Private ruling: Income - capital vs revenue
Date of advice: 25 February 2026
Published: 20 April 2026
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Did the Taxpayers commence the carrying out of a profit-making undertaking or scheme during the relevant year, such that any profit from the sale of Property 1 and Property 2B should be treated as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. | Q2: Did the Taxpayers commence the carrying on of a business involving the sale of the Property 1 and Property 2B as trading stock? | A2: No. | Q3: Are any losses arising from the sale of Property 1 and Property 2B deductible under section 8-1 of the ITAA 1997? | A3: No.

Relevant facts and circumstances: The Taxpayers obtained finance to purchase a land and build package. They obtained additional finance for the construction of Property 1. The Taxpayers then acquired the land and build package for Property 1, held in unequal ownership proportions, with the intention of retaining it for long-term capital growth. The Taxpayers had no experience in property development and engaged a property advisor to assist with acquisitions. The construction contract for Property 1 was entered into. The Taxpayers then applied for finance to purchase an additional property. Their intended construction was later declined by the relevant approving office, requiring them to vary their initial plans. Property 1 was then rented until shortly before its sale. The Taxpayers acquired Property 2 as joint tenants as a land and building package with long-term investment intentions. The Taxpayers later sought an appraisal of Property 1 to consider refinancing and potentially expanding their investment portfolio. Property 2 was subdivided, and a duplex was constructed. Property 2A was rented at the relevant rental stage. Property 2B was rented at a later relevant rental stage. The Taxpayers sought advice regarding their financial position at a relevant time to obtain more favourable lending options. They purchased Property 3 as a land and build package, with construction commencing shortly afterwards. Their intention was long-term capital growth. The Taxpayers engaged with a portfolio advisor to explore refinancing options and were subsequently referred to an accountant. They obtained an appraisal of Property 2 for that purpose. Following a review of their situation, the Taxpayers identified that selling Property 1 and Property 2 might be viable. Additional calculations and discussions occurred subsequently. Factors including financial pressures relating to their property portfolio, increases in interest rates, an upcoming end to a fixed interest period that would increase repayments, ongoing construction expenses for Property 3, and reduced household income due to personal circumstances influenced this reassessment. The Taxpayers formed a tax law partnership for the long-term holding of rental properties. GST registration was backdated to an earlier period. It was confirmed that no general law partnership existed. The partnership subsequently cancelled its GST registration. The Taxpayers then instructed their real estate agent to sell Property 1 and Property 2. Contracts of sale for Property 1 and Property 2B were entered into, with settlement occurring at a later date. As no offers were received from Property 2A, it was withdrawn from sale and returned to the rental market. Construction of Property 3 was completed and renting commenced shortly afterwards. The Taxpayers have no plans to acquire further properties or undertake additional construction.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 6-10 | Income Tax Assessment Act 1997 section 70-10 | Income Tax Assessment Act 1997 section 104-10 | Income Tax Assessment Act 1997 section 108-7 | Income Tax Assessment Act 1997 section 995-1

Reasons for decision: Summary: The Taxpayers did not commence a profit-making undertaking or business operation during the relevant period. Accordingly, any gain from the sale of Property 1 and Property 2B is capital in nature. The sales represent a mere realisation of capital assets and are assessable under the capital gains tax (CGT) provisions, rather than as ordinary income under section 6-5 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Under section 6-5 of the ITAA 1997 assessable income includes ordinary income derived directly or indirectly from all sources, during the income year. Ordinary income is described as income according to ordinary concepts. Typical examples of ordinary income include salary, wages, dividends, rent, and proceeds from carrying on a business. Taxation Ruling TR 92/3 Income tax; whether profits on isolated transactions are income (TR 92/3) sets out the Commissioner's view on when profits from isolated transactions may be included in assessable income under section 6-5 of the ITAA 1997. TR 92/3 adopts the principles outlined by the High Court in FC of T v. Myer Emporium Ltd (1987) 163 CLR 199 ( Myer Emporium ). Paragraph 1 of TR 92/3 explains that isolated transactions include: • transactions outside the ordinary course of business of a taxpayer who is carrying on a business, and • transactions entered into by a taxpayer who is not carrying on a business. Paragraph 