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1 Were you carrying on an enterprise in accordance with section 9-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Yes. Issue 2 Sale of residential property and GST Question 2 Will the sale of Property A and Property B be taxable supplies pursuant to section 9-5 of the GST Act? Answer No. Issue 3 Tax treatment of the profit made upon the sale of the properties (revenue versus capital) Question 3 Will the profit or gain made on the disposal of Property A and Property B be treated as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? Answer No. Question 4 If the answer to question 3 is yes, will any capital gain made on the disposal of Property A and Property B be reduced by the amount of profit included as ordinary income? Answer Not applicable. Question 5 If the answer to question 3 is no, will the profit or gain made on the disposal of Property A and Property B be treated as a capital gain under section 102-5 of the ITAA 1997? Answer Yes. Issue 4 Capital gains tax (CGT) discount Question 6 If the answer to question 5 is yes, are you eligible to apply the CGT discount to the capital gain resulting from the disposal of Property A and Property B? Answer Yes. This ruling applies for the following period : Year ended 30 June 20XX The scheme commenced on:

1 July 20XX

You purchased two House and Land Packages (Property A and Property B). You signed the contracts for Property A in early 20XX, and you signed the contract for property B in mid-20XX. The real estate agent (the agent) introduced the House and Land Packages to you. The agent advised you who the assigned builders were and what the houses would look like. After this, you then signed the contracts provided by the agent and made the required progress payments when prompted. Everything was included in the packages at the time of purchase. The agent advised that they could help you find renters and manage the properties once they were built. You hold an ABN; however, this has only been used solely for your other work activities in a specialised field, and you have never been registered for GST Relevant activities relating to Property A and Property B up until they were sold is as follows: Property A Events in chronological order Early 20XX - you signed the contract as the purchaser. Early 20XX - you signed the building contract with the builder for the design and inclusions. Mid-20XX - land settlement occurred. Late 20XX - building commenced. Mid-20XX - building completed.

Mid-20XX - listed the property for lease through another real estate agent (agent 2) immediately after building completion. Mid to late 20XX - property leased. Your tenants remained unchanged. Early 20XX - property listed for sale, where the property was vacant from late 20XX. Early 20XX - property sold for $X. Early to mid 20XX - settlement took place. No other offers were received, and you negotiated on the price and special conditions. Property B Events in chronological order Mid-20XX - you signed the contract as the purchaser. Mid-20XX - you signed the building contract with the builder for the design and inclusions. Mid-to-late 20XX - the builder signed the building contract. Late 20XX - land settlement occurred. Early 20XX - building commenced. Mid-20XX - building completed. Mid-to-late 20XX - listed for lease through agent 2 immediately after completion. Late 20XX - property leased. Your tenants remained unchanged. Early 20XX - property listed for sale, where the property was vacant from late 20XX. Early 20XX - property sold for $X. Early 20XX - settlement took place. No other offers were received, and you negotiated on the price and special conditions.

Your parent gifted you the money to purchase Property A and Property B. You have not previously been involved in any property development activities, and you have no intention of being involved in property development. You have confirmed that your income from your other work activities has been below the GST turnover threshold of $75,000 therefore you have not registered for GST in relation to these work activities work. You leased Property A and Property B through agent 2, who was introduced to you by the agent. Following Property A and Property B being leased through agent 2 once constructions were completed, you also arranged for depreciation schedules to be prepared for both properties. In early 20XX you first consulted your accountant regarding the GST withholding obligations involved in any eventual sale of Property A and Property B. Your studies and work career 20XX was the final year of your first bachelor's degree. In 20XX, you took a gap year and worked as an employee. From 20XX to 20XX, you completed a degree in a specialised field. Since graduating, you have been working in that specialised field.

