Private ruling: CGT – sale of property - Income or capital
Date of advice: 6 October 2017
Published: February 2018
Ruling period: Year ending 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Are the proceeds from the sale of the property assessable under sections 6-5 or 15-15 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. | Q2: Are the proceeds from the sale the property subject to the capital gain tax (CGT) provisions? | A2: Yes. | Q3: Are Persons A and B entitled to reduce the capital gain included in their assessable income by the 50% CGT discount? | A3: Yes.


Relevant legislative provisions: Income Tax Assessment Act 1936 Section 97 | Income Tax Assessment Act 1997 Section 6-5. | Income Tax Assessment Act 1997 Section 6-10 | Income Tax Assessment Act 1997 Subsection 6-10(4) | Income Tax Assessment Act 1997 Section 10-5 | Income Tax Assessment Act 1997 Section 15-15. | Income Tax Assessment Act 1936 Subsection 102-5(1) | Income Tax Assessment Act 1997 Section 104-10. | Income Tax Assessment Act 1997 Subparagraph 104-10(5)(a) | Income Tax Assessment Act 1997 Section 108-5 of the ITAA 1997 | Income Tax Assessment Act 1997 Section 115-10 | Income Tax Assessment Act 1997 Section 115-15 | Income Tax Assessment Act 1997 Section 115-25 | Income Tax Assessment Act 1997 Subsection 115-25(1) | Income Tax Assessment Act 1997 Subsection 115-215(3) | Income Tax assessment Act 1936 Section 115-225 | Income Tax assessment Act 1936 Subsection 115- 225(1) | Income Tax assessment Act 1936 Section 115-227 | Income Tax Assessment Act 1997 Section 115-228

