Private ruling: Capital vs revenue - disposal of a block of units
Date of advice: 18 June 2021
Published: August 2021
Ruling period: Year ending 30 June 2020
Date scheme commenced: 1 July 2019

Ruling: Q1: Will the gross proceeds or net profit from the sale of the Property by the Trustee constitute ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No The proceeds or profit from the sale of the property will not be included in your assessable income in accordance with subsection 6-5(1) of the ITAA 1997. Generally, when an asset is sold, the key question to be determined is whether the ultimate sale is a 'mere realisation', or whether it is a disposal either in the course of business or as part of a profit-making undertaking or scheme. A sale that is more than a 'mere realisation' will be on revenue account and proceeds will generally be assessable as either income from the carrying on of a business or income from a profit-making undertaking or scheme. Where the sale is a 'mere realisation' the sale is on capital account to which the capital gains tax (CGT) rules will generally apply. These proceeds are not ordinary income. | Q2: Will the gain on the possible sale of the Property by the Trustee be assessable as statutory income as a realisation of a capital gains tax (CGT) asset? | A2: Yes You held the property until the market price rose and then sold it and therefore you are not engaging in an adventure in the nature of trade or carrying out a profit-making scheme. The situation is not altered by the fact that you carried renovations and repairs to enable the property to be sold to its best advantage. The proceeds resulting from the mere realisation of a capital asset are not income in accordance with ordinary concepts, even though the realisation is carried out in an enterprising way so as to secure the best price.

Relevant facts and circumstances: Several years ago the Company (after 19 September 1985), as Trustee for the Trust, purchased a property with the intent to make a high investment return. While waiting for the value of the property to rise, it was decided to lease the property out in order to meet the mortgage and other costs from the rental income. Sometime later the property manager advised the property required renovation in order to attract desirable tenants and increase the investment return. The Company proceeded with the renovation however after the renovation started the builder advised there was a number of structural issues including large cracks. Asbestos was also found to be present in the building. External walls remained intact however major internal walls and pillars were required to be replaced to comply with State Government regulations and the renovation went over budget. After the renovations were completed the property was available for rent however due to high tenant turnover and irregular rental income, the Company experienced difficulties in meeting the loan repayments. Eventually there was a rise in the real estate market and the Trustee decided to sell the property at a profit to meet the loan amount as the renovation cost more than the budget. The entity has not conducted any regular and repetitive transaction of this nature before this.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 70-5(2) | Income Tax Assessment Act 1997 section 70-10 | Income Tax Assessment Act 1997 section 995-1 | Income Tax Assessment Act 1997 section 11-550


This ruling applies for the following period: