Private ruling: Property sale
Published: 5 August 2024
Ruling period: Year ended 30 June 20YY
Date scheme commenced: 1 July 2020

Ruling: Q1: Is the consideration received from the sale of the Property capital proceeds made from a mere realisation? | A1: Yes. | Q2: Is the consideration received from the sale of the Property ordinary income of the applicant? | A2: No. | Q3: Does section 118-20 of the Income Tax Assessment Act 1997 apply? | A3: No.

Relevant facts and circumstances: Property Purchase The Trust was established for the sole purpose of acquiring the Property, and subsequently constructing substantial commercial buildings on the Property for leasing to long term build to rent tenants. The Trust acquired the Property in the year ending 30 June 20YY. The acquisition was funded by: • Equity investment • Secured related party equity loan. A further related party loan was to be provided to fund construction of the commercial buildings on the Property once build to rent tenants were secured. This would then lead to tenders being called for from builders. The equity investments were made by three individuals referred to as 'the Investors'. The Investors each held their interests in the Trust in their respective family trusts. The Investors are not related and are not associates. The Investors have collaborated on property acquisitions on four other occasions. The Investors all have experience in the property industry, and all have property investment and development experience. Cash flow projections prepared by one of the Investors predicted that if construction commenced in April 20YY, the project would be cash flow positive by June 20YY and project costs would be able to be commercially refinanced by September 20YY or June 20YYbased on a 4% or 2.5% loan interest rate respectively. Property Development and Disposal The Property was zoned allowing for the development of industrial sheds. As a result, there was no need for the Trust to have the Property rezoned. It was known at the time of acquisition that there were potential traffic flow issues, however based on the Investors' experience and existing crossover and access, the Investors determined there was not a traffic flow issue. The Property was partially cleaned and cleared when it was acquired by the Trust, the Property was subsequently further cleaned and cleared to prepare for development. The subsequent cleaning and clearing was completed by an unrelated business and informed by consultation with the relevant local Council (Council). The Property was first made available for rent in the year ending 30 June 20YY. At this time, the Trust was seeking a tenant prior to construction commencing (for the purposes of agistment, storage or hard stand rental for example) and a tenant commitment for after a purpose designed facility was constructed. The Investors initiated engagements with the relevant state government, Council, and traffic engineers regarding the development of the Property by constructing commercial buildings in line with the original intent. During these engagements, a traffic engineer working on traffic flows and sight lines identified an issue with large vehicle access. The Trust continued to seek possible tenants for the Property, however due to the ongoing traffic related issues, a long term tenant was not secured as quickly as anticipated and construction of the buildings on the Property was not able to commence in the timeframe initially contemplated by the Investors. In November 20YY, the Trust received three offers of purchase. The Trust did not at any time list the Property for sale, nor was the Property marketed for sale. All offers made to the Trust were unsolicited. At no point prior to receiving the above offers did the Investors: • change their intent of constructing substantial commercial buildings on the Property for leasing to long term build to rent tenants • contemplate selling the Property. Once a specific pre-condition had been met, a contract was signed with the ultimate purchaser in July 20YY for $X. Settlement occurred in August 20YY. A pre-condition of entering into a contract for sale was the Trust would seek development approval for the Property. While the Investors had already initiated discussions with Council, they were awaiting a committed tenant before seeking development approval. In June 20YY, the Trust submitted a Development Application on behalf of the ultimate purchaser.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 6-5(1) | Income Tax Assessment Act 1997 subsection 108-5(1) | Income Tax Assessment Act 1997 section 118-20 | Income Tax Assessment Act 1997 subsection 118-20(1)