6 of TR 92/3 provides that a profit from an isolated transaction will generally be ordinary income where both of the following elements are present: • the taxpayer's 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. TR 92/3 also recognises that if a taxpayer acquires an asset for private use or enjoyment but later decides to devote that asset either: • as the capital of a business, or • to a profit-making undertaking with business-like or commercial characteristics, then the activities may amount to the carrying on of a business or a commercial transaction. In such circumstances, any resulting profit will be ordinary income even if the taxpayer did not have a profit-making purpose at the time of acquiring the asset. Profits from the sale of land may be treated as ordinary income under section 6-5 of the ITAA 1997 in two main situations: 1. Ordinary income from carrying on a business. 2. Ordinary income from an isolated business or commercial transaction. | Detailed Reasoning - 1. Ordinary income from carrying on a business: In Myer Emporium , the High Court stated that profits or gains made in the ordinary course of carrying on a business are income. A business is ordinarily carried on with a view to profit, and profits arising in that context have the character of income. Paragraph 32 of TR 92/3 explains that the Commissioner considers that business-related profits fall into two categories: i. A profit or gain arising from a transaction that forms part of the taxpayer's ordinary business, judged by the nature of the transactions the taxpayer routinely undertakes ( Commercial and General Acceptance Ltd v. FC of T (1977) 137 CLR 373 at 381: 77 ATC 4375 at 4380; 7 ATR 716 at 722); and ii. A profit or gain arising from a transaction that is an ordinary incident of the taxpayer's business activity, even if the transaction is not part of the business's main activities (e.g. profits of insurance companies and banks on the sale of investments discussed in Chamber of Manufactures Insurance Ltd v. FC of T (1984) 2 FCR 455; 84 ATC 4315; 15 ATR 599 and C of T v. Commercial Banking Co. of Sydney (1927) 27 SR (NSW) 231). Carrying on a business Business is defined under section 995-1 of the ITAA 1997 to include any profession, trade, employment, vocation or calling, but does not include occupation as an employee. Whether a taxpayer is carrying on a business is a question of fact and degree, as emphasised by Hill J in Evans v Federal Commissioner of Taxation 89 ATC 4540, who noted that each case must be determined on its own facts. The Commissioner's view on the relevant business indicators is found in TR 97/11: Am I carrying on a business of primary production? (TR 97/11) and sets out indicators applicable beyond primary production. These indicators include: • 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 businesslike manner such that it is described as making a profit, and • the size, scale and permanency of the activity. TR 97/11 states the indicators must be considered together and that no single indicator is decisive. The question ultimately depends on the large or general impression gained from examining all factors ( Martin v FC of T) , and whether the activities carry a commercial flavour ( Ferguson v. FC of T (1979) 37 FLR 310; 79 ATC 4179; (1985) 16 ATR 331 ) . Significant commercial purpose or character The significant commercial purpose or character indicator considers whether the activity is carried on in a business like and commercially viable manner. This includes assessing factors such as the size and scale of activity, the repetition and regularity of activity and profit indicators. An activity is more likely to have a significant commercial purpose or character where there is a business plan, a clear profit-making purpose, and evidence that the activity is capable of being carried on in a commercially viable way. The business planning process generally involves research or knowledge relating to marketing, capital requirements and how these will be met, expected costs, legal obligations, and the scale required for commercial viability. Size, scale, and permanency of the activity When considering this factor, the focus is on the scale of the activity, including the number of properties involved and the level of management input required to conduct the activity. Where size and scale are a relevant factor, the activity should be large enough to make it commercially viable as a business. Intention of the taxpayer The carrying on of a business in not merely a matter of intention alone. Rather, it is the actual activity motivated and supported by intention that is relevant. It is appropriate to look objectively at the activity (including when it started) to reach conclusions about a taxpayer state of mind in deciding to conduct the activity. The ATO view of whether property development activities constitute the carrying of a business or an isolated transaction is of a revenue nature, or merely realisation of a capital asset is based on principles established by the courts. A taxpayer's stated intention is insufficient. Courts and tribunals require objective, demonstrable actions and consistent activity such as, applying for approvals, engaging