The current case study provides the scenario that the Rob has inherited the business that contained the small plot of land. An adjacent plot of land was purchased by Rob so that he can set up the plant of concrete recycling by paying stamp duty and legal fees. Due to the rapid residential development Rob failed to set up the concrete recycling plant. On noticing the current boom in the residential property if Rob takes into the account the option 1 of selling the land to the property developer for $3,000,000 and $1,500,000, the profit made from thereon will not be treated as income.
One should note that objective or intention of a person is not held as subjective purpose to ascertain the determination of a person. For example, when a profit is made from the transaction which is beyond the ordinary course of business and do not enters in the transaction with the intention of deriving profit then the profit made from such transaction is not held into the revenue account.
Whenever it is noticed that the land is acquired as the inheritance or as the gift then it is generally not believed that the property is obtained for the purpose of resale at profit. It is only during the circumstances when the property is bought as the portion of business, a profit making undertakings or possessing the characteristics of business if found will be considered under the revenue account. The decision made in “McCorkell v FC of T (1998)” held that a land was inherited by the taxpayer so that the taxpayer can carry out orchard in Victoria. Nevertheless, the neighbours complained regarding usage of pesticide led to the conclusion of orchard activities. The taxation commissioner in its judgement held that the profits that was derived from the sale of land was treated on capital account and not an income.
In the other instance of “Casimaty v FC of T (1997)” the judgment of court included that the profits derived upon the subdivision of land and selling the subdivided lots was not held as income within the statutory standing of “section 25 (1) and 25 (A)”. The main reason for not treating the profit as income because the profit was not made from the performing the business of subdividing and sale of land or from conducting any profit making schemes or undertaking. Rather the profit was made by the taxpayer from the mere realisation of the land. With the deteriorating health the taxpayer was left with no option but to sale the profit and avoid the financial hardships.
The owner of land usually undertakes the decision of selling the whole property as the single sale to the developer. Therefore, such kind of single sale which is not bought by the taxpayer with the purpose of resale for profit or development would be held as capital receipt.
In the present situation of Rob, the receipts that would be obtained on undertaking the option 1 of selling the entire property will not be held as income rather it will be treated on capital account. Citing the judgement of “McCorkell v FC of T (1998)” on undertaking both the option of selling the property will not be held as business or commercial transaction. The property that was inherited by Rob accounts as acquisition and sale of investment despite the significant intention of Rob while acquiring the property was to make profit. The profit that would be made on undertaking the option 1 does not amounts to carrying on of a business activities and selling land or conducting any profit making scheme. The profit that would be made upon selling the capital asset constitutes mere realisation of land and therefore not taxable as income within the legislative standings of “section 25 (1) or section 25A of the ITAA 1997”.
In an another situation if Rob makes the decision of subdividing and selling the land through the land developer and further spend a sum of $500,000 to sell the land for a sum of $500,000 then his activities would account as the carrying on the business of land development. As defined under the “section 6-5, ITAA 1997” profits which is derived upon selling the subdivided land will be treated as ordinary income within the ordinary concepts or may be held as profits from the undertaking inside the legislative standing of “section 15-15 of the ITAA 1997”. However, the activities must amount to separate business processes or commercial transactions.
As per the “taxation ruling of TR 92/3” any profits derived from the isolated transactions are treated as income in accordance with the ordinary meaning or usage of making is dependent on the situations of a case. Nevertheless, profits that are made from the isolated transactions is generally treated as having the nature of income provided the below stated elements are met;
- The purpose or intention of a person that enters into the transaction is to derive profits or gains thereon,
- The contract was entered into by a person with the objective of deriving profit in the ordinary business course or carrying out the business functions or any form of commercial transactions.
As held in “FC of T v Whitfords Beach Pty Ltd (1982)” the issues associated to the business income was whether or not subdividing and selling the land amounts to ordinary income or capital transactions. The taxpayer in this case changed the land zoning and developed the subdivided land for residential purpose and finally sold the numerous subdivided lots for a significant amount of profit. The taxation commissioner imposed tax liability on the taxpayer for the profits which was derived from the sale of subdivided plots of land. By referring to the “section 25 (1) of the ITAA 1997” the commissioner of taxation held that the profits made from the subdivided land is taxable under “section 26 (e) of the ITAA 1997” since it amounted to carrying on the business of land development and from carrying on the business of profit making schemes.
In an another example “FC of T v Crow (1988)” the federal law court verdict stated that profits derived from the sale of subdivided land was held as chargeable income because the taxpayer was performing the business of land development. In this situation the acquisition of property and subdividing the same for the purpose of resale constituted the transactions that were repetitive and systematic in character that carried the nature of constant land development business. The activities that were performed by the taxpayer describes that he carried the land development business. The profits made thereon constitutes income within the meaning of ordinary conceptions under “section 6-5 of the ITAA 1997”.
In the present case of Rob, he appoints the property agent to further subdivide and develop the land for residential purpose. Citing the “Taxation Ruling of TR 92/3” the primary intention of Rob while entering into the transaction was to generate profit. The transactions will be entered into and profits derived thereon would amount to profits made in the due course of business or commercial transaction. Referring to the judgement made in “FC of T v Whitfords Beach Pty Ltd (1982)” profits that would be generated following the adoption of second on will be held as income from the subdivided lands. The profits from the sale of numerous plots of land would be held chargeable for Rob within the ordinary meaning of the “section 6-5 of the ITAA 1997”.
Rob here would make profit upon the sale of subdivided land because he has gone further than the concept of merely realizing the capital asset and his activities of engaging sales agent as well as subdivision of land represented the activities of performing the business of land development. The acquisition, development and sale of land would be held as business processes of commercial transactions. The nature development activities that would be undertaken by Rob reflects that transactions are carrying the nature of commercial character.
With reference to the second option, the subdividing of land and extensive development is more than just a mere realisation of the capital asset. Profits which would be generated from the disposal of subdivided plots is taxable within the second limb of “section 26 (a)” as profits derived from the profit producing scheme.
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