Private ruling: Sale of land
Date of advice: 2 August 2022
Published: November 2022
Ruling period: Year ending 30 June 20XX | Year ending 30 June 20XX | Year ending 30 June 20XX
Date scheme commenced: XX March 20XX

Ruling: Q1: Is the sale of the land, held on capital account at all times since its acquisition, sold as a single lot to be treated as a mere realisation of a CGT asset being assessed on capital account? | A1: No. | Q2: Have you commenced to undertake an isolated profit-making transaction? | A2: No. | Q3: Have you commenced an activity such that the property becomes trading stock? | A3: Yes. | Q4: Will all your land, excluding your main residence, be treated as trading stock? | A4: Yes. | Q5: Are the proceeds from the sale of the undeveloped land (excluding your residential premises) to a single purchaser a mere realisation of a capital asset and assessed on capital account? | A5: No.

Relevant facts and circumstances: Purchase of the Land You acquired the land after 20 September 1985 which contained your main residence. A portion of the land is used for your main residence and farming business. You have resided in the main residence since you acquired the land, and you continue to reside there. You operated a farming business on the land from the time you purchased the land to a specified date when you retired from the business. At this point your child ('Person A') oversaw the farming business. Person A operated the farming business as a sole trader until a specified date. Since your retirement, to pay your expenses you have relied on the social security benefits along with assistance from relatives. Person A was responsible for the expenses for holding the property. The City Council decided to rezone your land at a specified date. At this time, you did not have any intention to dispose of any part of the land. Decision to enter into an agreement You were approached in a specified year by your neighbour's child, Person B who is a property broker and local real estate agent, with the proposal to develop your land along with the land adjoining your land owned by your child. Person A and various other local real estate agents approached all landowners in the area with offers for the sale of their land. Person B advised you that the land could only be sold to advantage with a plan of subdivision. Person B introduced you to a project manager being Company A. You decided to subdivide and sell your subdivided land to reduce the financial burden on Person A along with reducing your existing loans. In addition, you were concerned about the increased risks of declining health which is common in older aged adults. The Contracts You provided us with the Contract 1 between you, Company A and Company B to subdivide your land. You provided us with the Contract 2 between you and Company B to subdivide your land. You provided us with Contract 3 between Company A and Company B. You provided us with the Power of Attorney you executed authorising any people nominated by the Management Committee to execute documents on your behalf in regards to the planning and development of the subdivision. You provided us with the deed acknowledging that the parties never adhered to Contract 1, their intentions were as per Contract 2, and that Contract 1 was terminated upon execution of Contract 2. You provided us with a deed of variation in relation to Contract 2. You provided us with the Contract for Sale with Company C to sell the lots undeveloped. Timeline for the sub-division At a specified date you were advanced a specified amount from your developer Company B. This allowed you to clear your existing mortgage so that the property could be used as security in order for the developer to obtain funding. At a specified date you granted a mortgage over your property to Bank A for the loan facility granted to Company B for the development of the property. At a specified date a sales office was constructed on part of your property. This was instigated by Company B and was part of your contractual agreement with Company B. During a one and a half year period, prior to the proposed development of the land being lodged and granted by Council, Company B pre-sold a specified number of residential lots for the entire development. At a specified date Company A applied for a planning permit for a multi staged development across a specified number of stages. Stage 1 was meant to commence at a specified date with the project to be completed within 2 and a half years. At a specified date Council issued a planning permit for the land allowing for a specified number staged development. Your land was to be developed under X stages. The final stage will be retained by you as it contains your main residence. The other stages of the development were in relation to land that was not owned by you. You provided us with a timeline for when the earthworks commenced for X stages of the development. During a XX month period XX% of the total number of lots settled. These lots were in relation to X stages of the development. The remaining contracts for the specified number of lots were rescinded and the purchasers were refunded. At a specified date you entered into a 'contract of sale of real estate' with purchaser Company C to sell your land (excluding your main residence) for a specified amount. Additional Facts You advised Person B and Company A that you had no experience or knowledge of the subdivision process which included the planning permits required for the subdivision. You or any nominated representative were never appointed to be part of any management committee(s) established to oversee the development of the land. Whilst you were contractually required by Contract 1 and Contract 2 that you entered into in a specified year to execute a power of attorney, this was not executed until some years later. All marketing and negotiations in relation to the sale of the individual lots was undertaken by your real estate agent Company D. Your property was used as security for Company B to secure development financing. At a specified time you sold the remainder of your land (excluding your main residence) to Company C for a specified amount. The remaining land was vacant and undeveloped at the time of the sale.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 70-10 | Income Tax Assessment Act 1997 section 104-10 | Income Tax Assessment Act 1997 section 118-20 | Income Tax Assessment Act 1997 section 118-25 | Income Tax Assessment Act 1997 Part 3-1 | Income Tax Assessment Act 1997 Part 3-3