planners, making valuations, entering contracts, or incurring works, related costs without these actions the original intent remains. Without such actions, the taxpayer's original stated intention remains unsubstantiated. Although holding an asset for a long period of time may suggest it is a long-term capital asset, the intention of the taxpayer at the time of acquiring the asset and throughout the ownership period remains an important consideration. Both business and investment will have a profit-making intention, whereas a hobby will not. Strategies that minimise the costs of pursuing a hobby will not amount to having a profit-making intention. In general terms, a business activity will be seeking to more efficiently allocate resources than a mere investment and will seek to conduct the activity in a way that provides a return that is higher than the investment levels received by others conducting similar activities. A business may seek to adapt to changing circumstances by altering the form or nature of the allocation of those resources. A business may be seen as being more open to taking risks to pursue these outcomes. Prospect of profits A taxpayer's involvement in the activity should be motivated by wanting to make a profit and the activity should be conducted in a way that facilitates this. This will require examining whether objectively there is a real prospect of making such a profit from participating in the business of the taxpayer. Repetition and regularity A taxpayer's activities should involve repetition and regularity and have an air of permanence about them. With regards to letting of properties, repetition and regularity can be measured by factors such as regularity of maintenance, collecting of rent, management and advertising of properties, insurance, dealing with tenancy agreements and inspection reports. In comparison to some rental property owners, your daily involvement is minor. Given the activities of other property owners who are considered to be carrying on a business of letting properties it could not be concluded the level of repetition and regularity on your activity is the same. We are looking at those activities that would be required in the renting of properties. If there was a block of 30 holiday units rented on a short time basis there is an extensive amount of work conducted on a daily basis in meeting tenants, providing and cleaning linen and other services. The fees paid by the tenants are for the services and the use of the property and if it is of sufficient scale, because of the regularity of these services it can be argued that they could be carrying on a business of renting properties. Activity carried on in a similar manner to that of ordinary trade If a taxpayer carries out their activity in a manner similar to other taxpayers in the industry whose activities constitute a business, it is more likely that their activity amounts to the carrying on of a business. Lord Clyde in the Commissioners of Inland Revenue v. Livingston and Others (1927) 11 TC 538 at TC 542 said that: '...the test, which must be used to determine whether a venture...is, or is not, "in the nature of trade", is whether the operations involved in it are of the same kind, and carried on in the same way, as those which are characteristic of ordinary trading in the line of business in which the venture was made'. This indicator requires a comparison between the activities of the taxpayer in question and those undertaken by a person in business in the same type of industry. Where the taxpayer's activities are similar in nature to other businesses, further support is given to the fact that a business exists. Whether the leasing of property amounts to the carrying on of a business will depend on the circumstances of each case. ( Californian Copper Syndicate (Limited and Reduced) v. Harris (1904) 5 TC 159). Generally, it is easier for a company that derives income from the leasing of property to show that it carries on a business than it is for an individual. If a company's objects are business objects and are, in fact, carried out, it carries on business. ( IRC v. Westleigh Estates [1924] 1 KB 390 at pp 408, 409 per Sir Ernest Pollock, M.R.). In American Leaf Blending Co. Sdn Bhd v. Director-General of Inland Revenue (Malaysia) [1978] 3 All E.R. 1185 at 9 1189 Lord Diplock concluded that it would be difficult to displace the prima facie inference that the gainful use of a company's property in letting it out for rent would constitute the carrying on of a business. Generally, where the property owners grant exclusive possession of the property to the residents the relationship between the two parties is one of tenant and landlord, and the activity is more likely to be passive investment rather than a business. Similarly, activities constituting the mere maintenance of an asset and the mere collection of income do not indicate the existence of a business of renting premises. Planned, organised, and carried out in a business-like manner In Newton v. Pyke (1908) 25 TLR 127 the court suggested that business should be conducted systematically. A business is characteristically carried on in a systematic and organised manner rather than on an ad hoc basis. An activity