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09 Mar 15 Profit from property sale assessable income – Re WWXY

The Administrative Appeals Tribunal has found that the profit from the sale of a property, purchased with the intention of developing the property but later sold undeveloped, was assessable income of the taxpayer.

The taxpayer company acquired two adjoining properties, each with a house on it. The taxpayer proposed developing the two parcels as part of a joint venture with another company, but the original joint venture proposal came to nothing. The taxpayer decided to rent out the two properties in their unimproved state until they were sold some years later. The sale occurred shortly after the taxpayer had obtained a development application for the two parcels.

The taxpayer asked for a private ruling in relation to the profit made on the sale of the properties. It argued the sale of the properties was properly regarded as the realisation of a capital asset, so it should be assessed for capital gain pursuant to s 6-5 of the Income Tax Assessment Act 1997 (Cth). The Commissioner’s ruling concluded the sale yielded 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 went to the Tribunal.

The Tribunal found that the taxpayer was engaged in a business during the relevant period, and that the business described in the ruling contemplated a business that was broader than developing the property in a particular way with the participation of a particular joint venturer. There was evidence that the taxpayer contemplated the property being resold at a profit after obtaining development approval, even if that was not the preferred option. The sale occurred in the ordinary course of the taxpayer’s business, which meant that profits generated by the sale should be brought to account as ordinary income.

The Tribunal also found that, even if it were to accept the taxpayer’s argument that, as a matter of fact, there was not sufficient system, regularity and scale to justify a finding the taxpayer was engaged in a business, or the sale was outside the scope of whatever business did exist, the Tribunal would still be required to consider whether the isolated or unusual transaction that eventuated had a profit-making purpose from the outset. The Tribunal was satisfied from the evidence that it did. The evidence recorded the taxpayer’s objective of achieving “the best outcome possible”. A range of successful outcomes must have been in contemplation. That range presumably included (and certainly did not exclude) the possibility of a profitable sale after obtaining a development approval.

Re WWXY and FCT [2015] AATA 130 (Bernard J McCabe, Senior Member, 6 March 2015).

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