Private ruling: Disposal of land
Date of advice: 23 April 2026
Published: 13 July 2026
Ruling period: 1 July XXXX to 30 June XXXX

Ruling: Q1: Will the Taxpayers' proceeds from the sales of the Land under the terms of the Development Agreement (DA) be subject only to the CGT provisions set out in Part 3-1 and Part 3-3 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No - the profit or gain from the disposal of the Land under the terms of the DA is considered income pursuant to section 6-5 of the ITAA 1997.

Relevant facts and circumstances: The Taxpayers acquired the Land as equal tenants in common after 20 September 1985 for $X. The Land The Land was purchased because it adjoined Property A and Property B. The acquisition of the Land allowed for boundary realignments between Property A and the Land and Property B and the Land to increase the land availability of Property A and Property B - to support the use of those premises for commercial purposes. Property A has been held by Trust A - a trust controlled by the Taxpayers. Property A has been leased to a non-related entity for use in the conduct of its business. It was purchased on XXXX and the shed building developed in XXX. This property has been held on capital account. The Partnership acquired Property B for commercial purposes - Trust A has a X% interest in the Partnership. Property B was purchased as vacant land on XXXX and developed in the XXXXs into X commercial lots under body corporate. The property was developed with the intention of selling. A body corporate structure was established. X lots of the X lots are held by the Partnership. These lots are leased to unrelated parties and held on capital account. The residue of the Land that was not required for the boundary realignment with respect to Property A and Property B was acquired for land banking (i.e. an investment strategy, to acquire land and hold it on a long-term basis with no specific purpose in mind - for potential future opportunities). The Taxpayers have held the Land on capital account for income tax purposes. Land zoning and market value The zoning of the Land, at the time of acquisition, was Future Urban. No rezoning applications have been made since the acquisition of the Land and no rezoning request was necessary prior to making the development application with respect to the DA. As result of changes to council planning policies/ codes over a period of time (over decades), the Land had the requisite zoning classification (i.e. Medium Density Residential) for the purposes of the DA. An application for the Land to the Council in XXXX to clear vegetation identified as weed species in accordance with Council guidelines and incidentally to identify any potential development of the site. During the period of ownership, the Land has not been used in any way by the Taxpayers other than for the purposes of boundary realignments and the property development that is the subject of the DA. This Land has been vacant since acquisition (noting the boundary realignments). The Land was valued at $X by a Valuer on XXXX. The valuation report sets out the following details: Prepared For Developer Instructing Party Taxpayers' child Purpose of Valuation Transfer (Stamp) Duty Interest Valued Unencumbered estate in fee simple subject to vacant possession. Basis of Assessment Market Value 'As Is' Land Area X Property Description The subject property comprises an X square metre, ... The site is considered to have a developable area of approximately X square metres, with X square metres dedicated for communal open space. Development of the Land The Taxpayers have not considered or attempted to sell the Land en globo as undeveloped vacant land has a lower value. The Developer is 100% owned by Company A as trustee for Trust B. The sole director of the Developer is the Taxpayers' child. The Taxpayer and the Developer entered into the DA. DA The key terms of the DA are as follows. The broad terms and purpose of the DA are set out in the Recitals: A. The Landowner is the registered owner of the Land, free from any Encumbrance. B. The Developer has expertise in built form development, and has expended funds in feasibility studies, consultant's fee and other expenses in relation to progressing the development. C. The Landowner has determined to enter into an agreement with the Developer pursuant to which the Landowner will receive the market value of the Land if it were sold undeveloped plus reimbursement of cash contributed, and the Developer will develop the Land and procuring the sale of the resultant Dwellings, on the basis set out in this agreement. D. The Landowner will take a passive role in the Development and will not be entitled to any profits from the Development. E. The Landowner has agreed to appoint the Developer to appoint and liaise with consultants and undertake works to develop the Land in such manner as the Developer considers appropriate to permit realisation of the Development to best advantage, on the basis all proceeds of sale of the Dwellings shall be applied as per Clause 3 and 10 of this document. F. The parties wish to record their agreement in writing. The Developer intends to develop the Land, which is to construct Dwellings on the Land, in accordance with the Development Program, being a development program prepared for the Project, which means carrying out the Development Activities on the Land by the Developer as updated and amended from time to time, which means: • designing the Proposed Development in