Private ruling: Whether you are in the business of property development
Date of advice: 13 October 2015
Published: October 2015
Ruling period: Year ended 30 June 2014 | Year ended 30 June 2015 | Year ending 30 June 2016
Date scheme commenced: 1 July 2013

Ruling: Q1: Are you in the business of property development? | A1: Yes | Q2: Are the units considered trading stock? | A2: Yes


Relevant legislative provisions: Income Tax Assessment Act 1997 Section 70-10 | Income Tax Assessment Act 1997 Section 118-25

Reasons for decision: Summary: Taxation Ruling TR 97/11 discusses whether you are carrying on a business of primary production. The factors considered in TR 97/11 are equally applicable to other businesses. Paragraph 13 of TR 97/11 lists the following indicators as relevant: • 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 out in a business-like manner such that it is directed at making a profit • the size, scale and permanency of the activity • whether the activity is better described as a hobby, a form of recreation or a sporting activity • whether the activity has a significant commercial purpose or character; this indicator comprises many aspects of the other indicators. Other indicators which support the main indicators include: • whether records are kept • whether a business plan exists • whether there has been commercial sales of the product • the taxpayer's knowledge or skill. In this case you have more than an intention to engage in business in that over a substantial period of time you have used the knowledge you have gained from your profession with advice from your accountant and others to specifically target properties which are capable of being developed. You have purchased properties with the intent to develop when funds allow. You purchased land and organised the building of a number of units which are currently up for sale. It is your intention to make profit from purchasing and developing properties. With the sale proceeds from your first rental property you purchased the current land and developed the units. You are anticipating making a net profit before tax of $x. Even though you have only developed property on one occasion your intentions and actions are clear that you intend to develop further properties in the future. You carry on your activities in a similar manner to other businesses in the industry. Your activities display a significant commercial purpose. You keep records and compile and submit your own BAS. You currently have a number of units up for sale. From the information supplied it is considered that you are currently in the business of property development. Section 70-10 of the ITAA 1997 in part states "trading stock" includes anything produced, manufactured or acquired that is held for purposes of manufacture, sale or exchange in the ordinary course of a business. Section 118-25 of the ITAA 1997 in part states a capital gain you make from a CGT event is disregarded if, at the time of the CGT event, the asset is your trading stock. In this case the individual units are considered trading stock as they were produced for the purpose of sale. When the units are sold any capital gain that is made is disregarded.

Relevant facts: You have experience in purchasing properties over a number of years and you have a solid understanding of all legal requirements and processes around purchases, development and sale. | You first owned a property which was used as a rental property for a number of years. It was sold and the net proceeds were used to purchase vacant land for the purpose of development and sale with a view to making a profit. | You own a number of other properties which are currently used as rental properties and have recently been rezoned so that multiple dwellings can be built on a single block. You purchased these properties to develop into multiple dwellings on the land. | You also own another property which is used purely as a positively geared rental property. | You have also put in an offer to purchase another property which you intend to develop. | One particular property will be next to be developed and requires all units in the current development to be sold first. You are also in the process of looking for other properties to develop. | Prior to purchasing the current unit development you applied for an Australian Business Number (ABN), investigated the profitability of the development which involved looking at costs of construction, subdivision and anticipated sales proceeds of four residential units. | Whilst investigating how the development would be funded you determined that you needed to sell an investment property you owned and would need to apply for bank finance, all of which occurred. | You applied for and followed to completion the subdivision process, you engaged a builder to do the rest of the work including the surveying but excluded land preparation, which an entity undertook as a separate contractor. | You registered for Goods and Services Tax (GST), subdivided the land and engaged a building contractor to build the residential units. | As the construction of the units became close to finalisation you arranged for a Real Estate Agent to list the properties for sale. | Throughout the development process you prepared and lodged Business Activity Statements (BAS). You also reported the development costs and closing stock value in the Business & Professional Items Schedule of your 20XX Income tax return. | You expect the units to be sold in the 20YY-ZZ financial year. | In relation to the current development to date you have expended $X and you expect to receive $XX from the sales which will give you a net profit before tax of $X. | In the future you plan to use profits and equity from other properties that you currently own to purchase additional properties to develop. | You sought advice from your accountant and others. | You do your own record keeping. You prepare and lodge your own BAS. Your accountant merely includes records in your annual tax return.