should generally conform with ordinary commercial principles to amount to the carrying on of a business. In Ferguson v FC of T (1979) Ryan J was satisfied that the taxpayer was in the business of goat breeding as he had 'organised his activities in a business-like way through the keeping of books of account'. The weight that is attached to this indicator will depend on the facts of the situation and a taxpayer may still carry on a business despite having poor organisational skills. Although intention is relevant, it is the objective conduct of the taxpayer that determines whether a business is being carried on. Courts have consistently required that a taxpayer's conduct demonstrate organisation, system, or commerciality before an activity can be characterised as a business. | Detailed Reasoning - 2. Ordinary income - isolated transaction: Where a taxpayer is not carrying on a business, profits may still be assessable as ordinary income under section 6-5 of the ITAA 1997 if they arise from an isolated business or commercial transaction. TR 92/3, applying the principles of Myer Emporium , provides that a profit from an isolated transaction will generally be income where: • the taxpayer entered into the transaction with a profit-making intention, and • the profit was made in the course of carrying out a business operation or commercial transaction. The courts have distinguished between profits arising from a business operation or profit-making scheme, and profits arising from the mere realisation of a capital asset. As TR 92/3 notes, a taxpayer may realise an asset in an enterprising way without converting the activity into a profit-making scheme. Where the taxpayer's purpose at acquisition was investment, and the disposal occurs without the taxpayer undertaking development, enhancement, subdivision, or other commercial steps, the sale is ordinarily treated as a mere realisation, as demonstrated in Casimaty v. FC of T 97 ATC 5135; (1997) 37 ATR 358 ( Casimaty ). The decision in Casimaty demonstrates that in circumstances where there is an absence of profit-making intention when land is acquired, and nothing to suggest a change in that purpose, the likelihood of any profit made on the eventual sale of land being income according to ordinary concepts is greatly diminished. Casimaty considered the sale of farming land. In 1955, the taxpayer acquired a farming property comprising 988 acres ('Acton View') from his father. The next year, the taxpayer purchased a further 40 acres adjoining Acton View on which he erected a homestead. For the next 20 year, the taxpayer conducted a business of primary production on the property but because of growing debt and ill health, the taxpayer had to subdivide and sell off a large part of the property. In all, there were eight separate subdivisions carried out between 1975 and 1993. Most of the subdivisions required the taxpayer to construct one or more roads, provide water and sewerage facilities to the relevant blocks and to fence all boundaries. The sales from the relevant subdivisions were held to not be income according to ordinary concepts but rather constituted the mere realisation of a capital asset of the taxpayer. Apart from the activities necessarily undertaken to obtain approval from time to time for subdivision of parts of the property, there was nothing to suggest a change in the purpose or object with which Acton View was held. The proceeds were held to be from the mere realisation of a capital asset, carried out in an enterprising way so as to secure the best price. Consequently, the profit derived from the subdivision and sale of the land by the taxpayer was not assessable income under section 6-5 of the ITAA 1997. Change of intention Although a profit-making intention at the time of acquisition is usually required for a profit to be ordinary income, the authorities recognise that the taxpayer's intention may change at a later point. The High Court decisions in White v. FC of T (1968) 120 CLR 191; 15 ATD 173 and FCT v . Whitfords Beach (1982) 150 CLR 355, demonstrate, that a profit-making purpose may arise after acquisition where the taxpayer commits the asset to a business operation or commercial transaction. Paragraph 42 of the TR 92/3 confirms that a taxpayer's intention may change after acquisition, however, to amount to a profit-making undertaking or scheme, the subsequent conduct must involve commercial or business-like steps. Application to your circumstances The Taxpayers did not commence a profit-making undertaking or scheme in the relevant period for the purposes of sections 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997). Although the Taxpayers circumstances changed during the relevant period, including increasing interest rates, higher holding costs, and reduced earning capacity, these factors did not amount to a change in intention in the sense required by TR 92/3. The properties were always held as long-term capital investments generating passive rental income, and at no point was there a shift toward profit making through business-like or commercial development activity. The only action taken was to list the properties for sale. This is a normal step in the mere realisation of investment