The AAT has upheld a private ruling that the taxpayer was engaged in a business of property development and that the profit from sale of properties acquired with a profit-making purpose was ordinary income. This decision was reported at 2014 ATC ¶1-074.

In 2006 and 2007, the taxpayer – the corporate trustee of a discretionary trust – acquired adjoining properties in suburban Brisbane with the intention of developing the land in a joint venture with another company. In the 2009/10 financial year negotiations for the joint venture fell through. The taxpayer decided to rent out the two properties in their unimproved state until they were sold in the 30 June 2013/14 year of income, after the taxpayer had obtained a development application (DA) for the properties, enhancing their value.

The AAT accepted that the sale occurred in the ordinary course of the taxpayer’s business, which meant that profits on sale should be brought to account as ordinary income. It rejected the taxpayer’s argument that because the original plan to engage a joint venture partner and redevelop the land had not occurred, the ultimate on sale was on capital account.

The AAT found that the taxpayer was conducting a business of property development for a number of reasons including the fact that the directors of the taxpayer were experienced builders, their negotiations with the joint venture partner, a major developer, and the enhancement of the value of the property by obtaining the DA before sale.

AAT ref: [2015] AATA 130, B McCabe (Senior Member), 6 March 2015, Brisbane.

[IT 9/3/15]

The AAT has upheld the Commissioner’s private ruling decision that profits made by the taxpayer company from the sale of properties were ordinary income and not the realisation of a capital asset.

  • The taxpayer is a corporate entity.
  • It acquired 2 adjoining properties in Brisbane in March 2006 and August 2007 and proposed developing the 2 parcels as part of a joint venture with another company;
  • However, the original joint venture proposal came to nothing.
  • The taxpayer decided to rent out the 2 properties in their unimproved state until they were [finally] sold during the year of income ended 30 June 2014.
  • The sale occurred shortly after the taxpayer had obtained a development application (DA) with respect to the conjoined parcels.

The taxpayer sought a private ruling in relation to the profit made on the sale of the properties. It claimed the sale of the properties was properly regarded as the realisation of a capital asset, so [only the ‘net capital gain’ under s102-5 should be assessed as statutory income under s 6-10 of the ITAA 1997].

The Commissioner’s ruling concluded the sale produced assessable income, and said it should be treated accordingly. On the Commissioner’s view, the sale was not simply the realisation of a capital asset: it was the end result (even if not the planned end result) of a commercial property development that commenced when the properties were acquired.

The taxpayer objected to the ruling; the objection was disallowed and the matter came before the Tribunal.

After reviewing the matter, the Tribunal said it was satisfied the Commissioner was correct in his conclusion that the sale of the property was not the mere realisation of a capital asset. Given the facts set out in the private ruling, the Tribunal was satisfied the profits from the sale should be brought into account as ordinary income for the purposes of s 6-5 of the ITAA 1997. The objection decision was therefore affirmed.

(Re WWXY and FCT [2015] AATA 130, AAT, File No: 2014/3293, McCabe SM, 6 March 2015.)

[LTN 45, 9/3/15]

FJM Note

This taxpayer assumed that the assessment as ‘ordinary income’ was on the basis of an isolated transaction entered into as profit making undertaking or scheme – where the profit will not be assessable unless the profit is realised in the way originally intended (Westfield Limited v FCT 91 ATC 4234). But the AAT assessed this trust on the basis that it was in the business of development (meaning that any form of profit would be assessable).