Private ruling: CGT - Capital vs Revenue - Mere realisation of capital asset
Date of advice: 19 November 2025
Published: 5 January 2026
Ruling period: Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Will the profit from the sale of your properties situated at X XXXX XX, XXX, XX be included in your assessable income under section 6-10 of the Income Tax Assessment Act 199 7 (ITAA 1997) on the basis the profit will be from a mere realisation of a capital asset transaction? | A1: Yes, the proceeds from selling the property are not ordinary income under section 6-5 of the ITAA 1997. The proceeds represent a mere realisation of a capital asset which will fall for consideration under the CGT provisions in Part 3-1 and 3-3 of the ITAA 1997.

Relevant facts and circumstances: Company A (you) is the trustee of Trust A. Person A and Person B are the directors of the trustee. You purchased a property at the specified address on a specified date for a specified amount. Person A and their spouse, Person C, contributed substantial funds to the trust for the purchase. You have provided details of the property, the amount financed through the bank, and Person A and Person C's personal contribution. The property was purchased with the intention of constructing a business premises for Person B and their spouse at that time, along with a residential dwelling above for their own occupation. Draft plans were prepared accordingly. However, due to Person B's personal circumstances and the impact of COVID-19 restrictions, Person B was unable to complete the required training. Consequently, Person B abandoned the business plans Following the failure of the business venture, you were left with a property containing a small, old, and dilapidated dwelling, together with a substantial mortgage. The property was rented for a specified period; however, the tenants vacated due to dissatisfaction with the condition of the dwelling. At that time, Person A and Person C were residing elsewhere but decided to move into the property with the intention of renovating it. Upon occupation, it became apparent that the house was beyond repair and uninhabitable-particularly as Person A was undergoing treatment for critical health issues requiring surgery. Concurrently, Person C experienced serious health complications that ended their working career. Person C continues to require significant medication and ongoing care. Following the surgery, Person A was unable to continue working in the previous capacity and ultimately ceased employment. Subsequently, Person A and Person C decided to demolish the uninhabitable dwelling and construct a duplex on the property, with the intention of occupying one unit and leasing the other. You submitted an application for subdivision of the property on a specified date for a detached dual occupancy. Council subsequently approved the construction of a duplex on a specified date. You engaged Company B to manage the building works and Company C to undertake landscaping, and have provided copies of the contracts for both service providers. The development process required securing an easement through an adjoining property, which involved considerable time and incurred costs of a specified amount. These delays resulted in a significant increase to the fixed-price building contract. Further setbacks occurred due to prolonged heavy rainfall and a major weather event, which caused infrastructure damage and further delayed construction. Construction of the property was completed on a specified date, and landscaping is currently in its final stages. The total expenditure, including the initial property purchase price, construction, and subdivision, amounted to a specified amount. Of this, a specified amount was financed through a bank loan, while the remaining balance was contributed by Person A, Person B, and Person C. To fund this development, Person A liquidated a portion of their assets. The delays in construction and the associated cost overruns have resulted in Person A and Person C investing their entire retirement savings into the property. The mortgage obligations are now so substantial that they are unable to occupy one unit and lease the other as originally intended. Additionally, Person A and Person C were required to remain in the city to attend ongoing treatment for critical health conditions and to assist Person B with the care of their child. Following the unsuccessful business venture, Person A's intention remained to reside on the property; however, due to the circumstances outlined above, this has not been possible. You now intend to sell both units to discharge the mortgage and repay personal loans advanced by Person A, Person B and Person C for financing the property development. You expect to sell the property for a specified amount.

