained or prepared including a land survey, masterplan of subdivision, consultant design and reports, a planning permit report and an application for a permit to council The controlling individuals of the taxpayer have significant property industry experience. They have carried out work relating to development of the Land as follows: • development design and financial feasibility aspects of the development • land development design, town planning management and construction • community consultation and engagement The time spent by the controlling individuals on development activities can range from a few hours to 16 hours per week. The taxpayer plans to carry out the development alone without any profit sharing or any joint venture arrangements with any other entities. The taxpayer is registered for GST and submits quarterly BAS statements and remits GST The taxpayer holds the Land on revenue account as trading stock, as part of its business

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 8-1

Reasons for decision: Summary: All references are to the Income Tax Assessment Act 1997 , unless otherwise stated The taxpayer is carrying on a business as a property developer in respect of the Land and income from its property development activities is assessable as ordinary business income under section 6-5 and deductions are allowable under section 8-1 | Detailed Reasoning - Detailed reasoning: There are three ways the proceeds from a land subdivision can be treated for taxation purposes: • assessable ordinary income under section 6-5 as income from carrying on a business of property development • assessable ordinary income under section 6-5 as income from an isolated commercial transaction with a view to a profit, or • a realisation, often referred to as a 'mere realisation', of a capital asset, assessable under Parts 3-1 and 3-3. Whether the proceeds are treated as income or capital will depend on the situation and circumstances of each particular case. No single factor will be determinative; rather, it will be a combination of factors that will lead to a conclusion as to the character of the activities. | Detailed Reasoning - Carrying on a business of property development: Section 995-1 provides the term 'business' includes any profession, trade, employment, vocation or calling, but does not include occupation as an employee. The Commissioner's view on whether a taxpayer is carrying on a business is found in Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? Although TR 97/11 deals with the issues of determining whether a taxpayer is carrying on a business of primary production, the same principles can be applied to the question of whether a taxpayer is in the business of property development Paragraph 13 of TR 97/11, uses the following indicators to determine whether a taxpayer is carrying on a business: • whether the activity has a significant commercial purpose or character • 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. 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: The table at paragraph 18 of TR 97/11 provides a summary of the main indicators of carrying on a business. These are set out below alongside their application to the taxpayers circumstances: | Detailed Reasoning - Taxpayer: Significant commercial activity Not a significant commercial activity The activity is significant commercially, financially and in terms of work to be carried out The scale of the project with Council is for approval of 50 plus sub-divided lots Substantial funds have been spent on the development Purpose and intention of the taxpayer in engaging in the activity No purpose or intention of the taxpayer to carry on a business activity The taxpayer intends to carry on a business of land development The land was purchased solely for its development potential given the residential zoning Evidence of a business intention includes the taxpayer holding the Land on revenue account as business trading stock An intention to make a profit from the activity No intention to make a profit from the activity There is an intention to make a profit from the activity The taxpayer intends for the development activities to add value and more profit than would be the case without developing The activity is or will be profitable The activity is inherently unprofitable It is expected that the activity will be profitable, and it is undertaken with this expectation Repetition and regularity of activity Little repetition or regularity of activity The sole purpose of the taxpayer entity was to acquire, develop and subdivide the Land. Although it has not carried out other land developments, the individuals who established and control the taxpayer entity have had significant repetition and regularity of activity in property development Activity carried on similar to ordinary trade Activity carried on in an ad hoc manner The activities are carried on in a way common to a property development business. Plans are prepared, professionals are contracted and there is engagement with the local council, community and other stakeholders Feasibility studies have been undertaken, where relevant, for different development options The controllers have carried out activity relating to the land development as follows: • development design and financial feasibility aspects of the development • land development design, town planning management and construction • community consultation and engagement Activity organised and businesslike, systematic and records are kept Activity not organised in manner as normal business activity - records are not kept Development activities are carried out in a business-like, structured and systematic manner. Records and accounts are kept The taxpayer has recorded the relevant property in its accounts as trading stock The taxpayer is registered for GST, keeps records and submits quarterly BAS statements The taxpayer has carried out various businesslike and organised activities pursuant to developing the Land including: Activity size and scale Small size and scale The size and scale of the activity is not small. It is: The taxpayer acquired the Land with the intention of developing it into subdivided lots with dwellings on some lots (as house and land packages) and selling the balance after a staged subdivision. It is expected x lots per year will be sold and the whole estate will be sold in x years The business strategy is to do this in stages that are progressively released to the market Time spent by individual controllers on development activities ranges between a few hours per week to 16 hours per week Not a hobby, recreation or sporting activity A hobby, recreation or sporting activity No part of the Land is used for private or domestic purposes and there is no domestic dwelling on the Land The activities are not a hobby, recreation or sporting activity A business plan exists No business plan A business plan exists An investment feasibility analysis was undertaken showing expected cash flows, expenses and return on investment for developing the Land As part of the development process various documents and reports have been obtained or prepared including a: Commercial sales of product Sale of products to relatives and friends There will be commercial sales of the subdivided lots Has knowledge or skill Lacks knowledge or skill The individual controllers of the taxpayer have significant knowledge and skill from property industry experience. As demonstrated in the table above, the activities the taxpayer undertakes, as well as its plans and intentions, feature many of the factors that align them to carrying on a business including: The taxpayer was established for the sole purpose of acquiring, developing and subdividing the Land, the individual controllers have substantial experience, repetition and regularity of activity in property development. | Detailed Reasoning - Conclusion: After weighing up all of the relevant facts and the circumstances of this case, it is considered, the taxpayer is carrying on a business of property development. Income from the property development activities is assessable as ordinary business income under section 6-5 and deductions are allowable under section 8-1.

preparation of a plan of subdivision | actively seeking and consulting with and making applications to the local Council for a planning permit | preparing a plan of subdivision | actively consulting with and making applications to the local Council for a planning permit | expected to cost several million dollars | masterplan plan of subdivision | planning application to Council | a purpose and intention of carrying on a business | an intention and expectation of profit | the activity is carried on in a manner similar to ordinary trade for this type of activity | the activity is organised and businesslike. It is carried on in a systematic manner and records are kept | the size and scale of the activity is significant | it is not a hobby, recreation or sporting activity | there will be commercial sales of product | the directors of the Trustee have the necessary education, knowledge and skill. Where additional skills are needed professionals have been engaged to provide these