Draft Property and Construction Website Guidance – ATO identifies the factors it looks at for capital v’s revenue account treatment and seeks feedback

On Monday 9 July 2018, the ATO uploaded a Draft Paper providing outlines of real cases and decisions being made by the ATO in property developer cases. The Paper is intended to provide a transparent view into the decisions we are making on fact driven cases where a more technical product is not suited.

The ATO also seeks feedback on the content of this Guidance. It says that:

• Ongoing consultation and feedback on issues identified in this paper may lead to the development of further public advice products.
• The ATO’s intention is to update this guidance as they receive feedback, new arrangements arise and their thinking progresses.
• They may also provide similarly focussed GST guidance, too.

I have already given feedback, to the ATO, that the law relating to assessing the net profit, from a profit making undertaking or scheme, requires the landowner to have acquired the property, with the intention of making a profit, in the way (more or less) that the profit was ultimately made. In that sense, it is not possible to talk about land being ‘ventured into’ a profit making undertaking or scheme (after acquisition). That profit making undertaking or scheme, must be present, at the beginning. It is possible, however, to venture land into a business of property developing, as happened in the Whitfords Beach case [1983] FCA 97.

Consultation is due to close on Friday 17 August 2018.

The FACTORS THE ATO TAKES INTO ACCOUNT, when determining whether an agreement to develop and sell land a ‘mere realisation’ of a capital asset or a disposal either in the course of a business or as part of a profit making undertaking or plan?

A.  Capital v’s Revenue distinction

1. Has the land owner held the land for a considerable period prior to the development and sale?
2. Has the landowner conducted farming, or other non-development activities, prior to beginning the process of developing and selling the land?
3. Has the landowner originally acquired the property as a private residence or for recreational purposes?
4. Did the landowner originally acquire the property as an investment, such as for long term capital appreciation or to derive rental income (or both)?
5. Was the land near the urban fringe, at the time the landowner acquired it?
6. Where the land has been recently re-zoned, did the landowner actively seek the re-zoning?
7. Did the landowner have an offer to sell the property, prior to entering into the development?
8. Was the landowner unable to find a buyer for the land, before developing it?
9. Has the landowner applied for rezoning around the time of acquiring the property, but before developing it?
10. Has the landowner registered for GST on the basis that it is a profit making undertaking or scheme?
11. Has the landowner set up a related entity to do the development?
12. Does the landowner have a history of buying and profitably selling developed land or land for development?
13. Are the development operations carried out in a business like manner.
14. Whether the landowner has changed its use of the land from one activity to another (eg. farming to developing)?
15. That was the scale, scope, duration and degree of complexity of the development?
16. Who initiated the proposal to develop the land for resale?
17. What was the degree of sophistication of any development or other pre-sale arrangements?
18. What was the level of involvement of the landowner in any development activities?
19. What level of legal or financial control did the land owner maintain in the development?
20. What level of risk did the landowner bear, in acquiring, holding and/or developing the land?
21. What was the value of the development or other preparatory costs, relative to the value of the (undeveloped) land?

B.  Property development agreements

1. The ATO will look at the terms of any property development agreement (between the landowner and the developer) – particularly any profit share terms.
2. The ATO will look to see if the agreement makes the landowner and the developer partners, either at general law or under tax law (in receipt of income jointly) – to impute the business purpose of the developer to the landowner as well.
3. The ATO will look to see if one party has become the agent of the other (for instance, the developer doing all the ‘leg work’ in obtaining the development/building permits).
4. The ATO will look at whether the landowner holds the land on separate trust(s) including for the developer(s).
5. The ATO will look to determine any change of intent that may trigger CGT event K4 (i.e. when an asset already owned by the taxpayer begins being held as trading stock).

C.  Timing of return of income and deductions

1. The ATO will look for the correct application of TR 2018/3 Income tax: tax treatment of long term construction contracts to determine an appropriate allocation of income and deductions over the life of a long term development.

D.  Land banking entities with associated development entities

1. The ATO will apply TR 2018/3, which provides that the Commissioner will accept either the ‘basic method’ of income recognition or the ‘estimated profits method’ of income recognition, in respect of long term construction projects (where typically parts of the total project are sold off, as they are completed, but the overall profit of the project cannot be determined until the project is completed – straddling at least one (and perhaps many) income years.
2. The ATO will be looking for, broadly, dealings to be as if they were at arm’s length.

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FJM 14.8.18