Private ruling: Capital gains tax - sale of investment property
Date of advice: 28 July 2025
Published: 29 September 2025
Ruling period: Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Will the proceeds from the sale of the Property give rise to assessable income under either section 6-5 or section 15-15 of the Income Tax Assessment Act 1997 (ITAA 1997), on the basis that the transaction constitutes the profit from an isolated transaction or the profit arising from the carrying on or carrying out of a profit-making undertaking or plan? | A1: No. | Q2: If not, will the proceeds be assessable on any other basis other than under the capital gains tax (CGT) provisions? | A2: No. Profits from isolated transactions can be ordinary income and therefore be assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997). Additionally, section 15-15 of the ITAA 1997 includes in assessable income the profit arising from the carrying on or carrying out of a profit-making undertaking or plan. Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income (TR 92/3) provides guidance in determining whether profits from isolated transactions are income and therefore assessable under section 6-5 of the ITAA 1997. The term 'isolated transactions' refers to: 1) those transactions outside the ordinary course of business of a taxpayer carrying on a business; and 2) those transactions entered into by non-business taxpayers. However, where a taxpayer has merely enhanced or preserved the value of a capital asset, without entering into a commercial undertaking to profit from its sale, the gain will generally not be on revenue account. In this case, it is considered that the proceeds from the sale of the Property will not constitute an isolated profit-making transaction or the profit arising from the carrying on or carrying out of a profit-making undertaking or plan. Instead, the proceeds will represent the mere realisation of a capital asset. Consequently, the proceeds will not be assessable under either section 6-5 or section 15-15 of the ITAA 1997. The proceeds will be assessed on capital account under the capital gains tax provisions contained in Parts 3-1 and 3-3 of the ITAA 1997.

Relevant facts and circumstances: The Trustee of a trust (the Trust) acquired a residential dwelling situated on a suburban block of land (the Property). The Trust was set up for investment purposes, which eventuated in the acquisition of the Property. The Property was acquired by the Trustee for the purpose of holding as a long-term investment to generate rental income and to benefit from future capital growth. In selecting the Property, the Trustee specifically sought real estate with development potential, holding the view that such attributes generally correlate with stronger capital appreciation due to increasing scarcity and land-use constraints in the market. The acquisition of the Property was financed solely by way of capital injections into the Trust from the two directors of the trustee company (the Company). Following settlement, the Trustee appointed a real estate agent to manage the Property. The Property has remained available for rent and has been continuously leased since that time, with only minimal vacancy between tenancies. The Trust has consistently derived rental income and has incurred ongoing expenses including repairs and maintenance. During the initial phase of ownership, the Company directors were advised by an architect that the Property's location within a designated activity centre zone presented an opportunity for higher-density residential development. However, neither of the directors possessed experience in residential property development and did not proceed with any action at that time. To the best of the Company directors' knowledge, none of their associates, including family members or business connections, have any property development experience. About a year after the purchase, the Trustee began to consider whether there may be a possibility to realise greater returns through construction of multiple dwellings on the Property, by adopting a strategy similar to other nearby developments. The Trustee decided to apply for a planning permit as a preliminary exploratory measure. To support the planning permit process, the Trustee engaged various professionals to provide guidance on the proposed development. Due to the potential for constructing multiple dwellings, it was decided to register for GST. The Trustee's accountant advised that registration for GST would be prudent for two key reasons: 1) The potential to make taxable supplies through the sale of newly constructed dwellings; and 2) Should development proceed, retrospective GST registration would entail significant compliance costs, including the amendment of prior Business Activity Statements, trust tax returns, and financial reports for up to three to four years. A planning permit was subsequently granted. The Trustee ultimately decided not to proceed with any development. This decision was based on the following factors: 1) The COVID-19 pandemic led to severe disruptions in construction supply chains and a material increase in building costs, rendering the project uneconomical. 2) While the planning permit maximised potential density in accordance with applicable zoning, the resulting design was of a scale inappropriate for a first-time development project. The Company directors had no prior experience in residential construction, and the complexity and size of the proposed development was considered beyond their capability. 3) After consultations with development professionals, the directors were advised against proceeding with the project, given the significant complexity, commercial risk, and stress involved. Following the decision not to proceed with construction, the Trust has continued to lease the Property to the existing tenant. In recent months, the Company directors have observed a shift in broader economic conditions, including a reduction in interest rates and a rise in holding costs such as land tax. These changes have impacted the overall net return from holding the property as a passive investment. After assessing the ongoing financial performance of the property, the directors have made the decision to sell the property and redeploy capital into other long-term investments that will offer improved yield potential. The Property will be placed on the open market through a real estate agent. No buyer has yet been identified or approached.

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 | Income Tax Assessment Act 1997 Part 3-3