Private ruling: Property development business
Date of advice: 9 February 2018
Published: June 2018
Ruling period: 1 July 2013 to 30 June 2018
Date scheme commenced: DDMMYY (settlement date)

Ruling: Q1: Is the Trust B operating the business property development? | A1: Yes.

Relevant facts and circumstances: ● On June 2013, Trust B was established with Company A as its trustee. ● Company A entered into a contract of sale for the purchase of the property as a trustee of Trust B. Final settlement of the property occurred on July 2013. ● Trust B submitted a development application to build units on the property. The approved Development Application stated demolition of existing structures and the construction of a residential flat building containing 26 residential apartments on the property. The existing dwelling on the property has been demolished. ● Trust B is part of the ABC Group. The ABC Group of entities are a group of related entities to Trust B that have previously undertaken property development activities. The ABC group has recently been involved in five other property developments. ● Company C, one of the entities within the ABC Group, has been engaged by Company A for the construction and development of the property held by Trust B. Company C has been in the business of construction and development since July 1996. Its main focus of work is in respect to completing refurbishments, new dwellings and private sector clients. ● The Trustee is responsible for marketing and selling the units and winding up Trust B when all resulting 26 units are sold. ● The construction of the units commenced around March 2017 and is expected to be completed around May 2018. ● Estimated profit for the whole development is $X.X million and approximate total construction costs is $X.X million.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 995-1.

Reasons for decision: Summary: Section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) defines a business as including any profession, trade employment, vocation or calling, but does not include occupation as an employee. The question of whether you are carrying on a business is a question of fact and degree. There are no rigid rules for determining whether the activity amounts to the carrying on of a business. The facts of each case must be examined. In Martin v FC of T (1953) 90 CLR 470 at 474; 5 AITR 548 at 551, Webb J said: The test is both subjective and objective; it is made by regarding the nature and extent of the activities under review, as well as the purpose of the individual engaging in them, and, as counsel for the taxpayer put it, the determination is eventually based on the large or general impression gained. However, the courts have developed a series of indicators that can be applied to your circumstances to determine whether Trust B is carrying on a business. Taxation Ruling TR 97/11 outlines the factors that need to be considered to determine if someone is carrying on a business. It was stressed in the ruling that no one indicator is decisive and there is often a significant overlap of these indicators. The factors are as follows: ● 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 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; ● Whether the activity is better described as a hobby, a form of recreation or a sporting activity. ● In your circumstances; ● Significant commercial purpose or character and intention to engage in business: Paragraph 29 of TR 97/11 provides that a way of establishing that there is a significant commercial purpose or character is to compare the activities with those of a taxpayer who is carrying on a similar activity that is a business. Trust B purchased the property for $2.05 million. It has applied for and received approved development application from the relevant authority for its development. Trust B has also completed the demolition of existing dwelling on the property. It has also engaged a professional construction company for the building of the development. The Commissioner considers Trust B’s activities to have a significant commercial purpose and character. The Commissioner also considers Trust B has more than a mere intention to engage in business. ● Purpose of profit and prospect of profit: Trust B has stated that it is expecting an estimated net profit of $1.4 million from the development. The Commissioners consider Trust B has a purpose of profit and a prospect of profit in engaging in this activity. ● Repetition and regularity: This is a one-off development for Trust B. However Trust B is part of ABC group, who is active in the property development industry. The group has been involved and is continuously engaged in several property development ventures of significant commercial character. Trust B’s activity demonstrated repetition and regularity. ● Carried on in a similar manner to that of the ordinary trade and planned, organised, carried on in a businesslike manner: Trust B has purchased the property, demolished the existing dwelling and engaged a related party construction company to commence construction of units It will be responsible for the marketing and selling the units. These actions demonstrated that the taxpayer has engaged in business and the activity is planned, organised and carried on in a businesslike manner. The activity was also carried on in a similar manner to that of the ordinary trade in that line of business. ● Size, scale and permanency of the activity: The Property was purchased for approximately $2.05 million. The total development and construction cost is estimated at $7.2 million. The net profit from the activity is estimated at $1.4 million. The size and scale of the activity indicates Trust B is carrying on a business. ● Hobby, form of recreation or sporting activity: The Commissioner considers that Trust B’s activity is not a hobby, a form of recreation or a sporting activity. The large and general impression gained after examining the activity in the light of all the indicators is that the activities of Trust B amounts to carrying on a business of property development.