In 20XX, you undertook some formal studies but withdrew from the course in late 20XX due to accumulated stress from your tenants' issues and selling properties. In 20XX, you started different formal studies. Damages to property A and B and issues with tenants Although you engaged real estate agents to manage your properties with the expectation of a hassle-free experience, you nonetheless encountered ongoing tenant issues that caused considerable stress and difficulties. Growing issues with the tenants increasingly conflicted with your expanding personal commitments related to study and work, and keeping these two properties began to take a toll on your mental health. Your confidence in finding better tenants plummeted due to your negative experiences with both properties. These issues included suspected unauthorised subletting (Property A), delayed and irregular rental payments which eventually prompted you to apply for a tribunal hearing through agent 2, and damage to both properties. The difficulties you experienced with the tenants were ongoing and you believed would likely continue if you had kept renting out the properties.

In 20XX, you realised that both of your properties were causing significant stress and making it difficult for you to focus on your work and studies. You were employed and completing formal study at the time, hoping for a career change. To ease your mind, you began considering selling Property A and Property B. You engaged another real estate agent (agent 3) to inspect Property A and Property B. Agent 3 noted the tenants left Property A in a poor state. Agent 3 agent also noted other issues caused by the tenants in Property B. This confirmed your suspicion that the tenants had not been taking reasonable care of Property A and Property B. You felt overwhelmed at this stage. You took photos of both properties after the tenants moved out in late 20XX. When the photos were taken, you were with agent 3 who later sold your properties in early 20XX. Agent 3 didn't give very detailed comments on the poor state of the properties when they first inspected them.

You instructed your property manager (agent 2) to give tenants notices to vacate after Agent 3's first inspections. The extent of the wear and tear was only fully revealed when you inspected the properties yourself in the presence of agent 3. Therefore, the decision to sell was based on your intuition that the tenants were not taking reasonable care of the properties along with your lack of confidence in finding better tenants in that area. The photos and what agent 3 told you later only confirmed your intuition. You therefore learned that engaging property managers did not prevent issues from arising. However, given the distance of these two properties from your home and the fact that you did not own a car, self-managing the properties would have caused additional stress. Property A

: Your property manager (agent 2) mentioned over the phone after the tenants moved out that they had their suspicions of the tenants subletting the property, but you decided not to do anything about it at the time because you did not want confrontations. You also began to have worries for the state of this property because the tenants complained about rodents in 20XX and 20XX. You have supplied invoices for rodent control. Property B: You have supplied a copy of a tribunal court order dated in late 20XX relating to Property B. The court order specifies late /overdue rental payments owed to you (totalling $X) and orders the tenant to pay an amount of $X to you by mid-to-late 20XX, followed by some catch up payments (in addition to the weekly rental payments) until the total amount owed to you was paid. For Property A, you have provided some photos showing the condition of the house when the tenants moved out. This included photos of damage to the property. The excessive wear and tear made the property unappealing to potential buyers or renters, according to the agent 3. To address this, you arranged for the minor repairs and maintenance to be completed.

For Property B, you also arrange for minor repairs and maintenance to remedy the other issues caused by your tenants. Decision to sell the properties The primary reason you decided to sell both properties was due to the abovementioned issues with the tenants and damage to the properties which caused you distress. This led you to considering a purchase of an alternative investment property. You were thinking about using the money from selling Property A and Property B to help you buy a property in a nicer area either to rent or to live in because either option seemed to be a better alternative. However, despite you obtaining an investment home loan from an Australian financial institution to buy another house (property C) in mid-20XX (following the sale of Property A and Property B), you ended up moving into property C yourself as your principal place of residence. Your accountant confirmed that based on advice they received from the ATO, you were classed as a property investor and not carrying on an enterprise and therefore not liable for GST, but they also advised that capital gains tax (CGT) would apply, and you prepared your 20XX-20XX tax return on this basis.

