Private ruling: Sale of land
Published: July 2012
Ruling period: Year ended 30 June 2012 | Year ending 30 June 2013 | Year ending 30 June 2014 | Year ending 30 June 2015 | Year ending 30 June 2016
Date scheme commenced: After 30 June 2004

Ruling: Q1: Are the proceeds from the sale of land assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997). | A1: No.

Relevant facts and circumstances: Vacant land was purchased as a passive investment. It was reconfigured from two lots to one lot to reduce the local council rates. The land went to auction in a later year and the successful bidder was a corporate entity with its director being one of the original purchasers. The corporate entity lodged a development application for some units on the land which was approved. The land was later sold to another corporate entity which was your trustee with the director of the corporate entity being one of the original purchasers. There is no intention to develop the land. It was always intended to sell the land with the development approval in place to maximise the return.

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

Reasons for decision: Summary: Section 6-5 of the ITAA 1997 includes in a taxpayer's assessable income, where the taxpayer is an Australian resident, all ordinary income derived by the taxpayer both in and out of Australia during an income year. Ordinary income is defined as income according to ordinary concepts. Profits on the sale of land can be income according to ordinary concepts, or a profit making undertaking or plan, if your activities become a separate business operation or commercial transaction. In determining whether a transaction amounts to a business operation or commercial transaction, the Commissioner's guidelines are set out in paragraph 13 of Taxation Ruling TR 92/3. These include: (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 arid 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 consideration of the factors from paragraph 13 of TR 92/3 it could not be concluded that you carry on a business operation or commercial transaction of land development. Paragraph 35 of TR 92/3 states; a profit from an isolated transaction is considered to be income when both of the following elements are present · 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. As you are not considered to be carrying on a business operation or commercial transaction of land development your intention or purpose in entering into the transaction to make a profit or gain as described in paragraph 35 of TR 92/3 needs to be considered. Whether a profit from an isolated transaction is income according to ordinary concepts depends on the circumstances of the case. TR 92/3 states in the following paragraph; 36. 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. The expression 'mere realisation' is used to contradistinguish a business operation or a commercial transaction carrying out a profit-making scheme ( Myer at 163 CLR 213; 87 ATC 4368-4369; 18 ATR 699-700). If a transaction satisfies the elements set out in paragraph 35 it is generally not a mere realisation of an investment. 37. In considering whether a profit is assessable income, it is important not to apply the principles enunciated in Myer as if they are statutory tests. They are general principles, not conclusive tests, to be considered in deciding whether a profit is income. Taxpayer's intention or purpose 38. The intention or purpose of the taxpayer (of making a profit or gain) referred to in Myer is not the subjective intention or purpose of the taxpayer. Rather, it is the taxpayer's intention or purpose discerned from an objective consideration of the facts and circumstances of the case. This is implicit from what the Court said, in the passage quoted in paragraph 30 above: '..it may be said that if the circumstances are such as to give rise to the inference that the taxpayer's intention or purpose in entering into the transaction was to make a profit or gain, the profit or gain will be income..'. (R.W. Parsons, 'Income Taxation In Australia', The Law Book Company Limited, 1985 at p. 202 also refers to ...the objective inference of profit-purpose, which may be thought to be required by the ordinary usage notion [of an isolated business venture]'.) 39. If the taxpayer is a company, the purposes of those who control it are its purposes ( Whitfords Beach at 150 CLR 370; 82 ATC 4039; 12 ATR 701). 41. The taxpayer must have the requisite purpose at the time of entering into the relevant transaction or operation. If a transaction or operation involves the sale of property, it is usually necessary that the taxpayer has the purpose of profit-making at the time of acquiring the property. | Detailed Reasoning - Intention or purpose: No actual development has taken place on the land since you owned it and none since it was first purchased. Example 2 in TR 92/3 shows the taxpayer was not a property developer and acquired a property and sold it three years later at a large profit. The fact that a profit is made doesn't necessarily indicate that the profit is income. In your case you have no other undertaking in property subdivisions or development. The history of the ownership of the land shows your intention to make a profit or gain when selling the land. The evidence shows that the objective intention was to sell the land to the best advantage and this is supported by several entities under the control of the original purchaser holding the land through several entities for many years. Paragraph 249 of Miscellaneous Tax Ruling MT 2006/1 indicates that having control of a property for many years would not constitute being in control of a trading asset as a trading asset is generally dealt with or traded within a short period of time after acquisition. The profit on the sale of the property would match that as described in paragraph 36 of TR 92/3 where 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. The land was initially bought as a passive investment and this position was protected throughout the land's sale and transfer activity since initial purchase. It cannot be inferred that either of the conditions of paragraph 35 of TR 92/3 have been met so as to conclude that the sale of the land is an isolated transaction. Therefore the Commissioner has considered the facts involved and concluded that your activity as described does not amount to an isolated profit making transaction. As a result the proceeds are not considered to be ordinary income and not assessable under sections 6-5 of the ITAA 1997. They represent a realisation of a capital asset which will fall for consideration under the CGT provisions in Part 3-1 of the ITAA 1997.

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