Reasons for decision: Summary: Subsection 108-5(1) provides: A CGT asset is: (a) any kind of property; or (b) a legal or equitable right that is not property. The Property is property and therefore a CGT asset. The distinction between a 'mere realisation or change in investment' and 'an act done in what is truly the carrying on, or carrying out, of a business', is provided by Lord Justice Clerk in Californian Copper Syndicate v. Harris (Inspector of Taxes) (1904) 5 TC 159 at page 166: What is the line which separates the two classes of cases may be difficult to define, and each case must be considered according to its facts; the question to be determined being - Is the sum of gain that has been made a mere enhancement of value by realising a security, or is it a gain made in an operation of business in carrying out a scheme for profit-making? Lord Justice Clerk's approach was adopted with approval by the High Court of Australia in Whitfords Beach Pty Ltd v Commissioner of Taxation 82 ATC 4031, with Gibbs CJ stating at page 4034: When the owner of an investment chooses to realize it, and obtains a greater price for it than he paid to acquire it, the enhanced price will not be income within ordinary usages and concepts, unless, to use the words of the Lord Justice Clerk..."what is done is not merely a realisation or change of investment, but an act done in what is truly the carrying on, or carrying out, of a business". These principles were applied in Statham & Anor v. Federal Commissioner of Taxation (1988)89 ATC 4070 ( Statham ), where it was held that the sale of a rural property that had been subject to four stages of subdivision was a mere realisation of the property. In their joint judgment, Woodward, Lockhart and Hartigan JJ provided at page 4076 that: There is nothing surprising in the fact that they went about this realisation in a manner calculated to maximise their receipts. The fact that this occurred does not necessarily make the proceeds either profits from an undertaking or scheme, or income from a business. The Investors did not contemplate selling the Property, and the option was only explored after receiving unsolicited offers. The steps taken by the Investors in order to complete the sale of the Property did not materially depart from the steps that needed to be taken in order to fulfil the initial intention of constructing commercial buildings on the Property for long term rent. It is considered that the consideration received from the sale of the Property was a mere realisation and not the conclusion of a profit making undertaking or scheme. | Detailed Reasoning - Conclusion: Consequently, the consideration received by the Trust from the sale of the Property are capital proceeds. | Detailed Reasoning - Question 2: Subsection 6-5(1) provides: Your assessable income includes income according to ordinary concepts, which is called ordinary income. Paragraph 6 of Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income (TR 92/3) provides: Whether a profit from an isolated transaction is income according to the ordinary concepts and usages of mankind depends very much on the circumstances of the case. However, a profit from an isolated transaction is generally income when both of the following elements are present: (a) the intention or purpose of the taxpayer in entering into 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 on a business or in carrying out a business operation or commercial transaction. The High Court held in FC of T v. The Myer Emporium Ltd (1987) 163 CLR 199 at 213: It is one thing if the decision to sell an asset is taken after its acquisition, there having been no intention or purpose at the time of acquisition of acquiring for the purpose of profit-making by sale. Then, if the asset be not a revenue asset on other grounds, the profit made is capital because it proceeds from a mere realization. But it is quite another thing if the decision to sell is taken by way of implementation of an intention or purpose, existing at the time of acquisition, of profit-making by sale, at least in the context of carrying on a business or carrying out a business operation or commercial transaction. The intention of the Investors in departing from their original intention and entering into the sale was to make a gain from the disposal. As such, it is necessary to consider whether the transaction was entered into in the course of carrying on a business, or in carrying out a business operation or commercial transaction. Paragraphs 31 and 32 of TR 92/3 : 31. In Myer , the High Court spoke of profits or gains made in the ordinary course of carrying on a business being income. The Court went on to say that, because a business is carried on with a view to profit, such profits or gains are invested with a profit-making purpose and are thereby stamped with the character of income. 32. It is not completely clear what the High Court meant in referring to 'profits or gains made in the ordinary course of carrying on a business'. However, we consider that there are two types of profits or gains which come within that description, namely: (i) a profit or gain arising from a transaction which is itself a part of the ordinary business of a taxpayer (judged by reference to the transactions in which the taxpayer usually engages) - provided that the gross receipts from the transaction lack the character of income... (ii) a profit or gain arising from a transaction which is an ordinary incident of the business activity of the taxpayer, although not a transaction entered into directly in its main business activity e.g. profits of insurance companies and banks on the sale of investments are generally income... The sole purpose of the Trust was to develop the Property and hold it long term to receive rent. Selling the Property is not in line with that and therefore the transaction was not part of the ordinary business of the Trust. Equally, it cannot be said that selling the Property would be an ordinary incident of its activities. | Detailed Reasoning - Conclusion: The consideration received from the sale of the Property was not ordinary income of the Trust. | Detailed Reasoning - Question 3: Subsection 118-20(1) provides: A * capital gain you make from a * CGT event is reduced if, because of the event, a provision of this Act (outside of this Part) includes an amount (for any income year) in: (a) your assessable income or * exempt income; or (b) if you are a partner in a partnership, the assessable income or exempt income of the partnership. No other amount was included in the assessable income of the Trust as a result of the sale of the Property. As a result, section 118-20 has no application.