respect of the Land in accordance with the Development Program; • obtaining all the necessary Approvals, meaning all Development Approvals, authorisations, licences, permits, approvals and consents of and from any Government Agency which are necessary or desirable to enable the parties to carry out the Project for the Proposed Development; • complying with conditions of any Approvals; • registering one or more plans at the Land Titles Office, Department of Natural Resources & Mines; • creating a community title scheme in respect of the Land and establishing the Body Corporate for the community title scheme; • giving notice to any existing Tenants on the Land to vacate the Land when necessary to enable the Proposed Development to proceed to construction; • marketing and settling the sale of the Dwellings; and • anything incidental to the matters referred to above. The Dwellings are the residential dwellings which will be constructed on the Land over the course of the Project. The Developer will supervise and manage the Development Activities and the Project as the Developer considers appropriate. The Taxpayers' role under the DA includes: • Granting full and unrestricted access to the Land to the Developer and Contractors (all town planners, valuers, environmental experts, engineers, excavators, civil works contractors, tradesmen, consultants, real estate agents and all other relevant persons that may be necessary to carry out the Development Activities and appointed by the Developer for that purpose) to implement the Project. • Executing any act or document the Developer may request to enable it to implement the Project. • Executing the power of attorney (see below). • To do any other things in accordance with the DA such as matters relating to receipts, outgoings, liabilities, warranties and indemnifications. At the same time as entering into the DA, the Taxpayers entered into a power of attorney with the Developer that allows the Developer to execute acts and documents necessary to implement the Project - including the power to sign any transfer and other document that must be signed by the Landowner to complete the Landowner's obligations as seller under a contract for the sale of a Dwelling. The Taxpayers are responsible for Outgoings (rates or charges levied on the Land by any Government Agency (for example, council rates, water rates and fire services levies) and land tax levied on the Land by any Government Agency) up to the Commencement Date (XXXX). All Project costs (broadly, all third-party costs, fees and outgoings to carry out and complete) the Project, which are not able to be met from the Landowner Contribution, will be borne by the Developer. Landowner Contribution means: • The contribution of the Land at an agreed value of $X being the market value of the Land if it were sold undeveloped as at the Commencement Date, plus • A financial contribution of $X on or before X, ­ being a total contribution of $X. The Taxpayers are using their own funds in the amount of $X to assist with the funding of the Project and minimising interest charges with respect to the cost of early third party provider civil works. Funding for the Project will, if required, be provided from the Developer Financial Contribution, that is: Account or the amount paid by the Developer direct or on account of any Project Costs pursuant to clause 7.1, which the Landowner acknowledges will or may be funded through the Loan A. Loan A means the loan by the Landowner (or their related entity or entities) which were on-lent to the Developer to fund the Developer Financial Contribution. That is, any funding of Loan A by the Taxpayers will be in addition to the $X they have contributed Loan A relates to the funding of dwellings. Loan A is a bank loan based on the value of relevant accumulated assets. The Taxpayers did not contribute any funding to this loan. Any interest payable on the Loan A is capitalised on the loan. The loan will be repaid by the Developer including interest. Scope of Project The Proposed Development means the construction of X Dwellings on the Land in X stages including the creation of a Community Titles Scheme in respect of the Land in accordance with the Development Program for the Project. The Project is expected to be completed between XXXX-XXXX. Payment under the DA Pursuant to the application of Clause 3 of the DA, the maximum the Taxpayers will receive is the agreed market value of the Land if it were sold in an undeveloped state on XXXX and the financial contribution (which totals $X). That is, the Taxpayers are entitled to receive repayment of the land value and loan amount on a pro rata basis from the proceeds of sale of each property according to clause 3.1 - upon the eventual sale of all X properties, they will receive $X in respect of the land value, plus an additional $X representing repayment of the Taxpayers' financial contribution (interest-free): 3. SALE OF DWELLINGS 3.1. The parties agree that from the Gross Proceeds of Sale of the Dwellings: (a) The Landowner shall be entitled to receive the Landowner Contribution of $X payable in equal amounts on the settlement of the sale of each of the Dwellings with the amount payable on each sale of each Dwelling being calculated as follows: A = $X ÷ B Where: A = the instalment of the Landowner Contribution payable on the sale of a Dwelling B = the number of Dwellings included in the Completed Project. (b) the Developer shall be entitled to receive the balance pursuant to clause 10. ...

