Private ruling: CGT - disposal - isolated transaction
Published: May 2015
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Will the proceeds from the sale of house B be assessed under section 6-5 or section 15-15 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No | Q2: Will the proceeds from the sale of house B be assessable as a capital gain? | A2: Yes

Relevant facts and circumstances: In 20XX, the partnership of C & D (you) purchased a property located with the intention of subdividing it into two lots, building a house on each of the new lots and leasing out each new house. You borrowed money to finance this development. The property you purchased included a derelict house. You did not live in this house. You subdivided the property into two lots. The two new lots are A and B. You demolished the original house on the property and you built a new house on each of the two new lots. Construction began in 20XX and was completed in 20XX. D is a tradesperson. They did no work in relation to the project. You did not hire a project manager to oversee the development work. You did not establish an office in connection with the development and sale. You did not use letterhead on correspondence they prepared in relation to the development. You did not bring the property to account as a business asset, for example, recording it as an asset in a balance sheet. After completion of construction, you placed both A and B on the market to be leased. A has been leased and you plan to continue to lease A for a period of at least 5 years. After completion of construction, it was decided that due to being unable to secure an ongoing tenant for B and interest being accrued on lending for the construction of the houses, that you would sell B. You have used B as a holiday home a couple of times. B was on the books of an agent for holiday rental. You leased out B only once, for a weekend. You sold B in 20XX for $XXX,XXX. This development is a one-off development and you have no plans for any future developments.

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

Reasons for decision: Summary: Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that assessable income includes income according to ordinary concepts. Typical examples of ordinary income include salary and wages, proceeds from carrying on a business, rent, interest and dividends. Profits from the sale of a capital asset are generally not income, although they may be assessable as statutory income under the capital gains provisions. Section 15-15 ITAA 1997 provides that your assessable income also includes profit arising from the carrying on, or carrying out, of a profit-making undertaking or plan. Subsection 15-15(2) goes on to say that this section does not apply to a profit that is assessable as ordinary income under section 6-5 or arises in respect of the sale of property acquired on or after 20 September 1985. Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income (TR 92/3) deals with determining whether profits on isolated transactions are income. According to TR 92/3, a profit from an isolated transaction is generally income if the intention or purpose of the taxpayer 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 your case, you acquired the property with the intention of subdividing it into two lots, building a house on each of the new lots and leasing out each new house. You have no history of property development and you undertook this development with the intention of creating two rental properties, which you intended to hold. The decision to sell one of the houses, B was made after the completion of construction when you were unable to secure an ongoing tenant for the property. Accordingly, the proceeds from the sale of B will not be included in your ordinary income. Rather, the disposal is considered to be a mere realisation of a capital asset and the proceeds will be subject to the capital gains tax provisions in Part 3-1 of the ITAA 1997.