You were aware of the significant CGT you would be liable for by selling Property A and Property B in the same financial year, however you prioritised your mental health and decided to sell them both at the same time. Property A and Property B were the first properties you had bought and sold. Ownership of another property (Property D) At the time of sale of Property A and Property B in early 20XX, other than those properties, the only other property you owned was an apartment (Property D) that had been your principal place of residence continuously since 20XX. Property D has 2 bedrooms, 2 bathrooms, and 1 parking space which was leased out until mid-20XX. During your ownership of Property D, you rented it out to several long-term tenants, typically for periods of X months or longer. By renting out property D to these long-term tenants, you rented out 1 bedroom and use of the other bathroom (as Property D was a 2 bedroom / 2-bathroom apartment), and you always remained living in Property D during these periods.

Since you never encountered any issues with your tenants in Property D when it was being rented out, you continued to rent it out throughout your ownership period in this fashion up until the last long-term tenant moved out in early 20XX. From mid 20XX, after you moved out of property D, you engaged an Airbnb property manager to list Property D on Airbnb (including the parking space) to produce rental income from mid-to-late 20XX until it was eventually sold in mid-20XX. You moved into property C in mid-20XX which you have used as your main residence since that time. Property A and Property B were the first properties you had ever bought and sold at the time they were sold.

A New Tax System (Goods and Services Tax) Act 1999 section 9-5 A New Tax System (Goods and Services Tax) Act 1999 section 9-20 A New Tax System (Goods and Services Tax) Act 1999 section 23-5 A New Tax System (Goods and Services Tax) Act 1999 section 40-35 A New Tax System (Goods and Services Tax) Act 1999 section 188-10 A New Tax System (Goods and Services Tax) Act 1999 section 188-15 A New Tax System (Goods and Services Tax) Act 1999 section 188-20 A New Tax System (Goods and Services Tax) Act 1999 section 195-1 A New Tax System (Goods and Services Tax) Regulations 1999 section 23.15.01 Income Tax Assessment Act 1997 section 6-5 Income Tax Assessment Act 1997 Parts 3-1 and 3-3 Income Tax Assessment Act 1997 Division 115

Issue 1 Enterprise Question 1 Were you carrying on an enterprise in accordance with section 9-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)? Summary Yes. You were carrying on an enterprise in accordance with section 9-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) as you were renting out residential properties (Property A and Property B) on a regular and continuous basis in the form of lease. Detailed reasoning Subsection 9-20(1) of the GST Act provides that an enterprise includes (amongst other things) an activity or series of activities done: (a)          in the form of a business; or (b)          in the form of an adventure or concern in the nature of trade; or (c)          on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property Miscellaneous Taxation Ruling MT 2006/1 The New Tax System: The meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number (MT 2006/1) covers the meaning of an entity carrying on an enterprise

Paragraph 5 of MT 2006/1 specifically states that the ruling does not consider the meaning of 'lease, licence or other grant of property'. However, paragraphs 303-305 of MT 2006/1 states: 303. Paragraph 9-20(1)(c) of the GST Act includes in the definition of an 'enterprise', 'an activity, or a series of activities, done on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property'. The paragraph does not cover trading in the assets but rather the activity of a lessor or grantor of the interest in the property. 304. The term 'property' covers all types of property. It includes tangible assets such as land, cars and boats. It also includes intangible assets such as copyright and patents.

305. The Commissioner does not believe that, in any practical sense, 'in the form of a lease, licence or other grant of an interest in property' is wider than 'a lease, licence or other grant of an interest in property'. The phrase 'in the form of' does not broaden the meaning of 'lease, licence or other grant of an interest property'. This is because leases and licences are longstanding, well understood legal concepts. In addition the terms 'lease, licence or other grant of an interest in property' encompass all activities that are directed to the exploitation of property rights. Paragraph 306-306A of MT 2006/1 also give some guidance as to what will be a lease, licence or other grant of an interest in property on a 'regular and continuous basis':

306. To be an enterprise the grant of a lease, licence or other grant of an interest in property must be done on a regular or continuous basis. The grant need not be done on both a regular and a continuous basis. An activity will be 'continuous' if there is no significant cessation or interruption to the activity. An activity is 'regular' if it is repeated at reasonably proximate intervals. The intervals need not be fixed. Whether an activity is repeated over time on a regular basis is a question of fact and degree.

