Private ruling: Capital gains tax
Published: February 2014
Ruling period: Year ending 30 June 2014 | Year ending 30 June 2015 | Year ending 30 June 2016 | Year ending 30 June 2017 | Year ending 30 June 2018
Date scheme commenced: 1 July 2013

Ruling: Q1: Are the proceeds from the sale of the subdivided land considered a mere realisation of a capital asset for income tax purposes? | A1: Yes.

Relevant facts and circumstances: The trustee of the trust was established more than 20 years ago. Individual A is a director of the trustee company. Individual A is also the appointer and a beneficiary of the trust. Individual A gifted the land to the trust after 20 September 1985. The trust is not registered for GST. The trust has not carried on any business activities on the land since it was gifted and has not carried on any work on the land. The trust held the property mainly for the personal use and enjoyment of the land by the beneficiaries. When the trust acquired the land from individual A there were very few houses in the area. The surrounding area was mainly farms. The trust has lodged a development plan with the council in regard to the subdivision of the land and the X adjoining properties. It is expected that the council will issue a planning permit for the properties mentioned in the lodged development plan. The trust is considering subdividing the land into less than 50 lots and sell the lots either individually or all of them to one purchaser. It is expected that the project will be in X stages and the trust does not have a business plan for the project. No lots have been realised as yet. No funding has been arranged or organised at this point of time. The trust would borrow a minimum amount for the development of the land. The trust anticipates a maximum borrowing of $X to complete stage one and expects the project to be self-funding. The trust has not prepared any cash flows or detailed budgets yet. It has been recommended that the trust use the 'Cash Flow Manager' software to keep records. The trust intends to carry out the absolute minimum amount of clearing and earth works as required by the statutory bodies. The trust will not construct any buildings on the land. There is no site office or any other buildings erected on the land. The trust intends to appoint surveyors/engineers to project/manage the total project/development. They will be responsible for engaging and organising all contractors and the trust will have minimal involvement (if any). The trust will not be actively involved with the sale and/or marketing of the lots and instead will list the lots for sale with local agents. The trust does not intend to undertake any sort of concerted advertising or be involved in any way. The trust has no business organisation, no manager, no office, no secretary, and no letterhead. The trust has not previously been involved in subdivision of development of property in the past. The trust has no plans to undertake any further developments.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5

Reasons for decision: Detailed Reasoning - Detailed reasoning: 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 Income Tax Assessment Act 1997 (ITAA 1997) as ordinary income. If a taxpayer makes a profit from a transaction or operation, that profit is income if the transaction or operation is not in the course of the taxpayers business but: · the intention or purpose of the taxpayer in entering into the profit-making transaction or operation was to make a profit or gain, and · the transaction or operation was entered into, and the profit was made, in carrying out a business operation or commercial transaction. 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 contrast, paragraph 36 of TR 92/3 notes that the courts have often said that a profit on the mere realisation of an investment is not income, even if the taxpayer goes about the realisation in an enterprising way. However, if a transaction satisfies the elements set out above it is generally not a mere realisation of an investment. Miscellaneous Taxation Ruling MT 2006/1 provides a list of specific factors relevant to isolated transactions and sales of real property. If several of the factors are present, it may be an indication that a business or an adventure or concern in the nature of trade is being carried on. These factors are as follows: § there is a change of purpose for which the land is held; § additional land is acquired to be added to the original parcel of land; § the parcel of land is brought into account as a business asset; § there is a coherent plan for the subdivision of the land; § there is a business organisation - for example a manager, office and letterhead; § borrowed funds financed the acquisition or subdivision; § interest on money borrowed to defray subdivisional costs was claimed as a business expense; § there is a level of development of the land beyond that necessary to secure council approval for the subdivision; and § buildings have been erected on the land. No single factor is determinative; rather it will be a combination of factors that will lead to a conclusion as to the character of the activities. | Detailed Reasoning - Application to your circumstances: In this case, the property was gifted to the trust. The trust has not previously been involved in the subdivision or development of land. The trust intends to carry out the absolute minimum amount of clearing and earth works as required by the statutory bodies and will not construct any buildings on the land. Having regards to your circumstances and the factors outlined above, we consider that any proceeds from the sale of the subdivided land will represent a mere realisation of a capital asset which will fall for consideration under the capital gains tax provisions of the ITAA 1997.