The present subject deals in ascertaining whether sale of property will be held assessable under section 6-5 of the ITAA 1997 (Robin & Barkoczy 2016). As evident Smith and Jones are involved in the activities of business that relates to the property development. Furthermore, they also use the block of land for grazing sheep. It is understood from the case study that business experienced loss which them to subdivide the land and sell it.
Below listed are the following laws that are considered in the context to the present case study which are as follows;
- FC of T v St Hubert’s Island Pty Limited 78;
- Section 995-1 of the ITAA 1997;
- Taxation ruling 92/3
- Section 25 (1) of the ITAA 1997;
- Ferguson v FC of T (1979);
As held under division 70 of the ITAA 1997, selling of property will be regarded as the portion of business that is linked with development and such properties are regarded as trading stock (Barkoczy, 2016). Section 995-1 of ITAA describes business as a profession or trade of earning profit. The current issues that has ascended in this context is to ascertain the activities of business is associated with property development. On assessing the current situation, it is understood that the subdivided block of land cannot be regarded as land, which was initially acquired with the purpose of carrying trading stock. It is worth mentioning that Smith and Jones did not assimilated land with the purpose of reselling it. To execute the activities of sheep grazing Smith and Jones initially acquired the land, however on incurring loss they decided to subdivide the land into blocks so that they could earn profit.
The income earned from the activities of business must be treated as isolated transactions and such transactions will be included for assessment as ordinary income defined under section 6-5 of the ITAA 1997 (Braithwaite and Braithwaite, 2016). Conferring to Para 6 of the taxation rulings 92/3 revenue received from isolated transaction is treated as ordinary income given that the taxpayer originally intended to sell the land in order to derive profit from the ordinary course of business.
As held under “FC of T v St Hubert’s Island Pty Limited 78” land can be treated as a portion of trading stock given the land was acquired with the intention of selling it again (Morgan et al., 2016). It is compulsory to own the purpose of earning profit at the time of obtaining capital asset. Upon viewing the nature of business, the subdivided block of land can be considered as inventory. On assessing the present case study, it is established that taxpayer primary objective was sheep grazing and they improved the land for that same purpose.
Denoting to taxation rulings of 92/3 it is perceived that business of selling land will be considered for assessment under the heads of Isolated Transaction. The amount of earnings, which is generated from these transactions, will be held for assessment as ordinary income under section 6-5 of the ITAA 1997.
Barkoczy, S., 2016. Foundations of Taxation Law 2016. OUP Catalogue.
Braithwaite, V. and Braithwaite, J., 2016. Managing taxation compliance: The evolution of the ATO Compliance Model.
Morgan, A., Mortimer, C. and Pinto, D., 2016. A practical introduction to Australian taxation law 2016.
Robin &BarkoczyWoellner (Stephen & Murphy, Shirley Et Al), 2016. Australian Taxation Law 2016. Oxford University Press.