assets. There was no development, enhancement, restructuring or any of the steps identified in paragraph 42 of TR 92/3 as indicators of a profit-making scheme. The Taxpayer's conduct is consistent with passive capital investment and aligns with the principles in Casimaty . Accordingly, the sales represent the mere realisation of capital assets. Any gains are capital in nature. No ordinary income arises under section 6-5 of the ITAA 1997. | Summary: For reasons outlined in Question 1, the Taxpayers were not carrying on a business. The properties were not converted into trading stock for the purposes of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Trading stock Trading stock is defined in subsection 70-10(1) of the ITAA 1997 as 'anything produced, manufactured or acquired that is held for purpose of manufacture, sale or exchange in the ordinary course of business, and includes livestock'. Taxation Determination TD 92/124 Property Development: In what circumstances is land treated as 'trading stock'? (TD 92/124) states at paragraph 1 that 'land is treated as trading stock for income tax purposes if:' • It is held for the purpose of resale; and • A business activity which involves dealing in land has commenced. Paragraph 2 of the TD 92/124 confirms that both points are required and must be present before land is treated as trading stock. For reasons outlined above in question 1, the Taxpayers are not considered to be undertaking of carrying on a business. Therefore, the properties do not meet the definition of being classified as trading stock. Application to your circumstances The Taxpayers owned three residential rental properties that were leased to unrelated tenants at market rates through a real estate agent. This level of activity lacks the scale, repetition, and commercial character ordinarily associated with the carrying on of a business as outlined in TR 97/11. The activities undertaken do not demonstrate a plan directed towards profit-making through property turnover, repetition or regularity of transactions, business-like systems or processes, or a commercial level of organisation. Instead, the activity reflects passive investment activity. The Taxpayers undertook minimal personal involvement, relied on property managers, and derived rental income in a manner consistent with long-term investment, not business operations. The decision to dispose of two properties due to financial pressures does not constitute the commencement of a business. Selling investment properties in response to changing personal or economic circumstances is typical of a capital investor and does not convert the activity into a business of property dealing. Accordingly, the Taxpayers did not commence carrying on a business and the properties were not held as trading stock. The sales of Property 1 and Property 2B were the mere realisation of capital assets, not business trading transactions. The mere decision to sell two properties due to financial pressure does not amount to the commencement of a business. Accordingly, the Taxpayers did not commence carrying on a business during the income year, and the properties did not become trading stock for the purposes of the ITAA 1997. | Summary: For reasons outlined in Questions 1 and 2 above, the Taxpayers were not carrying on a business and did not enter into a profit-making undertaking or scheme. The sales of Property 1 and Property 2B constitute the mere realisation of capital assets. Accordingly, any losses are capital losses that are not deductible under section 8-1 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Section 8-1 of the ITAA 1997 allows a deduction for losses or outgoings incurred in gaining or producing assessable income or necessarily incurred in carrying on a business. Capital losses are specifically excluded from deductibility under section 8-1 of the ITAA 1997 where neither a business of property dealing exists or a profit-making undertaking or scheme exists. Taxation Ruling TR 92/4 Income tax: whether losses on isolated transactions are deductible (TR 92/4) provides guidance in determining whether losses on isolated transactions are deductible under section 8-1 of the ITAA 1997. Application of your circumstances As established in the answers to Questions 1 and 2, the Taxpayers did not commence a business, and they did not enter into a profit-making undertaking or business operation. Their conduct was consistent with holding the properties as long-term capital investments for the purpose of deriving rental income. The sales of Property 1 and Property 2B represent the mere realisation of capital assets. Under the CGT provisions, losses arising from the disposal of capital assets are capital in nature. Capital losses do not fall within the scope of section 8-1 of the ITAA 1997, which only applies to losses or outgoings incurred in gaining or producing assessable income, or necessarily incurred in carrying on a business. As the Taxpayers were neither carrying on a business or disposing of trading stock, section 8-1 of the ITAA 1997 does not apply. Any losses arising from the sale of Property 1 and Property 2B are capital losses, which may only be applied against capital gains in accordance with the CGT provisions.