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 Part 3-1 | Income Tax Assessment Act 1997 Part 3-3

Reasons for decision: Detailed Reasoning - Income tax treatment of the sale of land: Profits or gains made from the disposal of land can be assessed for income tax purposes in a number ways, including: • as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997), resulting from: ­ carrying on a business; or ­ an isolated or commercial transaction, by a non-business taxpayer or outside the ordinary course of business of a taxpayer carrying on a business, that was entered into with a profit-making intention; or • as statutory income pursuant to the capital gains tax (CGT) provisions in Part 3-1 and 3-3 of the ITAA 1997 (section 6-10 of the ITAA 1997) Whether the sale of land is a mere realisation of an asset, or whether it is a disposal either in the course of business or isolated business or commercial transaction, is to be determined by examining and weighing all the relevant facts and circumstances taken as a whole. | Detailed Reasoning - Profits or gains made in the ordinary course of business: Taxation Ruling TR 92/3 - Income tax: whether profits on isolated transactions are income (TR 92/3) sets out the Commissioner's view on the application of the principles established in Federal Commissioner of Taxation v The Myer Emporium Ltd (1987) 163 CLR 199 ( Myer ). Paragraph 32 of TR 92/3 states that a profit or gain made in the ordinary course of a business includes: • a profit or gain arising from a transaction which is itself a part of the ordinary business of a taxpayer (judged by reference to the transactions in which the taxpayer usually engages); and • a profit or gain arising from a transaction which is an ordinary incident of the business activity of the taxpayer, although not a transaction entered into directly in its main business activity. In determining whether profits or gains made from the disposal of real property are made in the ordinary course of business, one must establish if a taxpayer is carrying on a business and what the nature of the business is. The definition of 'business' for income tax purposes is wide and includes any profession, trade, employment, vocation or calling, but does not include occupation as an employee (subsection 995-1(1) of the ITAA 1997). Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? (TR 97/11) sets out the matters that Commissioner considers are relevant in determining whether a taxpayer is carrying on a business, and the principles set out therein can be applied in various contexts. Specifically, paragraph 13 of TR 97/11 provides a list of indicators that are relevant in determining whether a taxpayer is carrying on a business. In general, the indicators are: • 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; and • whether the activity is better described as a hobby, a form of recreation or a sporting activity. No one indicator is decisive but rather different indicators must be considered in combination and as a whole. So the question of whether a business is being carried on is determined in an objective manner based on the weighing up of all the relevant facts and circumstances of each case. In relation to property or land development, in Taxation Determination 92/124: Income Tax: property development: in what circumstances is land treated as trading stock ('TD 92/124') the Commissioner recognises that repetitive buying and selling of property is not necessary to establish that a business of property acquisition, development and sale is being carried on. If a 'definite and continuous cycle of operations' has been initiated, a business of property development has commenced. Once it is established that there is a business, it then follows that the profits made in the ordinary course of carrying on that business constitute income. This principle has been discussed in many court cases, generally in the context of distinguishing between income and capital receipts. Californian Copper Syndicate (Limited & Reduced) v Harris (1904) 5 T.C. 159 (Californian Copper Syndicate) has been cited with authority in many Australian court cases as the leading case regarding these principles.(See for example, Westfield Limited v Commissioner of Taxation (1991) 91 ATC 4234 ( Westfield ), London Australia Investment Company Limited v Federal Commissioner of Taxation 77 ATC 4398 ( London Australia ) and Myer ). In Californian Copper Syndicate Lord Justice Clerk stated at 165-166 that: It is quite a well-settled principle in dealing with questions of assessment to income-tax, that where the owner of an ordinary investment chooses to realise it, and obtains a greater price for it than that for which he originally acquired it, the enhanced price is not profit...But it is equally well established that enhanced values obtained from realisation or conversion of securities may be so assessable, where what is done is not merely a realisation or change of investment, but an act done in what is truly the carrying on, or carrying out, of a business. ... What is the line which separates the two classes of cases it may be difficult to define, and each case must be considered according to its facts, the question to be determined being, is the sum of the gain that has been made a mere enhancement of value by realising a security, or is it a gain made by an operation of business in carrying out a scheme for profit-making. In London Australia , Gibbs J, in discussing the above principles, stated: Their Honours [in Colonial Mutual Life Assurance Society Ltd v Federal Commissioner of Taxation (1945) 73 CLR 604] went on to