Private ruling: Capital gains tax (CGT) discount
Date of advice: 12 September 2017
Published: January 2018
Ruling period: Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Are you entitled to the CGT discount for the sale of your newly constructed residential dwelling? | A1: No.

Relevant facts and circumstances: You purchased vacant land in 20XX for $XXXX. You signed with a builder to complete construction of a dwelling on the vacant land at a cost of $XXXX. At this time you intended that the property be your main residence. You financed the purchase of land and construction of the dwelling yourself from your savings. Handover of the completed dwelling occurred in 20XX. You did not move into the property as soon as practicable, nor at any time after. You are still living in rental premises that you have been living in during the course of construction. Your intention to sell the property came into effect at some time between late XXXX and early XXXX as your savings have been depleted and you have no other source of income. You are not currently employed, nor are you the director of a company, nor engaged in other business activities.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 115-25 | Income Tax Assessment Act 1997 section 118-20

Reasons for decision: Summary: Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that your assessable income includes income according to ordinary concepts, which is called ordinary income. Taxation ruling 92/3 (TR 92/3) provides the Commissioner’s view on whether profit from an isolated transaction is income according to the ordinary concepts and usages of mankind. Profit from an isolated transaction is generally income where: (a) The intention or purpose of the taxpayer in entering the transaction was to make a profit or gain; and (b) The transaction was entered into, and the profit was made, in the course of carrying out a commercial transaction. Paragraph 7 of TR 92/3 provides that the relevant intention or purpose of the taxpayer is not the subjective purpose or intention. Rather, it is the taxpayer’s intention or purpose discerned from an objective consideration of the facts and circumstances of the case. Paragraph 13 of Taxation Ruling 92/3 (TR 92/3) provides some matters which may be relevant in considering whether an isolated transaction amounts to a business operation or commercial transaction. These are: (a) The nature of the entity undertaking the operation or transaction; (b) The nature and scale of other activities undertaken by the taxpayer; (c) The amount of money involved in the transaction and the amount of profit sought; (d) The nature, scale and complexity of the transaction; (e) The manner in which the transaction was entered into or carried out; (f) The nature of any connection between the relevant taxpayer and any other party to the transaction; (g) If the transaction involves the acquisition and disposal of property, the nature of that property; and (h) The timing of the transaction or the various steps in the transaction. After considering the facts and circumstances of your case, it is our view that the sale of the dwelling constructed on vacant land would constitute an isolated profit making transaction and any profit would be assessable as ordinary income. Section 118-20 of the ITAA 1997 primarily exists to ensure that amounts which are assessable income outside of the CGT provisions are not also taxed as capital gains. In the absence of such a provision, it is conceivable that a receipt properly characterised as ordinary income and which has also been derived as a result of a CGT event could result in the receipt being taxed twice. Therefore, whilst CGT event A1 will happen when you sell the property, any capital gain will be disregarded to the extent of any amount already included as ordinary assessable income. Accordingly, the CGT discount is not relevant.