Private ruling: Property development - Abandoned at an early stage
Date of advice: 24 February 2017
Published: August 2017
Ruling period: 20XX-YY income year | 20YY-ZZ income year
Date scheme commenced: 1 July 2000

Ruling: Q1: Is any part of the sale proceeds for the property assessable to you as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. | Q2: Is any part of the sale proceeds of the house assessable to you as ordinary income under section 6-5 of the ITAA 1997? | A2: No. | Q3: Did CGT event K4 happen to the property when your rental use ended about a year ago? | A3: 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. You bought the property in about 2000. The property consisted of a house on a traditional urban block of land. At the time of purchase, the property could not be developed due to how it was zoned. About 2010, the Council changed the zoning to medium density with the possibility to develop the site to a unit block. You used the property to derive rental income until about a year ago. The value of the property at that time was provided. About the same time, you sought the advice and the services of an architect, town planner, project manager and solicitor with the intention of obtaining a development approval for a multi-unit building; the overall intention being to maximise the value of the property and to extinguish the large debt over it. A development application was successful and the options considered at this time were to: ● Sell the property with the development approval in place ● Hold the property indefinitely, or ● Consider developing the property You believed that each unit could sell for about $XXX,XXX if the development proceeded. Funding to finance and construct a unit block was sought with limited success as you have no development experience. One non-conventional funder was prepared to consider funding but this was contingent upon a certain number of pre-sales being made. Funding was never approved. The house was removed from the property on the advice of the project manager and sold. Building plans were prepared as necessary for the development application but a building application has not been lodged with the Council. After X months of marketing, you have had no success in attracting pre-sales and have discovered a significant lack of demand for the project and a review with the possible funder was looking decidedly unlikely. Accordingly, you have decided not to continue with the project and instead sell the vacant land. You have received a verbal offer for the land that is about $XXX,XXX higher than its value from a year ago. No substantial improvements have been conducted on the property, although some renovations and upgrades were carried out nearly ten years ago. You have not engaged in any subdivision or property development activities in the past and have no intention to do so in the future. You registered for GST. This was due to an expression of interest in the land sale at that time, which never eventuated. Assumption For the purpose of this ruling, it is assumed that the sale price for the property is reasonably consistent with the verbal offer.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 and | Income Tax Assessment Act 1997 Section 104-220.

Reasons for decision: Summary: No part of the sale proceeds for the property is assessable to you as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997). | Detailed Reasoning - Detailed reasoning: The real issue raised by your request is about whether your property development activities progressed far enough to conclude that a property development business had actually commenced. If it did, the next question would be 'when did it commence?' You originally bought the property and used it as a rental property. This is not a property that you bought with the intention of re-sale at a profit. The zoning change enabled you to consider alternative uses for the property but you did not immediately change your use of it. About a year ago, you obtained development approval for the multi-unit building. At that stage, you were still considering your alternatives and were yet to commit to commencing a property development business (that would involve the sale of some or all of the units shortly after construction was completed). You later formed the intention of developing the property and removed the house. Generally, there is a period of time between forming the intention to begin a property development business and the actual commencement of the business. During this time preparatory activities will be undertaken to see whether the project is feasible or should be abandoned. The earning of business income and the incurring of business expenses only happens once the property development business proper has commenced. It is considered that your activities in seeking assistance from advisers, funding and pre-sales are preparatory to the commencement of your intended property development business. Your activities never progressed to the stage of lodging the building application with the Council or actually beginning to construct the multi-unit building. You are selling a vacant block of land. Therefore, it is not considered that your property development activities progressed far enough to conclude that a property development business had commenced before you abandoned it. You have abandoned it while you were still in the preparatory stage. Consequently, you will be selling the property as a capital asset and not as trading stock or as part of a profit making undertaking. | Summary: No part of the sale proceeds of the house is assessable to you as ordinary income under section 6-5 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Normally, there would be a cost to the owner of a property if they demolished or removed an existing building as a step toward making the property available for other purposes such as constructing another building. The owner might attempt to reduce this cost by seeking to sell the existing building or any salvageable materials. Any sale proceeds would not have a profit making motive as they are merely an attempt to reduce the net costs of removal of the building. In your case, the sale of the house could theoretically have been part of a property development business if the business had commenced before this time. However, the removal of the house has occurred during the preparatory stage before any property development business has commenced. Considered independently of your plan to develop the property, the house was sold and removed as is at the end of its use for rental purposes. There was no renovation or development of the house after the rental use ended in order to generate a higher selling price for it. As such, the sale of the house is not considered to be a profit making undertaking and any profit you make from it is not assessable under section 6-5 of the ITAA 1997. Note: A portion of the sale proceeds may need to be allocated to the sale of depreciating assets in the house. | Summary: CGT event K4 did not happen to the property when your rental use ended about a year ago. | Detailed Reasoning - Detailed reasoning: CGT event K4 would only happen if you began to hold the property as trading stock. Taxation Determination TD 92/124 states that land is only treated as trading stock for income tax purposes if: ● It is held for the purpose of resale, and ● A business activity which involves dealing in land has commenced. For the reasons given above, you never commenced a property development business. Therefore, the property has not become trading stock and CGT event K4 never happened.