point out that not all of the proceeds of a business carried on by a taxpayer are income for the purposes of the [Income Tax Assessment] Act; they will be so only if they are income 'in accordance with the ordinary usages and concepts of mankind, except in so far as the Act states or indicates an intention that receipts which are not income in ordinary parlance are to be treated as income' (see at p. 615). However it is in my opinion established by this and many other cases in which Californian Copper Syndicate v Harris has been applied that if the sale in question is a business operation, carried out in the course of the business of profit-making, the profit arising on the sale will be of an income character. To apply this criterion it is necessary 'to make both a wide survey and an exact scrutiny of the taxpayer's activities': Western Goldmines N.L. v C. of T. (W.A.) (1938) 59 C.L.R. 729 at p. 740. Gibbs J also noted that the test in Californian Copper Syndicate is applicable to any business. Similarly, in Myer , the High Court stated that: Although it is well settled that a profit or gain made in the ordinary course of carrying on a business constitutes income, it does not follow that a profit or gain made in a transaction entered into otherwise than in the ordinary course of carrying on the taxpayer's business is not income. Because a business is carried on with a view to profit, a gain made in the ordinary course of carrying on the business is invested with the profit-making purpose, thereby stamping the profit with the character of income. In Commissioner of Taxation v Morton [2026] FCAFC 31 ( Morton ), the Full Federal Court affirmed the finding in Morton v FC of T [2025] FCA 336, that the taxpayer, who had entered into development agreements with a third-party developer for his farmland to be subdivided and sold as individual allotments in a housing estate, at no stage embarked on a business of developing land, nor had he ventured the relevant land into a profit-making scheme. Consequently, the proceeds from the sale of lots were not assessable as income from business or profit-making activity in the taxpayer's hands. The Court observed the development agreement did not create the type of agency that supported the conclusion the developer's business was the taxpayer's business. The development agreement expressly provided that it did not establish a partnership, joint venture, or relationship of employment, and did not authorise the developer to act as taxpayer's agent except in accordance with the agreement's terms - whilst those permissible acts may have created some agency, under the development agreement the developer acted as an independent party, assumed the risks, and conducted the development in its own right. The taxpayer played little active role in the development of the land - he did not oversee the project, contribute in substance to planning applications, organise project finance, or manage the works involved. Whilst the taxpayer may have received monthly reports pursuant to the development agreement, he took little active interest in the conduct of the development. The Court found that the scale of the development was a factor that was not informative in the particular circumstances of this case and did not weigh in the balance, one way or another. | Detailed Reasoning - Isolated transaction with a profit-making intention: In some instances, a profit or gain made from an isolated or commercial transaction could constitute ordinary income if the taxpayer's purpose or intention in entering into the transaction was to make a profit, notwithstanding that the transaction was not part of its daily business activities or carried out by a non-business taxpayer. This was discussed in Myer , where the full bench of the High Court stated that: But a gain made otherwise than in the ordinary course of carrying on the business which nevertheless arises from a transaction entered into by the taxpayer with the intention or purpose of making a profit or gain may well constitute income. Whether it does depends very much on the circumstances of the case. Generally speaking, however, 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, notwithstanding that the transaction was extraordinary judged by reference to the ordinary course of the taxpayer's business. Nor does the fact that a profit or gain is made as the result of an isolated venture or a "one-off" transaction preclude it from being properly characterized as income ( F.C. of T. v Whitfords Beach Pty. Ltd . 82 ATC 4031 at pp. 4036-4037, 4042; (1982) 150 C.L.R. 355 at pp. 366-367, 376). The authorities establish that aprofit or gain so made will constitute income if the property generating the profit or gain was acquired in a business operation or commercial transaction for the purpose of profit-making by the means giving rise to the profit. And further: The important proposition to be derived from [ Californian Copper Syndicate ] and [ Ducker v Rees Roturbo Development Syndicate Ltd (1928) A.C. 132] is that a receipt may constitute income, if it arises from an isolated business operation or commercial transaction entered into otherwise than in the ordinary course of the carrying on of the taxpayer's business, so long as the taxpayer entered into the transaction with the intention or purpose of making a relevant profit or gain from the transaction. And further: The proposition that a mere realization or change of investment is not income requires some elaboration. First, the emphasis is on the adjective "mere" ( Whitfords Beach , at ATC pp. 4046-4047; C.L.R. p. 383). Secondly, profits made