Determining the tax treatment of transactions involving property can be an area of great contention.
Generally, when a landowner enters into an arrangement to develop and sell their land, the key question to be determined is whether the ultimate sale is a ‘mere realisation’, or whether is it a disposal either in the course of business or as part of a profit making undertaking or plan.
A ‘mere realisation’ is a sale on capital account to which the capital gains tax (CGT) rules will generally apply. Landholders will usually seek this treatment if they can access CGT concessions (e.g. applying the appropriate CGT discount or the small business CGT concessions) or the property is a pre-CGT asset.
A sale that is more than a ‘mere realisation’ will be on revenue account and the proceeds will generally be assessable as ordinary income. The two most common scenarios where the proceeds are income are:
- where the land is sold in the course of a business or as an incident of business operations; or
- where the land has been acquired and sold as part of a profit making undertaking or scheme.
Whether a sale is a ‘mere realisation’, or something more, is determined by examining and weighing all the facts and circumstances taken as a whole.
The ATO have recently issued Draft Guidance to facilitate consultation between the ATO, tax professionals, industry associations and taxpayers engaged in property transactions. The guidance aims to provide insight and transparency into their decision making on a range of property development scenarios that they are seeing. It discusses the various factors they look at in determining whether a particular transaction is on capital or revenue account.
As every transaction is different, there are no hard and fast rules to arrive at an answer. The ATO will take into account all the surrounding facts and circumstances in accordance with the legislation and established case law.
It is important to weigh all the facts and indicia together, and not in isolation. Some factors will be more influential than others, and some will, because of the particular circumstances, point more strongly to a particular conclusion.
The following is a list of some of the factors the ATO will consider in order to form an opinion on a property transaction:
- Whether the landowner has held the land for a considerable period prior to the development and sale
- Whether the landowner has conducted farming, or other non-development business activities, on the land prior to beginning the process of developing and selling the land
- Whether the landowner originally acquired the property as a private residence or for recreational purposes
- Whether the landowner originally acquired the property as an investment, such as for long term capital appreciation or to derive rental income
- Whether the land has been acquired near the urban fringe of a major city or town
- Where the property has recently been rezoned, whether the landowner actively sought rezoning
- A potential buyer of the property made an offer to the landowner before the landowner entered into a development arrangement
- The landowner was unable to find a buyer for the land without subdivision
- The landowner applies for rezoning and planning approvals around the time or sometime after acquisition of the property, but before undertaking further steps that might lead to a profitable sale or entering into development arrangements
- The landowner has registered for GST on the basis that they are carrying on an enterprise in relation to developing the land
- The landowner has registered a related entity for GST that will participate in (or undertake) the development of the land
- The landowner has a history of buying and profitably selling developed land or land for development
- The operations are planned, organised and carried on in a businesslike manner
- The landowner has changed its use of the land from one activity to another (e.g. farming to property development)
- The scope, scale, duration and degree of complexity of any development
- Who initiated the proposal to develop the land for resale
- The sophistication of any development or other pre-sale arrangements
- The level of active involvement of the landowner in any development activities
- The level of legal and financial control maintained by the landowner in a development arrangement
- The level of financial risk borne by the landowner in acquiring, holding and/or developing the land
- The value of the development or other preparatory costs relative to the value of the land