Private ruling: CGT - mere realisation - discount capital gain
Date of advice: 14 March 2023
Published: 1 May 2023
Ruling period: Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Is the capital gain made from the sale of the land assessable solely as a discount capital gain pursuant to Division 115 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes. We do not consider the partners were carrying on a business or that the disposal had the characteristics of an isolated profit-making transaction as described in Taxation Ruling TR 92/3 Income tax: whether profits on isolated transaction are income . Therefore the proceeds from the disposal are assessable under the capital gains tax provisions and given the partners held the land for more than 12 months they are entitled to the 50% discount.

Relevant facts and circumstances: Persons A and B (the partners) are individuals in partnership. Person A and Person B have no work experience in land development. The partners entered a contract to acquire land in 20XX and settled in 20XX. The area of the land is under 20 hectares and was vacant at settlement. No bank finance was obtained; the partners used savings and borrowed from family members. Prior to this transaction, neither of the partners had ever owned any real estate, either jointly or in their own right. The partners have never had any interest in any business ventures, including property investment or development. The land was zoned for low and medium density residential housing and was part of a larger conglomeration of land, for which the prior owners had submitted a masterplan concept to the local Council in the mid-2000s. The masterplan had been prepared by the prior owners prior to the time of the purchase contract. The partners had no involvement in preparing the masterplan. No development application had for subdivision been approved by the Council at the time of settlement. The masterplan showed a potential subdivision of the land into over 100 residential lots, in addition to various roads and green spaces. The partners' interest in the land arose because of its proximity to local facilities; the size of the land; the ability to keep and ride horses on the land; access to town services; and confirmation from the Council that the land had a dwelling entitlement, and therefore the partners could build a dwelling on the land. The prior owners had previously obtained an Aboriginal Heritage Impact Permit (AHIP) which noted various sites with potential Aboriginal artefacts on the land. The AHIP covered the land plus several adjoining lots, all of which were part of the masterplan. The AHIP required that the land be cleared in a specified manner prior to any disturbance of soil occurring. The AHIP obtained by the prior owners expired in 20XX. At the time the partners entered into the purchase contract, there was no current AHIP issued for the land. Activities during ownership In 20XX the partners entered an agreement to allow agistment on the land. Agistment commenced shortly thereafter and continued for approximately 12 months, at which point it ceased due to ongoing drought conditions resulting in little to no feed on the land. Around the time of settlement, the partners made enquiries to the NSW Office of Environment and Heritage for obtaining approvals to build structures on the property: a residential dwelling to become the main residence; a garage, shed, dam and driveway; a second residential dwelling, garage, shed, and driveway; fencing; and water and sewage connections. In 20XX, a new AHIP was issued. Before any construction could occur, the new AHIP required salvage works to be undertaken; and determinations of existence of Aboriginal artefacts on the land and salvaging and appropriate storage of such artefacts. In 20XX the development application for the partners' residential dwelling and accompanying shed was approved. House construction commenced shortly thereafter. The partners moved into the house in 20XX. The sale process In August 20XX, the partners were approached by a local real estate agent on behalf of a developer (the first developer) to determine if they would be interested in selling the land. The first developer progressively made increasing offers to the partners to buy the land, all of which were declined by the partners. In November 20XX, the partners received a letter from a second real estate agent confirming interest in the property from another developer (the second developer). In December 20XX, the second developer made several offers to the partners. One offer was accepted; shortly thereafter, solicitors were engaged to commence drafting contracts. However, this contract was never executed because the partners subsequently felt they were exposed to an unreasonably high level of risk, should the purchaser simply choose to default on the contract. As a result of worsening global economic conditions and rapidly rising interest rates, the second developer sought to renegotiate the terms of the sale and in June 20XX made a revised offer. The first developer contacted the partners in July 20XX to determine whether the partners had signed a contract with the second developer. The partners advised that they had not yet signed but were close to doing so. The first developer then made a new offer, which the partners accepted (the final offer). Although the final offer was less than previous offers made to the partners, they felt on balance that the final offer presented lower risk and greater certainty of contract fulfilment by the first developer. The sale contract was entered into in August 20XX and varied by Deed in September 20XX. The sale contract was completed in September 20XX. The partners subsequently purchased a replacement property to become their new main residence. The partners did not have access to the necessary capital or finance to undertake a subdivision or residential development. The partners did not contact or engage any consultants or professional to undertake such works on their behalf.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 102-5 | Income Tax Assessment Act 1997 section 104-10 | Income Tax Assessment Act 1997 Division 115