306A. In Commissioner of Taxation v. MBI Properties Pty Ltd [2014] HCA 49; 2014 ATC 20-474 (MBI Case) at [37], the High Court noted that in observing and continuing to observe the obligation to provide quiet enjoyment under a lease, a lessor is appropriately regarded as engaging in an activity done on a regular or continuous basis in the form of a lease. The High Court noted further that, whether or not the lessor might also be engaged in some other form of enterprise, it makes a supply of the use and occupation of leased premises in the course of carrying on an enterprise as defined in paragraph 9-20(1)(c) of the GST Act. In this context, consistent with the High Court decision in the MBI Case, the reference to a lessor is not considered to be limited to the entity that grants a lease in the premises, and includes an entity that acquires premises subject to an existing lease.

The facts show that you purchased two lots of land in separate locations and had residential homes built on them. Construction on Property A was completed on xxxx 20xx and the property was leased on xxxx 20xx. Construction on Property B was completed on xxxx 20xx and the property was leased on xxxx 20xx. The tenants remained unchanged for both properties in your entire period of ownership. You leased out Property A and Property B under residential leases in return for rental payments. Your activity of leasing the properties was in the form of a lease, licence or other grant of an interest in property. Accordingly, you were carrying on a leasing enterprise in relation to Property A and Property B. Issue 2 Sale of residential property and GST Question 2 Will the sale of Property A and Property B be taxable supplies pursuant to section 9-5 of the GST Act? Summary No. The sale of your properties are not taxable supplies as you are neither registered nor required to be registered for GST. Detailed reasoning GST is payable on any taxable supply you make. Under section 9-5 of theGST Act, you make a taxable supply if: a)            you make the supply for consideration; and

b)            the supply is made in the course or furtherance of an enterprise that you carry on; and c)            the supply is connected with Australia; and d)            you are registered, or required to be registered. However, the supply is not a taxable supply to the extent that it is GST-free or input taxed. For the sale of the property to be a taxable supply, all the requirements in section 9-5 of the GST Act must be satisfied. You satisfy the requirements under paragraphs 9-5(a) to 9-5(c) of the GST Act as you make the supply of the properties for consideration, the supply is made in the course of an enterprise of leasing the properties and the supply is connected with Australia as the properties are located in Australia. What remains to be determined is whether you are registered or required to be registered for GST at the time of the supply of the properties. GST registration Section 23-5 of the GST Act provides that an entity is required to be registered for GST if: (a)          it is carrying on an enterprise and (b)          its GST turnover meets the registration turnover threshold. The A New Tax System (Goods and Services Tax) Regulations 1999

at section 23.15.01 sets the registration turnover threshold for entities, other than non-profit bodies, at $75,000 a year. As concluded earlier, your activities of purchasing the properties, building residential dwellings, renting the properties and sale of properties fall within the scope of 'carrying on an enterprise' thus satisfying paragraph 23-5(a) of the GST Act. GST turnover Subsection 188-10(1) of the GST Act provides that your GST turnover meets the registration turnover threshold if: a)            your current GST turnover is at or above the turnover threshold ($75,000) and the Commissioner is not satisfied that your projected GST turnover is below $75,000; or b)            your projected GST turnover is at or above $75,000. Your current GST turnover is defined in section 188-15 of the GST Act as the sum of the values of all your supplies made in a particular month and the preceding 11 months. Your projected GST turnover is defined in section 188-20 of the GST Act as the sum of the values of all your supplies made in a particular month and the following 11 months.