Reasons for decision: Summary: When considered against the relevant case law indicia, your activities are considered to be those of a property development business. Your land was sold as trading stock. Sale proceeds will be assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) and are not considered to be the 'mere realisation' of the land. | Detailed Reasoning - Taxation treatment of property sales: 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 a profit; or • a realisation, often referred to as a 'mere realisation', of a capital asset, assessable under Parts 3-1 and 3-3. Whether the proceeds are treated as income or capital will depend on the situation and circumstances of each particular case. No single factor will be determinative; rather, it will be a combination of factors that will lead to a conclusion as to the character of the activities. | 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 of 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 the following indicators determine whether a taxpayer is carrying on a business: • whether the activity has a significant commercial purpose or character; • 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. 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. Taxation Determination TD 92/124 Income tax: property development: in what circumstances is land treated as 'trading stock'? (TD 92/124) provides that the land will be treated as trading stock if it is held for the purpose of resale and a business activity which involves the dealing in land has commenced. Both the required purpose and the business activity must be present. TD 92/124 further provides that the business activity is taken to have commenced when a taxpayer embarks on a definite and continuous cycle of operations designed to lead to the sale of the land. Land that was originally held for a purpose other than for resale may nevertheless become part of the carrying on of a business as trading stock for which it is held changes to that of resale and business activity involving the land commences. | Detailed Reasoning - Isolated commercial transaction: Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income (TR 92/3) sets out the Commissioner's view on the application of the decision in Myer Emporium and provides guidance in determining whether 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 provides 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. Paragraph 13 of TR 92/3 lists the following factors which are relevant in considering whether an isolated transaction amounts to a business operation or commercial transaction 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. | Detailed Reasoning - Capitals Gains Tax (CGT) provisions: CGT event A1 in section 104-10 of the ITAA 1997, relating to the disposal of a CGT asset, will happen when you dispose of your ownership interest in a CGT asset. You will make a capital gain if the capital proceeds from the disposal of the land is more than the cost base of the land. You will make a capital loss if those capital proceeds are less than the reduced cost based of the land. Section 118-20 of the ITAA 1997 contains anti-overlap provisions which operate to reduce capital gains by any amounts which are included in your assessable income under the provision of the ITAA outside of Part 3-1 of the ITAA 1997, for example, as ordinary income under section 6-5 of the ITAA 1997. Where the land is treated as trading stock, section 118-25 of the ITAA 1997 provides that a capital gain or capital loss you make at the time of CGT event is disregarded. Application to your situation In your circumstances the Commissioner considers that based on the information provided your activities are the result of carrying on a business of property development. You have owned your land for a long time and used it as a main residence and for farming activities; however, there was a change of intention when you engaged and entered into a contract to develop and sell your land. In Scottish Australian Mining Co Pty Ltd v FCT (1950) 81 CLR 188 and Commissioner of Taxation v Whitfords Beach Pty Ltd (1982) 150 CLR 355, the decisions stated that a taxpayer, who had originally acquired property for farming operations or other purposes, could subsequently embarked on a profit-making scheme. This means that a taxpayer can embark on a profit-making scheme after property was acquired for a different purpose. You chose to sign a development agreement with a potential profit whilst you retained ownership of the land. The size and scale of the activity is significant. The development was to progress over X stages (with X stages being completed) with the entire undertaking to be carried out over a considerable period in a complex large-scale manner. While you may not personally undertake the development activities, you were involved by engaging a developer to perform the development tasks for you and being required to execute various contracts to support the development project, either by you directly or your representative, and this can still be considered to be carrying on a business activity. You stated in your application that your role is passive; however, you were involved in the document signing and/or executed a power of attorney to sign the documents on your behalf. The activity is carried on in a similar manner to that of ordinary trade in that line of business. You would have shared in the profits of the project and you carried a level of risk through using your land as security for the project's financing. While CGT event A1 occurred on the disposal of your land, the disposal of the land will be viewed as a business transaction. Any profit from the sale will be assessable income under section 6-5 of the ITAA 1997 as a result of carrying on a business of property development. Any capital gain arising from the CGT event will be reduced to the extent any profit is also assessable under section 6-5 of the ITAA 1997. | Detailed Reasoning - Conclusion: In this case, you are considered to be carrying on a business of property development and any profit from the sale of your land will be assessable ordinary income under section 6-5 of the ITAA 1997. The land (excluding your residence) will be considered trading stock from a specified date, and any capital gain or loss made at the time of the sale of the land will be disregarded under subsection 118-25(1) of the ITAA 1997.