Private ruling: Property development
Published: December 2014
Ruling period: Year ending 30 June 2015 | Year ending 30 June 2016 | Year ending 30 June 2017 | Year ending 30 June 2018
Date scheme commenced: 1 July 2014

Ruling: Q1: Are you carrying on a property development business? | A1: No | Q2: Will the proceeds from the disposal of the X Street properties be assessable income under section 6- 5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A2: No | Q3: Will the proceeds from the disposal of the X Street properties be accounted for under the capital gains tax provisions? | A3: Yes

Relevant facts and circumstances: You are employed by carry out paid work outside of the building and construction industry. Your spouse is a professional in the building and construction industry who operates their own business. Previously you had purchased a home at Y Street. However, once you moved in the decision was made to subdivide the Y Street property, demolish the existing dwelling and build two new houses. You and your family moved into one of the new dwellings for a period of time. Both of the Y Street properties have now been sold. It was your intention to build a contemporary principal place of residence for your family within walking distance to your children's school. However, there is a lack of available vacant land in the area. You purchased a property at X Street. The X Street property consists of a large home on a large block. You and your family moved into the dwelling on the X Street property. The X Street property will be subdivided into two blocks and a new dwelling will be constructed at the rear of the property. Your spouse was involved in the design of the new dwelling and a builder has been engaged to construct the new dwelling. The engagement of the builder was on an arms-length basis. You may spend up to five hours per week on activities related to the X Street development; however this is dependent on the builder requirements. These activities will include choosing finishes for the dwelling and fortnightly site meetings. The development will be funded by loans from financial institutions. Your family will reside in the existing dwelling on the X Street property while construction is underway. Following the completion of the construction of the new dwelling, the existing dwelling on the X Street property will be disposed of. The existing dwelling has heritage value to the local area and no major renovations will occur prior to disposing of it. You have no intention of carrying out any similar developments in the near future, as it is your intention that you and your family will live in the new dwelling on the X Street property for an extended period of time while your children finish school.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Part 3-1 | Income Tax Assessment Act 1997 Section 995-1

Reasons for decision: Detailed Reasoning - Carrying on a business: Section 995-1 of the ITAA 1997 defines 'business' as 'including any profession, trade, employment, vocation or calling, but not occupation as an employee'. In Evans v. Federal Commissioner of Taxation 89 ACT 4540; (1989) 20 ATR 922 it was determined that whether or not an activity amounts to carrying on business for taxation purposes is a question of fact. There is no exhaustive or determinative definition which can be applied to determine this matter. Martin v. Federal Commissioner of Taxation (1953) 90 CLR 470; (1953) 10 ATD 226; (1953) 5 AITR 548, however, provides that the test for determining whether or not a business is being carried on is both subjective, which considers the individuals purpose at the relevant time, and objective, which considers the nature and extent of the activities undertaken. Taxation Ruling TR 97/11 provides the Commissioner's view of the factors used to determine if you are in business for tax purposes. In the Commissioner's view, the factors that are considered important in determining the question of business activity are: • 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 regularity and repetition of the activity • whether the activity is of the same kind and carried on in a similar manner to that of ordinary trade in that line of business • whether the activity is planned, organised and carried on in a business-like manner such that it is described as 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 sporting activity. No one indicator is decisive. The indicators must be considered in combination and as a whole. Whether a 'business' is carried on depends on the large or general impression gained. In this case, we do not consider that you are carrying on a property development business. You have alternative employment and the activities you are carrying out in relation to the development are typical of a client/builder relationship as opposed to a property developer. While you have undertaken a similar development in the past, we do not think your activities have the scale, repetition or regularity of what would be expected of a property developer. | Detailed Reasoning - Profits from isolated transactions: Under section 6-5 of the ITAA 1997, the assessable income of an Australian resident includes ordinary income derived both in and out of Australia during an income year. Ordinary income is defined as income according to ordinary concepts. In FC of T v The Myer Emporium (1987) 163 CLR 199; 87 ATC 4363; (1987) 18 ATR 693 ( Myer Emporium ), the Full High Court expressed the view that profits made by a taxpayer who enters into an isolated transaction with a profit making purpose can be assessable income. Taxation Ruling TR 92/3 considers the assessability of profits on isolated transactions in light of the principles outlined in Myer Emporium . According to Paragraph 1 of TR 92/3, 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. Paragraph 6 of TR 92/3 provides that a profit from an isolated transaction will generally be income when both the following elements are present: • your intention or purpose 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 or in carrying out a business operation or commercial transaction. In contrast, paragraph 36 of TR 92/3 notes that 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. However, if a transaction satisfies the elements set out above it is generally not a mere realisation of an investment. In your case, you do not carry on a business of buying, selling or developing land. While you will subdivide the X Street property and sell the existing dwelling at the front of the property you will not be undertaking any major renovations to the existing dwelling prior to selling it. The dwelling you will construct at the rear of the property will be your family's private residence for an extended period of time. A lack of vacant land in the area you wished to reside contributed to the decision to carry out the transaction in the described manner. Accordingly, the proceeds from the disposal of the X Street properties will not be included in your ordinary income. Rather, the sale will be considered a capital transaction subject to the capital gains tax provisions in Part 3-1 of the ITAA 1997.