Private ruling: The characterisation on capital account of your disposal of certain properties
Date of advice: 1 March 2017
Published: May 2017
Ruling period: Years ending 30 June 201X and 30 June 201X
Date scheme commenced: 1 July 201X

Ruling: Q1: Do the proceeds of the taxpayer's disposals of land constitute ordinary income? | A1: No

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. Background The applicant is the X Trust ('the Trust'). The specified beneficiary of the Trust is Y. Y is now a property developer. The Trust is used by Y to hold investment properties intended to be held for long periods while deriving rental income. The Trust does not undertake property developments. It holds interests in other entities, such as unit trusts, which undertake property developments. In this way, Y's development and investment activities are clearly segregated. Properties disposed of This ruling relates to the disposal of the following properties: ● Property A, acquired in 200X ● Property B, acquired in 201X Property A purchased new from a builder. The builder had approached Y, to sell the property. However, Y wished to have the property as an investment and so decided to have the Trust buy the property instead. Property B was acquired from a company associated with the Trust. The company had constructed X dwellings, one of which was Property B. The company's original plan had been to hold the X dwellings as rental properties and distribute the income to the shareholders. However, in 201X it was decided to separate out the ownership of the dwellings by transferring the dwellings to the shareholders or associated entities to hold in their own right respectively; this is how the Trust came to hold Property B. In respect to each of the investments, there was no further scope to profit by way of property development activities at the time they were acquired by the Trust; this was because the dwellings were new, were in newly-developed suburbs, and had already used the available building allowance on the land; therefore there was no scope for Y's usual property development methods to generate a profit on sale as opposed to generating rental income. There is no explicit contemporaneous documentation of the Trust's subjective purpose in acquiring the properties the subject of this ruling, such as an 'investment plan' or similar. However, bank records show that, as at the time of acquiring Property A and Property B respectively, the Trust had applied for finance which was repayable over a 30 year term, which is consistent with an intention to hold the properties as rental properties. The properties subject to this ruling were offered to the public and rented out for the period they were held by the Trust. These properties were sold during the years ended 30 June 201X and 201X in order to release equity, to enable an entity associated with the Trust to settle on the acquisition of land for a property development.

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

Reasons for decision: Summary: All legislative references are to the Income Tax Assessment Act 1997 (Cth) ( 'ITAA97' ) unless otherwise specified. The proceeds from the sale of land may constitute ordinary income under section 6-5 where the sale is more than the mere realisation of the property. In general terms, a distinction is drawn between: (a) the realisation of an investment, which is on capital account and dealt with under the capital gains tax provisions, and (b) a sale in the course of business or as part of a profit-making undertaking or scheme, which gives rise to ordinary income. The correct characterisation of a transaction can only be arrived at through the examination and weighing of all the facts and circumstances taken as a whole. Where the taxpayer's purpose in acquiring land was to derive rental income and, over the long term, a gain from growth in the value in the property, those factors would tend to suggest an investment purpose. In contrast, where the taxpayer's purpose was to develop or redevelop the land in order to make a profit on the sale of the land that would tend to suggest that the proceeds would be ordinary income. In this case, the Trust's investments can be clearly distinguished from the property development activities undertaken by associated entities. In relation to the properties the subject of this ruling, the Trust's activities have been confined to purchasing and renting each property. The circumstances of the sale of each property has not been as part of a business or commercial venture under which the property constituted trading stock; rather, the sales have been the mere realisation of an investment at a time when the equity embedded in the properties was required for other purposes. Therefore, the properties were held by the Trust on capital account and the proceeds of their disposal do not constitute ordinary income under section 6-5.