Private ruling: CGT - disposal - mere realisation
Date of advice: 8 February 2017
Published: July 2017
Ruling period: Year ended 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Q1: Will the proceeds received from the sale of Lot X be assessable pursuant to section 6-5 or section 15-15 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No | Q2: Will the proceeds received from the sale of Lot X be assessed under the capital gains tax provisions of the ITAA 1997? | A2: Yes Issue 2 | Q3: Was the sale of Lot X treated correctly for GST purposes? | A3: Yes, you have correctly accounted for GST on the sale of the property.

Relevant facts and circumstances: X family members consolidated and subdivided X properties and built X units in X stages. Property one was originally purchased by X family members, A and B, prior to 20 September 1985 and was used as their primary place of residence until 20XX when they moved into property two. Property two (next door to property one) was purchased by the X family members, A, B, C and D, in 20XX. The X parties each owned a X% interest in property two. Stage 1 involved consolidating the two properties and dividing it into X. Lot A - to be used by D as their primary residence Lot B - to be gifted/sold by A and B to another family member to use as their primary residence Lot C - to be used by A, B and C Stage 2 involved dividing Lot C into X. Lot C - to be used by C as their primary residence Lot X - to be used by A and B as a rental property Lot Y - to be used by A and B as their primary residence Stage 1 has been completed with not in common ownership (NICO) titles issued for Lots A, B and C. A partition agreement was made and at the completion of development, Lot A (X% of property two) will be owned by D and Stage 2 - Lot C (X% of Stage 1 - Lot C) will be owned by C. A private ruling (Authorisation Number 1012223057969) was issued addressing the tax consequences of Stage 1 and 2 as described above. The private ruling was issued in 20ZZ. Due to higher costs for the development that anticipated, A and B sold Lot X to reduce debt. Lot X was subdivided from property one, which was A and B primary residence from before 20 September 1985 to 20XX. The first subdivision was registered on X MM 20XX The second subdivision was registered on X MM 20XX The Land Title was issued on X MM 20XX The building was completed on X MM 20XX Certificate of occupancy issued on X MM 20XX Contract of sale (Lot X) X MM 20XX Settlement date (Lot X) X MM 20XX The original intention was that Lot X would be a rental property and this property was held in vacant possession for twelve months after completion. A was employed. B was employed. A and B are not in the business of property development and have no intention of completing any further property development activities. When the Lot X was sold, A and B applied for an Australian Business Number (ABN), a partnership tax file number (TFN) and registered for GST. A and B calculated the relevant GST and paid this amount in 20XX.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 15-15 | Income Tax Assessment Act 1997 Part 3-1 | A New Tax System (Goods and Services Tax) Act 1999 section 9-5 | A New Tax System (Goods and Services Tax) Act 1999 section 40-75

Reasons for decision: Detailed Reasoning - Issue 1: Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that assessable income includes income according to ordinary concepts. Typical examples of ordinary income include salary and wages, proceeds from carrying on a business, rent, interest and dividends. Profits from the sale of a capital asset are generally not income, although they may be assessable as statutory income under the capital gains provisions. Section 15-15 ITAA 1997 provides that your assessable income also includes profit arising from the carrying on, or carrying out, of a profit-making undertaking or plan. Subsection 15-15(2) goes on to say that this section does not apply to a profit that is assessable as ordinary income under section 6-5 or arises in respect of the sale of property acquired on or after 20 September 1985. Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income (TR 92/3) deals with determining whether profits on isolated transactions are income. According to TR 92/3, a profit from an isolated transaction is generally income if the intention or purpose of the taxpayer in entering into the transaction was to make a profit or gain; and the transaction was entered into, and the profit was made, in the course of carrying on a business or in carrying out a business operation or commercial transaction. In your case, your intention had always been to hold Lot X as a rental property and you held the property in vacant possession for twelve months after completion of the development. You have no history of property development and you undertook this development with the intention of creating primary residences for yourself and your X children as well as a property for rental purposes. Due to additional development costs, a decision was subsequently made to sell Lot X rather than hold it as a rental property in order to reduce debt incurred. As your intention or purpose in building the property was not for resale to make a profit or a gain, the activity is not considered to be an isolated profit making transaction and the proceeds from the sale of Lot X are not included in your ordinary income. Instead, any capital gain or loss made on the disposal of the property will be assessed under the capital gains tax provisions in Part 3-1 of the ITAA 1997. | Detailed Reasoning - Issue 2: In the previous private ruling issued 20ZZ, we concluded: “None of the co-owners of the properties are required to be registered for GST and there are no GST consequences from the development if there is no intention to sell the properties within five years.” We also provided a copy of GSTR 2003/3 which discusses the sale of new residential premises that are sold within five years of construction. We note when applying for the previous private ruling, the owners of Lot X were intending to conduct an enterprise of renting, that supply was input taxed and was not included in the calculation of GST turnover. Therefore, the owners were not required to be registered for GST. When the enterprise of renting residential premises ceased and the premises were to be sold, there was a change of intention within five years. Pursuant to the previous ruling issued on 20ZZ, the owners of Lot X would be considered to be carrying on an enterprise and again there arose a need to consider if your current or projected GST turnover exceeded the turnover threshold. When the sale of the property was included in your calculation of projected GST turnover, you exceeded the threshold and correctly registered for GST. The sale of new residential premises is a taxable supply if all the requirements of s9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) are met. New residential premises is defined in section 40-75 of the GST Act and it includes residential premises that is rented for less than 5 years. The supply of the property was correctly treated as a taxable supply and there is no adjustment required.