Private ruling: CGT - Main residence
Date of advice: 8 December 2016
Published: May 2017
Ruling period: 1 July 201X to 30 June 201X | 1 July 201X to 30 June 201X | 1 July 201X to 30 June 201X
Date scheme commenced: 1 July 201X


Relevant facts and circumstances: The Taxpayers own land and a dwelling (the property). The property was purchased in the early 1990s and has been the Taxpayers place of residence for the entire time they have owned it. The property is valued at around $X.X million. The Taxpayers wish to downsize their property now their children no longer live at home. They also wish to use the surplus area for investment purposes. The Taxpayers will sell the property to their family trust (the Trust). The transfer will take place for no value. The Trust has as beneficiaries the Taxpayers, their children and grandchildren. The Trust will demolish the dwelling. Then the Trust will subdivide the land into two. The Trust will build two new dwellings on the subdivided land. The building work will be carried out by an unrelated builder. The Taxpayers expect the builder to begin work in early 201X. The development is estimated to cost an amount. The development will be financed by loans from the taxpayers and supplemented with bank loans. The Taxpayers estimate the new dewellings will each be valued at a similar amount to the original dwelling. As soon as the development is complete, the Trust will transfer one dwelling back to the Taxpayers. The transfer will take place for no value. The Trust will not make a profit on the transfer. The Taxpayers will move into the dwelling as soon as they take ownership. The dwelling will become their main residence. The Taxpayers will have no other main residence during this period. The Trust will keep ownership of the remaining land and dwelling. The Trust will hold the dwelling as a long term investment for more than five years, collecting rental income. The Taxpayers and their associates have no history of prior property development


Reasons for decision: Summary: The scheme to acquire the dwelling from your associates, demolish and subdivide the land, transfer one new dwelling back to your associates and keep the remaining dwelling as a long term investment will be capital in nature rather than an isolated profit making undertaking or a business of property development. Both properties will be on the capital account. | Detailed Reasoning - Detailed reasoning: The subdivision, development and disposal of property can be either treated as on the revenue account, and taxed under section 6-5 of the ITAA 1997 (either as a business or an isolated profit making transaction), or on the capital account, and taxed as statutory income under the Capital Gains Tax (CGT) legislation. Whether the proceeds are treated as income or capital depends on the situation and circumstances of each particular case. | Detailed Reasoning - Carrying on a business of property development: The Commissioner's view on whether a taxpayer is carrying on a business is found in Taxation Ruling TR 97/11 (TR 97/11). To be engaged in a business, a taxpayer must hold a significant commercial purpose, have repetition and regularity of activity, significant size and scale, and organisation directed at making a profit. | Detailed Reasoning - Application of the law to your facts: The taxpayer and their associates lack scale, repetition of activity, or organisation directed at profit making. They are not engaged in a business of property development. | Detailed Reasoning - Isolated profit making transaction: Profits arising from an isolated business or commercial transaction will be ordinary income if the taxpayer's purpose or intention in entering into the transaction is to make a profit, even though the transaction may not be part of the ordinary activities of the taxpayer's business ( FC of T v. Myer Emporium Ltd 1987 163 CLR 199; 87 ATC 4363; 18 ATR 693) (Myer Emporium). Taxation Ruling TR 92/3 considers the principles outlined in the Myer Emporium case and provides guidance in determining whether profits from isolated transactions are assessable under section 6-5 of the ITAA 1997 as ordinary income. The Commissioner considers that the following matters (listed at paragraph 13 of TR 92/3) may be relevant in determining whether an isolated transaction amounts to a business operation or commercial transaction: (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 and 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. If a taxpayer makes a profit from a transaction or operation, that profit is income if the transaction or operation is not in the course of the business but: ● the intention or purpose of the taxpayer in entering into the profit-making transaction or operation was to make a profit or gain, and ● the transaction or operation was entered into, and the profit was made, in carrying out a business operation or commercial transaction. 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. The purpose will not be the subjective purpose as stated by the taxpayer, but the objective purpose, as discerned from the taxpayer's actions. | Detailed Reasoning - Capital gains tax: The CGT provisions are contained in Part 3-1 of the ITAA 1997. Broadly, the provisions include in your assessable income any assessable gain or loss made when a CGT event happens to a CGT asset that you own. CGT event A1 under section 104-10 of the ITAA 1997 happens if you dispose a CGT asset. A CGT asset is any kind of property or a legal or equitable right that is not property. | Detailed Reasoning - Application of the law to your facts: The taxpayer has acquired the property from their associates with the purpose of demolishing the existing dwelling, subdividing the land, building two new dwellings, transferring one dwelling to the associates and retaining the other as a long term investment earning rental income. The taxpayer will acquire the original dwelling from their associates for no value, and dispose of one of the new dwellings to their associates for no value. The taxpayer intends to spend as much on the development as the existing property is worth. Where an investment is greater the value of the existing asset, this is considered to be fundamentally transforming the asset, and is taken to be one indicator of a profit making intention. The purchase of an asset for the purpose of development would often be considered an indicator of a profit making undertaking, as would selling the dwellings after development at market value. However the transfer of property to and from the taxpayers associates at no value would instead tend instead to indicate that there was no profit making intention behind the arrangement. The taxpayer does not plan to and will not make a profit on the transfer to your associates, which is strongly indicative of no intention to make a profit. Neither the taxpayer nor their associates have been involved in property development before, and have no intention to be involved in it in the future. The scale of the property development is small, a simple two dwelling subdivision. The taxpayer intends to hold one of the new dwellings as an investment property for at least five years, earning rental income. Actually keeping the property for five years and renting it will also be a strong indicator of the capital nature of the scheme. When weighed together, the evidence strongly suggests that the transferred property is not part of a profit making scheme, and the retained property is intended to be a long term investment. The making of a profit is not considered to be the motivation in entering into the scheme. The development will be on the capital account. The transfer of one dwelling to the taxpayer's associates will constitute CGT event E7. If the taxpayer later decide to sell the retained investment property, after having held it for more than five years and earned rental income from it, that sale will also be considered capital. | Summary: When the taxpayer transfers the dwellings to the beneficiaries they will use the market value of the land and dwelling that they transfer to the beneficiaries for the purpose of working out their capital gain or loss on the transfer. | Detailed Reasoning - Detailed reasoning: The transfer of the land and new dwelling to the beneficiaries will be CGT event E7. Whenever event E7 occurs, the taxpayer will make a capital gain if the market value of the asset is more than its cost base. It makes a capital loss if the market value is less than the asset's reduced cost base. (s104.85 ITAA 1997). Any capital gain or loss should be included in the taxpayer's taxable income for the year of transfer. For the purpose of calculating the capital gain or loss, the taxpayer will also be considered to have acquired the original land and house for its market value at the time of transfer. CGT event E2 deems the first element of the asset's cost base and reduced cost base in the taxpayer's hands to be its market value at the time the asset is transferred. (s104.60 ITAA 1997).

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