on a realization or change of investments may constitute income if the investments were initially acquired as part of a business with the intention or purpose that they be realized subsequently in order to capture the profit arising from their expected increase in value - see the discussion by Gibbs J. in London Australia , at ATC pp. 4403-4404; C.L.R. pp. 116-118. It is one thing if the decision to sell an asset is taken after its acquisition, there having been no intention or purpose at the time of acquisition of acquiring for the purpose of profit-making by sale. Then, if the asset be not a revenue asset on other grounds, the profit made is capital because it proceeds from a mere realization. But it is quite another thing if the decision to sell is taken by way of implementation of an intention or purpose, existing at the time of acquisition, of profit-making by sale, at least in the context of carrying on a business or carrying out a business operation or commercial transaction. In TR 92/3 the Commissioner explains that profits from an isolated transaction will be income when: • the intention or purpose 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. Even where the requisite intention may not exist on entering into the transaction, the High Court held in Whitfords Beach Pty Ltd v Federal Commissioner of Taxation (1983) 14 ATR 247 ( Whitfords ) there can be a change of intention. In Whitfords there was a change of intention when, at the time a company holding a large parcel of land originally acquired for long-term investment, adopted a new set of articles that changed the intended usage of the land. In Rosgoe Pty Ltd v Commissioner of Taxation (2015) FCA 1231, Logan J reinforced that the intent at acquisition and later, on sale of the property should be considered separately and the transactions as distinct activities: When, later, the property was sold, the profit here arose not from the purchase but from the sale and because the sale was not part of the profit-making scheme the profit did not arise 'from the carrying on or carrying out' of that scheme. The intention and purpose need to be carefully considered in each and every case. In Westfield , Hill J said at 4241: What was said in Myer has been applied in a number of cases in this court since. Among them are Moana Sand Pty Limited v Federal Commissioner of Taxation (1988) 88 ATC 4897, and Federal Commissioner of Taxation v Cooling (1990) 22 FCR 42. It does not, however, follow from the judgment in Myer , or for that matter, from the judgments in any later cases, that every profit made by a Taxpayer in the course of his business activity will be of an income nature. To so express the proposition is to express it too widely, and to eliminate the distinction between an income and a capital profit. In Re FLZY and Federal Commissioner of Taxation [2016] AATA 348 ( Domazet ), the Tribunal dealt with the disposal of property by a taxpayer whose business encompassed the acquisition, development and disposal of properties as well as the acquisition and/or development of properties for the purpose of the derivation of rental income. The taxpayer had acquired the property in question, an office building and a carpark, with an intention that both would be retained as commercial property investments for the purpose of producing rental and other income. The carpark was demolished to allow for construction of a building. Construction was substantially completed and tenants had been secured for the whole of the building. The taxpayer had received offers to purchase the car park from time to time after its acquisition, and a short time after securing the tenants the taxpayer received an offer for the car park which it chose to accept. The taxpayer formed the view that the property market was overheated. In rejecting the Commissioner's position that the sale of the property was on revenue account, the Tribunal made the following observations: 52. A wide survey and an exact scrutiny of the activities of the Doma Group shows that the relevant, but quite discrete, activities carried on by the Group have been: (a) the acquisition, development and sale of residential properties; (b) the acquisition and development of residential properties to hold as capital assets for the purpose of the derivation of rental income; (c) the acquisition, development and sale of commercial properties; (d) the acquisition of commercial properties to hold as capital assets for the purpose of the derivation of rental income; and (e) the acquisition and development of commercial properties to hold as capital assets for the purpose of the derivation of rental income. 54. ...The site of the Woden carpark (which later became the Glasshouse) was, at the time of acquisition, earmarked for activity (d).... 55. My view of the proper characterisation of the Doma Group's business activities means that I must reject the Commissioner's submissions that the Group was carrying on 'a business of the acquisition, development and disposal of properties or, alternatively, a business which included investing in property assets' 56. Neither of those characterisations, in my view, can be sustained on a proper wide survey and exact scrutiny of the Group's activities, because they fail to acknowledge the discrete nature of the different activities that the Group was undertaking. 57. The first of those characterisations could hardly be less exact. It is so generalised as to be quite misleading. Admittedly, the Doma Group did all of those things - acquisition, development and disposal - but it did not do all of them with respect to all of its properties. To say that that was its business is to avoid the very careful examination of its activities that was mandated by the High Court in Western Gold Mines ... 