Relevant legislative provisions: Income Tax Assessment Act 1997 Part 3-1 | Income Tax Assessment Act 1997 Part 3-3 | Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 6-10 | Income Tax Assessment Act 1997 subsection 104-10

Reasons for decision: Summary: Under section 6-5 of the ITAA 1997, your assessable income includes the ordinary income you derived directly or indirectly from all sources, during the income year. Although the legislation does not define income according to ordinary concepts, a substantial body of case law has evolved to identify various factors that indicate the nature of ordinary income. Section 6-10 of the ITAA 1997 states your assessable income also includes some amounts that are not ordinary income, which is assessable as statutory income. There are 3 ways the proceeds from a property development can be treated for taxation purposes: • Assessable ordinary income under section 6-5 of the ITAA 1997 as income from carrying on a business of property development • Assessable ordinary income under section 6-5 of the ITAA 1997 as income from an isolated commercial transaction with a view to profit; or • A mere realisation of a capital asset, assessable under Parts 3-1 and 3-3 as statutory income. Section 6-10 of the ITAA 1997 states your assessable income also includes some amounts that are not ordinary income, which is assessable as statutory income. | 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 Income tax: Am I carrying on a business of primary production? (TR 97/11). Although TR 97/11 deals with the issues in determining whether a taxpayer is carrying on a business of primary production, the same principles can be applied to the question of whether a taxpayer is carrying on any type of business including property development. Paragraph 13 of TR 97/11 states that the following indicators are relevant in determining whether a taxpayer is carrying on a business: • 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. In determining whether a taxpayer is carrying on a business, no one indicator will be decisive. The indicators must be considered in combination and as a whole. Whether a business is being carried on depends on the impression gained from looking at all the indicators against the case facts and whether these indicators provide the operations with a commercial flavour. Based on the information provided, the proposed sale of the property does not represent the commencement or continuation of a property development business. Your activities do not exhibit the indicators of a business as outlined in TR 97/11, there was no intention to generate income, the activity lacks a significant commercial purpose or character. There is no evidence of a genuine intention to engage in business beyond personal interest, nor is there a clear purpose or realistic prospect of profit. The activity is not carried out with repetition or regularity, and it does not resemble the manner in which similar businesses operate in the relevant industry. Furthermore, the activity is not planned or organised in a businesslike way, and there is no indication of formal systems or processes aimed at generating profit. The size and scale of the activity is minimal, and overall, the activity also cannot be described as a commercial enterprise. The original intention was to develop a business premises with a residence above, and the property was acquired to support that purpose. When those plans fell through, the intention shifted to personal use and residential investment. In Rosgoe Pty Ltd v Commissioner of Taxation [2015] FCA 1231 (Rosgoe case), a trustee purchased two adjacent parcels of land with the original intention to develop and sell the two properties. However, this intended plan was ultimately abandoned as funding could not be secured. The trustee subsequently rented out the two properties until they were sold several years later. The Court held the properties were capital assets and the sale therefore resulted in capital gains, rather than being the sale of trading stock or sold as part of an isolated or commercial transaction that was entered into with a profit-making intention and resulting in ordinary income. It was held that this was due to a change of the original intention. Logan J emphasised that the intent at acquisition and later, on sale of the property should be considered separately and the transactions as distinct activities. When the property was subsequently sold, the profit 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. In your case, your intention regarding the purpose of the property has changed due to a change in circumstances, similar to the Rosgoe case. There is no evidence to suggest that any other intervening factors have contributed to this change. The decision to sell the property is primarily driven by the need to repay the mortgage and recover personal loans made to the trust, rather than a commercial profit-making motive. The activity lacks a significant commercial purpose or character, was not carried out in a planned or organised manner, and there is no genuine intention to make a profit from the sale. It was not conducted in a way characteristic of the property development industry, and there is no indication of businesslike operations such as maintaining records or having a business plan. On the balance of the indicators and considering your circumstances, you were not carrying on this activity as a business. Your actions reflect an attempt to put the property to its best use to ensure your venture does not result in financial loss. | Detailed Reasoning - Isolated transaction with a profit-making purpose: Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income (TR 92/3) provides guidance in determining whether the profits from isolated transactions are assessable under section 6-5 of the ITAA 1997 as ordinary income. Paragraph 1 of TR 92/3 provides that the term 'isolated transactions' refers to: • those transactions outside the ordinary course of business of a taxpayer carrying on a business; and • those transactions entered into by non-business taxpayers. It is not necessary that the intention or purpose of profit-making be the sole or dominant intention or purpose for entering into the transaction. It is sufficient if profit-making is a significant purpose. Paragraph 6 of TR 92/3 and also paragraphs 16 and 35 provide that a profit from an isolated transaction or operation is generally income when both of the following elements are present: • the intention or purpose of a taxpayer 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 operation or commercial transaction. Whether an isolated transaction is business or commercial will depend on the circumstances of each case. Where a taxpayer's activities have become a separate business operation or commercial transaction, the profits on the sale of the land can be assessed as ordinary income within section 6-5 of the ITAA 1997. Paragraphs 7, 8 and 9 of TR 92/3 provides guidance in characterising profits on isolated transactions and states: 7. The relevant intention or purpose of the taxpayer (of making a profit or gain) is not the subjective intention or purpose of the taxpayer. Rather, it is the taxpayer's intention or purpose discerned from an objective consideration of the facts and circumstances of the case. 8. It is not necessary that the intention or purpose of profit-making be the sole or dominant intention or purpose for entering into the transaction. It is sufficient if profit-making is a significant purpose. 9. 