Private ruling: Capital gains – mere realisation
Date of advice: 25 July 2017
Published: November 2017
Ruling period: Year ended 30 June 2017 | Year ending 30 June 2018
Date scheme commenced: 1 July 2016

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

Relevant facts and circumstances: You own multiple rental properties. You are not in the business of property development or construction. For financial reasons, you decided to sell the property in the best real estate market. This property had dual occupancy approval and consisted of two small units. The property was going to be difficult to sell because of its size. However, with its large block size, you looked into strata subdivision, with the goal of selling one of the units and retaining the other as a rental. You received council approval for the renovations necessary to facilitate strata subdivision. After renovating the properties you have now decided to sell both strata titled properties.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5.

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, you do not carry on a business of property development or construction. You have owned the property in question for more than X years, it was a dual occupancy property. Due to the real estate market in the area, you sought council approvals to make the necessary renovations to enable strata subdivision of the property. It is accepted that you have acted on what was required of the real estate market. Accordingly, the proceeds from the sale of the property will not be included in your ordinary income. Rather, it 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.