58. The second characterisation - that the Group was carrying on a business which included investing in property assets - is unhelpful. Like the first characterisation, it ignores the discrete nature of the Group's different activities and the specific allocation of a given property to an identified activity... 59. As a further alternative, the Commissioner submits [E]ven if the Domazet Family Trust was not carrying on either of the businesses identified above, the Woden Car Park was part of a profit-making scheme; namely, it was a commercial acquisition and the trustee of the Domazet Family Trust acquired it with a profit-making intention which included not only the receipt of lease income, but other possibilities, including development and sale, as occurred: the Glasshouse was constructed and ultimately sold. 60. The 'possibilities' to which the Commissioner refers are remote, and not at all contemplated. It is, of course, always possible that the owner of an asset will sell it, but to elevate that possibility here into an intention to make a profit by selling the property is to draw a long bow indeed. The Commissioner ran a similar argument in Westfield , and it was rejected by the Full Court: (1991) 28 FCR 333 at 338-341 66. The transaction by which the Glasshouse was disposed of was not a transaction undertaken in the ordinary course of the Doma Group's business activities...Nor was the property acquired for the purpose of profit-making by sale: see Myer, 163 CLR 199 at 209. 67. It follows that the profit from the sale of the Glasshouse was a capital gain. The relevant intention or purpose of the taxpayer (of making a profit or gain) is the taxpayer's intention or purpose discerned from an objective consideration of the facts and circumstances of the case. Generally, in cases where a person's subjective purpose or intention is a relevant issue, the person's evidence as to their subjective purpose or intention can be considered but it must be tested closely, and received with the greatest caution. In Miscellaneous Taxation Ruling MT 2006/1 The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number ( MT 2006/1 ) the Commissioner considers, at paragraphs 262 to 270, whether isolated property transactions, including those involving the subdivision and sale of land, are considered to be a profit making undertaking or scheme, as opposed to the mere realisation of a capital asset. Paragraphs 264 to 266 of MT 2006/1 state: 264. The cases of Statham & Anor v Federal Commissioner of Taxation (Statham) and Casimaty v FC of T (Casimaty) provide some guidance on when activities to subdivide land amount to a business or a profit-making undertaking or scheme. In these cases, farm land was subdivided and sold. Minimal development work was undertaken to meet council requirements and to improve the presentation of certain allotments. On the particular facts of these cases the courts held that the sales were a mere realisation of a capital asset. 265. From the Statham and Casimaty cases a list of factors can be ascertained that provide assistance in determining whether activities are a business or an adventure or concern in the nature of trade (a profit-making undertaking or scheme being the Australian equivalent, see paragraphs 233 to 242 of this Ruling). If several of these factors are present it may be an indication that a business or an adventure or concern in the nature of trade is being carried on. These factors are as follows: • there is a change of purpose for which the land is held; • additional land is acquired to be added to the original parcel of land; • the parcel of land is brought into account as a business asset; • there is a coherent plan for the subdivision of the land; • there is a business organisation - for example a manager, office and letterhead; • borrowed funds financed the acquisition or subdivision; • interest on money borrowed to defray subdivisional costs was claimed as a business expense; • there is a level of development of the land beyond that necessary to secure council approval for the subdivision; and • buildings have been erected on the land. In Morton, reaching its conclusion that at no stage had the taxpayer embarked on a business of developing land, nor had he ventured the relevant into a profit-making scheme, the Court placed weight on the following matters: • The taxpayer acquired the land for farming, not resale at a profit. • The profitability and viability of the farmland was affected by rezoning, increased rates and land tax. • The taxpayer was unwilling to make any part of the land available to any developer to use as security for the developer's financing. • The taxpayer did not borrow to fund the development. • The taxpayer was unwilling to be actively involved in the project. | Detailed Reasoning - Capital gain from mere realisation: For CGT to apply there needs to be a CGT event that happens to a CGT asset. A CGT asset is defined in section 108-5 of the ITAA 1997, with note 1 indicating land is a CGT asset. Division 104 of the ITAA 1997 sets out the CGT events that can happen to a CGT asset and section 104-10 provides that CGT event A1 occurs on the disposal of an asset. As a consequence of CGT event A1, subsection 104-10(4) of the ITAA 1997 provides that you make a capital gain if the capital proceeds from the disposal are more than the assets cost base or conversely you make a capital loss if the capital proceeds are less than the assets reduced cost