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, but not always, necessary that the taxpayer has the purpose of profit-making at the time of acquiring the property. In circumstances where there has been a change of intention in respect of a property from holding the asset as a long term capital asset, to one of selling the asset for a profit the question which arises is whether the sale was a 'mere realisation' of capital asset. Paragraph 13 of TR 92/3 lists some of the matters which may be relevant in considering whether an isolated transaction amounts to a business operation or commercial transaction, they include: • the nature of the entity undertaking the operation or transaction; • the nature and scale of other activities undertaken by the taxpayer; • the amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained; • the nature, scale and complexity of the operation or transaction; • the manner in which the operation or transaction was entered into or carried out; • the nature of any connection between the relevant taxpayer and any other party to the operation or transaction; • if the transaction involves the acquisition and disposal of property, the nature of that property; and • the timing of the transaction or the various steps in the transaction. Paragraph 36 of TR 92/3 states the courts have often said that a profit on the mere realisation of an investment is not income, even if the taxpayer goes about the realisation in an enterprising way. The expression 'mere realisation' is used to contradistinguish a business operation or a commercial transaction carrying out a profit-making scheme. At paragraph 41 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. Further at paragraph 43 if a transaction or operation is outside the ordinary course of a taxpayer's business, the intention or purpose of profit-making must exist in relation to the transaction or operation in question. In your case, in determining whether the proposed sale of the property would be viewed as a profit making undertaking the following has been considered: • You or related persons have not previously undertaken any property development activities. • The property originally contained a dilapidated and uninhabitable dwelling, which was rented for a specified period; however, the tenants vacated due to dissatisfaction with its condition. • At that time, Person A and Person C were residing elsewhere and decided to move into the property with the intention of renovating it. Upon occupation, it became evident that the dwelling was beyond repair and uninhabitable. • Your initial intention was to develop a business premises for Person B and their spouse, with a residence above. • Due to COVID-19 restrictions, Person B was unable to complete the required training. Person B abandoned the business plans. • Person A and Person C were unable to continue working and ultimately ceased employment due to health issues. They then decided to demolish the uninhabitable dwelling and construct a duplex, intending to reside in one unit and rent the other. • The development process was delayed significantly due to various unforeseen reasons. • Person A and Person C invested their entire retirement savings into the project. However, the high mortgage costs have made it unfeasible to live in one unit and rent out the other as originally planned. • Person A's health issues needed to be considered. • You now intend to sell both the units to repay the mortgage and recover personal loans made to the trust to finance the construction. • Given your lack of development experience, the unexpected construction costs, and the substantial changes in personal and financial circumstances, the decision to sell the property reflects a response to these challenges rather than an intention to engage in property development as a business activity. Based on the facts and circumstances, the sale of the property does not constitute an isolated profit-making transaction. The property was not acquired with an intention to make a profit through a business operation or commercial transaction. Your circumstances have changed and you have adapted the use of the property based the prevailing conditions. There were no pattern of similar transactions, and no business-like conduct such as planning, marketing, or record-keeping. The activity was limited in scale and complexity, involving only a single property. Your final decision to build a duplex and sell both is a decision you have made in which to make the best use of the land and to at least recoup your funds invested in the property. Accordingly, the sale is not regarded as an isolated profit-making transaction. | Detailed Reasoning - Mere realisation of asset: Where the sale of a property is considered a 'mere realisation'-rather than occurring in the course of carrying on a business or as part of an isolated profit-making transaction-the proceeds are treated as being on capital account, and the CGT provisions under the ITAA 1997 generally apply. As outlined in paragraph 36 of TR 92/3, courts have consistently held that profits from the mere realisation of an investment do not constitute ordinary income, even if the disposal is carried out in an enterprising manner. However, if a transaction meets the criteria set out in paragraph 13 of TR 92/3, it is generally not regarded as a mere realisation, and the proceeds may be treated as ordinary income. In Casimaty v FC of T [1997] FCA 1388; (1997) 37 ATR 358 ( Casimaty's case ) the taxpayer acquired the land from his father in 1955 and its where he resided with his family and carried on a primary production business. The taxpayer experienced growing debt and deteriorating health. The taxpayer considered his options and decided to sell of parts of his land which he completed over a period of 18 years. The taxpayer undertook the necessary activities in which to subdivide each parcels of land. The taxpayer did not claim the subdivision costs or interest on the loan as a business expense and outsourced the advertising and sales of the lots of land. There was no change of purpose of object for which the property had been held. In his judgment, Ryan J in the Federal Court held that the profits resulted from the mere realisation of a capital asset and as such the profits were not assessable as ordinary income. | Detailed Reasoning - Application to your circumstances: We have concluded that you are not in the business of property development. It is therefore necessary to examine whether the sale of the duplex is considered an isolated profit-making transaction, and we have also concluded that the sale will not be regarded as an isolated profit-making transaction. Your initial intention was to develop a business premises for Person B with a residence above; however, this plan did not proceed due to Person B's personal circumstances. Subsequently, changes in Person A and Person C's situations led them to relocate to the property, where they discovered the dwelling was uninhabitable. They then decided to demolish the structure and construct a duplex, intending to reside in one unit and sell or lease the other. Due to financial pressures, they were ultimately compelled to sell both units to repay loans associated with the construction. While a profit is expected from the sale, the transaction represents a mere realisation of the asset-converting the property into cash rather than engaging in a business-like property development activity. | Detailed Reasoning - Conclusion: Therefore, the proceeds from the sale are not considered as ordinary income and are not assessable under section 6-5 of the ITAA 1997. Instead, they are treated as the mere realisation of a capital asset and will be subject to the capital gains tax provisions outlined in Parts 3-1 and 3-3 of the ITAA 1997.