Private ruling: Capital vs revenue
Date of advice: 27 March 2018
Published: June 2018
Ruling period: Year ended 30 June 2017 | Year ending 30 June 2018
Date scheme commenced: 1 July 2016

Ruling: Q1: Will the anticipated gross proceeds or profit realised from the sale of the Intangible Assets be assessable income pursuant to section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. | Q2: Will the anticipated gain made from the sale of the Intangible Assets be considered a Capital Gains Tax (CGT) event pursuant to Part 3-1 pf the ITAA 1997? | A2: Yes.

Relevant facts and circumstances: You are a unit trust with a corporate trustee. You run a business. You own the business assets required to operate the business, but do not own the premises. The premises are owned by a related party. A, B and C each own an interest in you via their family discretionary trusts. You have been involved in the childcare industry since prior to 2008. You have always intended to hold your centre for the long term. You began planning for the business in 20XX. The site was purchased with a view to it becoming the headquarters of the business group. It was planned to be utilised as a head office for the long term as it was easily accessible for the key head office staff. In early 20YY you began advertising to the public that the business would be opening soon. In mid 20YY a previous business held by you was sold to Company A. This sale was to, primarily, fund the set-up of your new business, repay bank debts and to make superannuation contributions. From 20YY onwards A, B and C held concerns that the fast pace at which competitors such as Company A and Company B grew would cause issues. In early 20ZZ you began advertising an opening date of early 20AA. Due to unexpected delays beyond your control the opening date for the business had to keep getting pushed back. The centre finally opened in early 20BB. In early-to-mid 20AA you entered into discussions with Company A for the potential sale of your business. However, it didn’t proceed. After the talks with Company A fell you through you entered into formal and informal discussions to sell to Company B. By the end of the discussions you had entered into a formal agreement to sell the assets of the business. The business assets owned by you in relation to the business were intangible assets.

Relevant legislative provisions: Income Tax Assessment Act 1997 Part 3-1 | Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 6-10 | Income Tax Assessment Act 1997 Section 102-5 | Income Tax Assessment Act 1997 Section 104-10

Reasons for decision: Summary: Profits from the sale of an asset can be treated in at least three ways for taxation purposes: (1) As ordinary income under section 6-5 of the ITAA 1997, as a result of carrying on a business of property development, involving the sale of the asset as trading stock. (2) As ordinary income under section 6-5 of the ITAA 1997, as a result of an isolated commercial transaction entered into by a non-business taxpayer or outside the ordinary course of business of a taxpayer carrying on a business. (3) As capital gains under Part 3-1 and Part 3-3 of the ITAA 1997, from the mere realisation of a capital asset. The term 'business' ordinarily refers to trade engaged in on a regular or continuous basis. Whereas an isolated (one-off) commercial transaction does not amount to a business but has the characteristics of a ‘business deal'. Taxation Ruling TR 92/3 explains, for an isolated commercial transaction to occur, it is usually necessary the taxpayer has the purpose of profit-making at the time of acquiring the property and that the property has no use other than as the subject of trade. The mere realisation of a capital asset was described in Commissioner of Taxes v Melbourne Trust Limited [1914] AC 1001 as “liquidating or realising the old assets”. In The Alabama Coal, Iron, Land and Colonization Co Ltd v Mylam (1926) 11 TC 232, a commercial transaction was distinguished from a mere realisation as “there must be something in the nature of buying at any rate, and not merely selling, which is mere turning your property into money''. In the High Court of Australia case of Federal Commissioner of Taxation v NF Williams 72 ATC 4188; (1972) 127 CLR 226, at ATC 4194-4195; CLR 249, Gibbs J explained mere realisation of land as follows: An owner of land who holds it until the price of land has risen and then subdivides and sells it is not thereby engaging in an adventure in the nature of trade, or carrying out a profit-making scheme. The situation is not altered by the fact that the landowner seeks and acts upon the advice of an expert as to the best method of subdivision and sale or by the fact that he carries out work such as grading, levelling, road-building and the provision of reticulation for water and power to enable the land to be sold to its best advantage. The proceeds resulting from the mere realization of a capital asset are not income either in accordance with ordinary concepts…even though the realization is carried out in an enterprising way so as to secure the best price… In the Federal Court of Australia case of Casimaty v Federal Commissioner of Taxation 97 ATC 5135, at 97 ATC 5152, Ryan J described a salient characteristic of the mere realisation of land as follows: …[to not] undertake any works on, or development of, the land beyond what was necessary to secure the approval by the municipal authorities of the successive plans of subdivision and enhance the presentation of individual allotments for sale as vacant blocks. In distinguishing mere realisation from a commercial transaction, Justice Ryan further said: Had he constructed dwelling houses, internal fencing or other improvements, it would have been easier to impute to him an intention to carry on a business of land development and improvement. In your case, you are not in the business of buying and selling businesses. You are in the business of operating them. The gain or loss from the disposal of the intangible assets associated with the business will be treated as a mere realisation of a capital asset because the assets were used in your business. Accordingly they will be assessable under Part 3-1 of the ITAA1997 when the sale of the business is complete.