base. The mere realisation of a capital asset will be subject to the CGT provisions. Where the sale is a 'mere realisation' the sale is on capital account to which the CGT rules will generally apply. These proceeds are not ordinary income. The expression 'mere realisation' is used to distinguish a mere realisation from a business operation or a commercial transaction carrying out a profit-making scheme. In Westfield , the company was in the business of designing, constructing, letting and managing shopping centres. The company acquired land in the early 1970s and further land via an option which it subsequently sold and realised at a substantial gain. The Full Federal Court held that the disposal of land was on capital account as the necessary intention or purpose of making a profit on the sale of the land was absent. This was because the main aim of the company was to secure contracts to design, develop and operate/manage a shopping centre on the land. The disposal of the land was incidental to these purposes. The fact that the transaction was commercial or a business transaction was, of itself, insufficient. The Full Federal Court in reaching its decision considered the judgement in Myer and stated at 4241 that Myer ' emphasises that where a transaction occurs outside the scope of ordinary business activities, it will be necessary to find, not merely that the transaction is 'commercial' but also that there was, at the time it was entered into, the intention or purposes of making a relevant profit' . Other aspects of the judgement in Westfield discussed when profits from transactions outside the ordinary course of business of an entity constituted ordinary income at 4243: Once it is clear that the activity of buying and selling, which generated the profit, was not an activity in the ordinary course of business, or, for that matter, an ordinary incident of some other business activity, the profit in question will only form part of the assessable income of the appellant, by virtue of its being income in accordance with the ordinary concepts of mankind, if the appellant had a purpose of profit-making at the time of acquisition. And further at 4243: While a profit-making scheme may lack specificity of detail, the mode of achieving that profit must be one contemplated by the taxpayer as at least one of the alternatives by which the profit could be realised. Such was the case in [Steinberg v Federal Commissioner of Taxation (1972-5) 134 CLR 640]. But, even if that goes too far, it is difficult to conceive of a case where a taxpayer would be said to have made a profit from the carrying on, or carrying out, of a profit-making scheme, where, in the case of a scheme involving the acquisition and resale of land, there was, at the time of acquisition, no purpose of resale of land, but only the possibility (present, one may observe, in the case of every acquisition of land) that the land may be resold. The same may be said to be the case where s. 25(1) of the Act is involved. As the court observed in Myer, in the passage already set out, the property, which generates the gain, must be acquired in an operation of business or commercial transaction: "... for the purpose of profit-making by the means giving rise to the profit." In determining whether a receipt is on revenue or capital account, the authorities establish that it is necessary to conduct 'a wide survey and an exact scrutiny of the taxpayer's activities': Commissioner of Taxation v Stone (2005) 222 CLR 289 at [19]; Federal Commissioner of Taxation v Montgomery (1999) 198 CLR 639 at 663 [69]; both citing Western Gold Mines NL v Commissioner of Taxation (WA) (1938) 59 CLR 729 at 740 per Dixon and Evatt JJ. This 'wide survey' is particularly important where the sale of the asset is by a taxpayer conducting a business. Jacobs J noted in London Australia at 127: The identification and characterization of the business carried on by the taxpayer is the essential task. Under the principle in Grollo Nominees Pty Ltd v Commissioner of Taxation (1997) 73 FCR 452 at 514-515 there will be occasions when it is appropriate to take into account the activities of the broader group of which the taxpayer is a part. | Detailed Reasoning - Application in these circumstances: The Commissioner considers that, on balance, the arrangement reflects more than a mere realisation of an asset. Having regard to the commercial context in which the Land was acquired and subsequently dealt, it is considered that the profit or gain from the sale of the Land is best accounted for under section 6-5 of the ITAA 1997. The activities of the Taxpayers include: a) The acquisition of a commercial property Property A to hold as a capital asset for the purpose of deriving rental income - through X Unit Trust; and b) The acquisition and development of a commercial property Property B for the purpose of building and selling commercial lots - through the Partnership. It is noted that the Partnership retained ownership of X (out of X lots), from which the Partnership has derived rental income. The Land was acquired to facilitate boundary alignments with respect to property 1 and property 2. The Taxpayer had no specific intentions regarding the balance of the Land. A critical factor in Domazet was that at the time of acquisition, the property was earmarked to be held as a capital asset for the purpose of derivation of rental income. The absence of intention with respect to the Land does not lend itself to the conclusion the Land was not acquired for the purpose of profit-making by sale (noting that the absence of a clearly articulated intention at