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29 Jul 14 Trusts mischaracterising property development receipts as capital gains - TA 2014/1

On 28 July 2014, the ATO issued Taxpayer Alert TA 2014/1 entitled "Trusts mischaracterising property development receipts as capital gains".

The Taxpayer Alert describes arrangements where property developers use trusts to return the proceeds from property development as capital gains instead of income on revenue account.

The ATO considers that arrangements of this type give rise to various issues relevant to taxation laws, including whether:

(a) the underlying property constitutes trading stock for the purposes of section 70-10 of the ITAA 1997 on the basis that the trustee is carrying on a business of property development,
(b) the gross proceeds from sale constitute ordinary income under section 6-5 of the ITAA 1997 on the basis that the trustee is carrying on a business of property development,
(c) the net profit from sale is ordinary income under section 6-5 of the ITAA 1997 on the basis that, although the trustee is not carrying on a business of property development, it is nevertheless involved in a profit making undertaking.

The ATO says that it has commenced a number of audits and has made adjustments to increase the net income of a number of trusts. Audit activity will continue.

In a media release issued on 28 July 2014, the ATO warned property developers against using trusts to return the proceeds from property developments as capital gains instead of income.


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