Private ruling: CGT - mere realisation
Published: October 2014
Ruling period: Year ended 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: 1. Will the proceeds received from the sale of the land be assessable pursuant to section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. | Q2: 2. Will the proceeds received from the sale of the land be taxed under the capital gains tax provisions of the ITAA 1997? | A2: Yes.

Relevant facts and circumstances: In 196X, the company acquired a block of land located, spanning different lots. At the time of purchase the land comprised of native vegetation and was zoned by the local council as rural. The land was used for farming. In 196X, a house was built on the land. This house was used as a residence by the farm manager and their spouse. Around 197X, a second residence was built on a separate lot to the farm house. This house was a main residence for the directors. X died in 198X and Y continued to live in the property until their death in 199X. In 199X, the farm manager retired. The house has been rented to various tenants since, and the land has been agisted to other farmers. In 199X, Y transferred the lot with their main residence on it, out of the company and into their personal name. The remaining lots continued to be held by the company. In 199X, Y began discussions and submissions with the local council regarding the future use of the land held by the company. A rezoning application and planning report was lodged with the council in order to protect the development rights of the property. Y passed away in 199X. The lot with their main residence on it was transferred to their children, and the property was then rented out. They also took over control of the company. In 199X, the directors met with consultants in order to get an overview of the submissions their parent had lodged. In 200X, the directors of the company incurred legal costs in determining whether to retain the existing development and re-zoning application and to obtain further information in regards to the inter urban break. In 200X, a submission was lodged to show the development potential of the site within the inter-urban break. In 200X an option fee was received to have exclusive rights to purchase the property and undergo a due diligence on the site. The purchaser ultimately withdrew the option as they found the site could not be developed viably. In 200X, valuation of the property were undertaken to determine the highest and best use that the property could be sold for. The valuations showed that a sale with a development approval in place would substantially improve both the prospects of selling the site and of achieving a far better sale price. The valuations also confirmed that the sale of the lots owned by the company together with the lot owned personally by the directors would achieve a higher sale price. In 200X, the directors lodged a final development application. They were always aware that they would not be able to conclude development approval without nominating outside land that would go with the site. From 200X to 201X, substantial effort was put into negotiations with various parties in relation to the acquisition of outside land. Various options were entered into however they all fell over for a range of reasons. In 201X, the directors elected to use their lot as the external land required by the council. In 201X, development approval was received. In 201X, mediation was entered into with the Council as the approval received was commercially unviable. In 201X, the local council proposed the final conditions in relation to the development approval. In 201X, the property was placed on the market once again, this time with development approval in place. The lot owned personally by the directors was also on the market, as all blocks were required to be sold together. In 201X, an offer was received for the land.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 15-15, and | Income Tax Assessment Act 1997 Part 3-1.

Reasons for decision: Summary: Under section 6-5 of the Income Tax Assessment Act 1997 (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, the parties do not carry on a business of buying, selling or developing land. The property was purchased as farming land, and later included the main residence for two of the owners. Accordingly, any proceeds received from the sale of the land will not be ordinary income and not assessable under sections 6-5 or 15-15 of the ITAA 1997. Rather, the proceeds will represent a mere realisation of a capital asset which will fall for consideration under the CGT provisions in Part 3-1 of the ITAA 1997.