the time of acquisition as to the ultimate use of the balance of the Land does not, of itself, determine its character as either capital or revenue). Rather, the characterisation must be undertaken by reference to the objective facts and circumstances as they unfolded over time, including the commercial context in which the Land was acquired and subsequently dealt with. In this regard, a relevant consideration is that Property B was acquired for the purpose of developing commercial lots for sale - the retention of X lots by the Partnership appears incidental, rather than a deliberate intention to acquire and develop Property B) for the purpose of building lots for the purpose of deriving rental income to any notable degree. In considering that commercial context referred to in the paragraph immediately above, the Taxpayers' broader property activities, including the acquisition and development of Property B for the purpose of constructing and selling commercial lots, do not determine the character of the Land, but they do provide relevant background against which the Taxpayers' approach to the use and disposition of the Land may be assessed. That background informs the evaluation of whether, beyond the initial boundary alignment purpose, the Land was later applied in a manner consistent with a contemplated commercial disposal for profit, as opposed to being, for example, positively committed to long-term holding for income production. Notwithstanding the long length of time the Land was held as a capital asset, in these circumstances, the absence of a specific intention regarding the Land combined with Taxpayers' property development history, leads to the conclusion that the Land was acquired with the intention of profit making by sale. Although the Land was held for a lengthy period, which is a factor commonly associated with capital assets, that factor is not determinative and must be considered in the broader factual and commercial context. The Land was acquired to facilitate boundary alignments in connection with the Taxpayers' existing commercial property activities. Beyond that purpose, there is no contemporaneous evidence that the balance of the Land was specifically earmarked or committed to being held as a long-term investment for the purpose of deriving rental income or other recurring income. While the absence of a clearly defined intention at the time of acquisition does not, of itself, establish a profit-making purpose, when considered together with the Taxpayers' established history of acquiring, developing and selling property in a commercial context, it supports the view that disposal of the Land at a profit was within the range of contemplated outcomes, rather than being merely incidental or unforeseen. The Taxpayers' other property development activities are not determinative of the character of the Land, but they provide relevant background against which the manner in which the Land was held and later dealt with can be objectively assessed. When the Land was ultimately committed to the DA and dealt with through a structured process directed toward its development and sale, it ceased to be held passively and was instead applied to a profit-making undertaking. Having regard to the totality of the facts and circumstances, the profit derived from the disposal of the Land is therefore considered to arise from the carrying out of a profit-making undertaking. The profit or gain from the disposal of the Land under the terms of the DA is therefore considered income pursuant to section 6-5 of the ITAA 1997. Where the proceeds are assessable as ordinary income under section 6-5 of the ITAA 1997, the profit is determined by reference to the amounts received in respect of the Land under clause 3.1 of the DA and the cost of acquisition of the Land. The Land cost is to be matched against those receipts on a reasonable apportionment basis having regard to the staged sale of the dwellings. Amounts received that represent repayment of funds advanced by the Taxpayers under the DA do not form part of the profit from the disposal of the Land and are treated separately from any amount assessable as income. (It is noted that under the DA, the Taxpayers' return is capped at the agreed undeveloped value of the Land together with repayment of their financial contribution, and that they do not share in any development profits or uplift. The Developer assumes the commercial risk and is solely entitled to any upside. While this fixed return may bring into question the revenue characterisation, it is not determinative. The absence of profit participation does not, of itself, preclude the conclusion that the Land was applied to a structured, commercially directed development and sale process. The character of the proceeds must be assessed having regard to the arrangement as a whole and the manner in which the Land was ultimately exploited, rather than solely by reference to the Taxpayers' lack of participation in development profits.)

Does IVA apply to this private ruling?: Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or diverted profits tax benefit in connection with an arrangement. | If Part IVA applies, the tax benefit or imputation benefit can be cancelled (for example, by disallowing a deduction that was otherwise allowable) or you or another taxpayer could be liable to the diverted profits tax. | We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part. | If you want us to rule on whether Part IVA applies, we will need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply. | For more information on Part IVA, go to our website ato.gov.au/gaar .