Reasons for decision: Detailed Reasoning - Income tax provisions: All subsequent legislative references are to the Income Tax Assessment Act 1997 unless noted otherwise. Under section 6-5, your assessable income includes the ordinary income you derived directly or indirectly from all sources, during the income year. Although the legislation does not define income according to ordinary concepts, a substantial body of case law has evolved to identify various factors that indicate the nature of ordinary income. Ordinary income includes amongst other things, income from salary and wages, income from the provision of services, income from property and business operations. Section 6-10 provides that the assessable income of a resident taxpayer includes statutory income amounts that are not ordinary income but are included in assessable income by another provision. Subsection 6-10(4) provides that for an Australian resident, your assessable income includes statutory income derived from all sources, whether in or out of Australia, during the income year. Section 10-5 lists certain statutory amounts that form part of assessable income. Included in this list is income derived pursuant to section 97 of the Income Tax Assessment Act 1936 (ITAA 1936) and section 102 of the ITAA 1997. Additionally, section 15-15 includes in assessable income profit arising from the carrying on or carrying out of a profit-making undertaking or plan. However, this provision does not apply to a profit that is assessable as ordinary income under section 6-5 of the ITAA 1997, or which arises in respect of the sale of property acquired on or after 20 September 1985. Section 97 of the Income Tax Assessment Act 1936 (ITAA 1936) includes in a person’s assessable income distributions of income made by a trust to the person as a beneficiary. | Detailed Reasoning - The sale of the Property: In this case, a review of the information provided indicates the trust and person A do not carry on a business of developing land. At the time of purchasing the property, the intention was to demolish and redevelop the property to provide residential unit accommodation to generate rental income for the trust and not to enter into the transaction to make a profit from the sale of property. Due to financial constrains suffered by the trust, Person A and associated entities the development never proceeded. Based on the information provided the proceeds the trust received from the sale of the property are not ordinary income and not assessable under sections 6-5 or 15-15 of the ITAA 1997. The proceeds represent a mere realisation of a capital asset which will fall for consideration under the CGT provisions in Part 3-1. | Detailed Reasoning - Capital gains tax: Under subsection 102-5(1) your assessable income includes your net capital gain (if any) for the income year. A net capital gain is worked out in accordance with the method statement set out in subsection 102-5(1). A capital gain or loss arises when a CGT event occurs. The most common CGT event is A1, disposal of a CGT asset, which is outlined in section 104-10. Generally, the time of the event is when the contract for the disposal is entered into. If there is no contract, the event occurs when the change of ownership takes place (section 104-10). The term 'CGT asset' is defined in subsection 108-5(1) as: (a) any kind of property; or (b) a legal or equitable right that is not property. A gain or a loss arising from CGT event A1 will be disregarded for CGT assets acquired before 20 September 1985 (subparagraph 104-10(5)(a)). | Detailed Reasoning - Application to the sale: In this case, the property is a CGT asset. The subsequent disposal of the property by the trust has caused CGT event A1 to occur. The time of the CGT event is the date when the contract to end the ownership of the asset. | Detailed Reasoning - Discount capital gain: Section 115-10 provides that to be a discount capital gain the capital gain must be made by an, individual, a complying superannuation fund, a trust or a life insurance company in relation to a CGT event in respect of particular CGT assets. A capital gain made from CGT event A1 meets the requirements of a discount capital gain under section 115-10. A capital gain is only a discount capital gain if it results from a CGT asset that was acquired at least 12 months before the CGT event that gave rise to the gain under subsection 115-25(1). In this case, the facts indicate the asset was acquired more than 12 months before the CGT event A1 happens to the asset. Accordingly, the trustee of trust is eligible to claim the 50% discount capital gain under section 115-15. The rules in Subdivision 115-C will apply to treat the beneficiary as having made a capital gain to the extent the capital gain otherwise forms part the Trust's net capital gain calculated under subsection 102-5(1) and the Trust has a positive net income, grossed up for any relevant CGT discount applied by the Trust at step three of the method statement in subsection 102-5(1) and for any of the small business CGT concessions applied by the Trust at step four of the method statement in subsection 102-5(1). The beneficiary will then be entitled to apply any relevant discounts and concessions as are available to them to the capital gain they are taken to have made. The manner in which Subdivision 115-C allocates a trust capital gain depends on whether, and the extent to which, a beneficiary is 'specifically entitled' to that capital gain. In this case, subject to the Trustee’s resolution, the beneficiaries will be made specifically entitled (for the purposes of section 115-228) to the entire amount of capital gain made by the trustee from CGT event A1. That amount will be the beneficiary’s share of the capital gain under section 115-227. The beneficiary is not simply treated as then having made their share of the capital gain for the purpose of working out their own net capital gain or loss. The way in which the Trustee has worked out its own net capital gain affects the way in which the beneficiary calculates their capital gain. Firstly, the rules in section 115-225 are applied to work out that part of the trust capital gain remaining after the Trustee has applied any capital losses or net capital losses to the capital gain and after applying any CGT discounts – subsection 115-225(1). That means, if the Trustee has applied its own capital losses or net capital losses in working out its net capital gain, this will be reflected in (and will reduce) the capital gain the beneficiary is taken to have made. The result obtained following the application of section 115-225 is then doubled if the Trustee applied the 50% CGT discount in working out its own net capital gain: subsection 115-215(3). That is the amount treated as a capital gain of the beneficiary which is then taken into account (along with the beneficiary's other capital gains and losses) in working out the beneficiary's net capital gain or loss under section 102-5. In doing so, the beneficiary can apply their own capital losses and net capital losses and any relevant CGT discount. In this case, the beneficiaries of the Trust Persons A and B are entitled to apply the CGT 50% discount to the capital gain included in their assessable income.

Relevant facts: A trust was established a number of years ago. | The trust is a discretionary trust. | The beneficiaries of the trust are Persons A and B | The trust does not carry on a business. | A company is the Trustee for the trust. | Person A is a director of the Trustee Company. | Person A operates a business through company A. | Person A is not a trader or a developer of land. | The trust purchased a commercial property. | Person A as a director of the Trustee Company acquired the property for the trust to develop the site by building a number of residential units on the property to generate increased rental income for the trust. | A financial institution provided funds to the trust to purchase the property. | The property was leased out by the trust as a commercial rental property for a number of years. | The trust returned rental income in its trust returns. | The trust sold the property to a developer. | The reason for the sale of the property was due financial problems as a result of loans made to Person A and associated entities. | The trust did not engage any contractors or builders to undertake development of the property. | The sale of the property resulted in a capital gain for the trust. | The entire sale proceeds were used to repay arm’s length debt owed by Person A and associated entities. | The Trustee of the trust has resolved to distribute net income and the capital gain to Persons A and B.