Private ruling: Joint venture
Published: March 2013
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: 1. Was capital gains tax (CGT) event B1 triggered when use and enjoyment of the investment property passed to the purchasers of the property under the instalment contract? | A3: 


Relevant legislative provisions: Income Tax Assessment Act 1997 - Section 6-5 | Income Tax Assessment Act 1997 - Section 104-15 | Income Tax Assessment Act 1997 - Section 118-20

Reasons for decision: Detailed Reasoning - Capital Gains Tax: Section 104-15 of the Income Tax Assessment Act 1997 (ITAA 1997) states that: CGT event B1 happens if you enter into an agreement with another entity under which: (a) the right to the use and enjoyment of a CGT asset you own passes to the other entity; and (b) title in the asset will or may pass to the other entity at or before the end of the agreement. A capital gain or capital loss you make is disregarded if title in the asset does not pass to the other entity at or before the end of the agreement (subsection 104-15(4) of the ITAA 1997). The time of the event is when the other entity first obtains the use and enjoyment of the asset. In your case, under the instalment sales contract signed by the purchasers, the purchasers are given the right to the use and enjoyment of the property when the contract is signed. The instalment contract also provides that title to the property will pass to the purchaser on completion of the contract. Therefore, CGT event B1 will occur at the time the instalment sales contract is entered into. | Detailed Reasoning - Revenue income: Subsection 6-5(1) of the ITAA 1997 provides that assessable income includes income according to ordinary concepts (ordinary income). In certain circumstances a profit made through an isolated transaction will be ordinary income. Taxation Ruling TR 92/3 deals with isolated transactions and at paragraph 16 states that: If a taxpayer not carrying on a business makes a profit, that profit is income if: (a) the intention or purpose of the taxpayer in entering into the profit-making transaction or operation was to make a profit or gain; and (b) the transaction or operation was entered into, and the profit was made, in carrying out a business operation or commercial transaction. Paragraph 40 of TR92/3 states that it is not necessary that the intention or purpose of profit making be the sole or dominant intention for entering into the transaction, although it must be a significant purpose. Paragraph 41 of that ruling also states that if the transaction or operation involves the sale of property, it is usually necessary that the taxpayer has the profit making intention or purpose at the time of acquiring the property. In your case, the joint venture agreement states that the purpose of the venture is the acquisition and sale of a specified property for profit. While you also intended to derive joint venture profits under the joint venture agreement, there is a clear and significant intention of making a profit through buying and selling the property under the terms of the agreement. The terms of the joint venture agreement mean that you will make a profit by entering into the instalment sale contract soon after purchase of the residential property, for a price in excess of the purchase price. The purchase of the property and subsequent entering into of the instalment contract constitutes a 'commercial transaction' as envisaged by TR 92/3. Therefore, the profit was made in the carrying out of a commercial transaction. In the case of Gasparin v. Federal Commissioner of Taxation (1994) 50 FCR 73; 94 ATC 4280; (1194) 28 ATR 130 ( Gasparin's case) , where contracts for the sale of land were executed in one income year but settled in another, it was held that the income was not derived until settlement. Taxation Ruling TR 97/9, while specifically dealing with the sale of wool, discusses the impact of Gasparin's case in relation to the sale of real property and at paragraph 89 states: The derivation of income from the sale of goods should be contrasted with the derivation of income from the sale of real property. It was held in Gasparin 's case that income from the sale of land was not derived until settlement had taken place. We do not think that von Doussa J's decision was based on the fact that legal ownership in the land would not be transferred until settlement. The explanation for the judgement rather lies in the realisation that a vendor in a real property transaction will not have performed all that is needed to become entitled to a payment prior to settlement. At settlement, transfers are effected which put the purchaser in a position to become registered as owner. As such, the vendor does not earn the income from the sale until settlement. Under the instalment sale contract in question, whilst the relevant contract provides for the payment of instalments over a number of years, as in the Gasparin Case, the income from the sale of the properties has not been derived until settlement of the contract. At settlement, the taxpayer as vendor will transfer the title to the property, and will at that point, have done all that is required in order to derive the payments in respect of the sale of the property. Accordingly, no income from the sale of the property has been derived under subsection 6-5(2) of the ITAA 1997 until the instalment contract is completed and settlement has occurred. At the completion of the instalment sales contract, in pursuance of the agreement which gave rise to the B1 event, an amount will be included in your assessable income. Section 118-20 of the ITAA 1997 allows a capital gain you make from a CGT event to be reduced if, because of the CGT event, an amount has been (or will be) included in your assessable income, other than as a capital gain, in any year of income. Accordingly section 118-20 of the ITAA 1997 will apply to reduce the capital gain you make from the B1 event. | Detailed Reasoning - Net profits under the joint venture agreement: The net profits received under the joint venture agreement are regarded as ordinary income for the purposes of section 6-5 of the ITAA 1997 in the year in which you receive them. The net profits would not include amount attributable to the sale of the property under the agreement.

2. Will you derive assessable revenue income under the agreement? | 3. Will section 118-20 of the Income Tax Assessment Act 1997 (ITAA 1997) apply to reduce the capital gain made? | Relevant facts: You entered into a joint venture agreement with a co-venturer for the purpose of acquisition and sale of a specified property for profit. | You purchased the specified property using funds borrowed in the name of you and your spouse. | The property is held in your name only. | Under the agreement, the co-venturer identified and arranged the purchase of the property as well as the subsequent sale. You (the investor under the agreement) were to fund the purchase of the property. | The property was to be sold at a profit under an instalment contract over a period of years. The purchaser will pay interest at a premium above the interest rate paid by the investor and will be responsible for all rates, taxes, levies and repairs and maintenance on the property, as well as insurance premiums. | The purchaser will be entitled to complete the instalment contract early, subject to early completion charges, and shall be entitled to occupy the property during the term of the instalment contract. Title of the property will transfer to the purchaser when all monies outstanding under the contract are paid. | Joint venture profits will be divided equally between you (the investor) and the co-venturer and calculated 'regularly', monthly if convenient. | Purchasers were found for the property and contracts were exchanged in the relevant financial year. | Under an instalment contract, the purchasers have been able to occupy the premises from the possession date. | You paid $XX for the property, plus stamp duty and legal expenses, amounting to a cost base of $XX. | The purchasers have agreed to purchase the property from you for $XX. This will be funded by a deposit and the balance to be paid in fortnightly instalments. | The instalment amounts are made up of loan repayments, reimbursement of rates and insurance and bank fees. The interest rate applied is higher than the interest rate incurred on the loan used to initially purchase the property. | You are not in the business of buying and selling property.