The calculation of both your current GST turnover and your projected GST turnover will include the value of all supplies you make in relation to your work as an xxx. Paragraphs 188-15(1)(a) and 188-20(1)(b) of the GST Act provide that input taxed supplies are to be disregarded when calculating your current and projected turnovers respectively. Your rental income from Property A and Property B in this case is an input taxed supply under section 40-35 of the GST Act (i.e. being a supply of residential premises that are neither commercial residential premises (hotel, motel etc.) nor accommodation in commercial residential premises). As such, rental proceeds in relation to the rental of the properties are not included in the calculation of your 'current GST turnover' or your 'projected GST turnover.' Section 188-25 of the GST Act provides that in calculating your projected GST turnover, you disregard any supply made, or likely to be made, by you by way of transfer of ownership of a capital asset. Section 188-25 of the GST Act is extracted below: In working out your projected GST turnover, disregard:

(a)            any supply made, or likely to be made, by you by way of transfer of ownership of a capital asset of yours; and (b)            any supply made, or likely to be made, by you solely as a consequence of: (i)          ceasing to carry on an enterprise; or (ii)          substantially and permanently reducing the size or scale of an enterprise. Goods and Services Tax Ruling GSTR 2001/7 Goods and Services Tax: meaning of GST turnover, including the effect of section 188-25 on projected GST turnover (GSTR 2001/7) discusses this issue. The meaning of 'capital assets' is discussed at paragraphs 31 to 36 of GSTR 2001/7: Meaning of 'capital assets' 31. The GST Act does not define the term 'capital assets'. Generally, the term 'capital assets' refers to those assets that make up 'the profit yielding subject' of an enterprise. They are often referred to as 'structural assets' and may be described as 'the business entity, structure or organisation set up or established for the earning of profits'.

32. 'Capital assets' can include tangible assets such as your factory, shop or office, your land on which they stand, fixtures and fittings, plant, furniture, machinery and motor vehicles that are retained by you to produce income. 'Capital assets' can also include intangible assets, such as your goodwill. 33. Capital assets are 'radically different from assets which are turned over and bought and sold in the course of trading operations'. An asset which is acquired and used for resale in the course of carrying on an enterprise (for example, trading stock) is not a 'capital asset' for the purposes of paragraph 188-25(a). 34. 'Capital assets' are to be distinguished from 'revenue assets'. A 'revenue asset' is 'an asset whose realisation is inherent in, or incidental to, the carrying on of a business'. 35. If the means by which you derive income is through the disposal of an asset, the asset will be of a revenue nature rather than a capital asset even if such a disposal is an occasional or one-off transaction. Isolated transactions are discussed further at paragraphs 46 and 47 of this Ruling.

36. Over the period that an asset is held by an entity, its character may change from capital to revenue or from revenue to capital. For the purposes of section 188-25 the character of an asset must be determined at the time of expected supply. We consider the sale of Property A and Property B would constitute the transfer of a capital asset for the purposes of section 188-25 and would therefore be disregarded when calculating your projected GST turnover. The properties were not intended to be acquired for the primary purpose of resale. The primary reason you decided to sell both properties was due to issues with the tenants and damage to the properties. Furthermore, you have derived your rental income from the use of the properties as opposed to the trading of properties with the intent of capital gains.

As amounts of input taxed residential rent and supplies by transfer of capital assets are disregarded, your GST turnover does not meet the registration turnover threshold as the income you derive from your other work activities is under the registration turnover threshold. Thus, you are not required to be registered for GST and the sale of Property A and Property B will not be taxable supplies as paragraph 9-5(d) of the GST Act has not been met. Conclusion The sale of the properties is made for consideration and the properties are located in Australia. You also make the supply through the leasing enterprise you conducted. However, you are neither registered nor required to be registered for GST. Consequently, you are not making taxable supplies when you sold the properties. Subject 2 Capital gains tax (CGT) Issue 3 Tax treatment of the profit made upon the sale of the properties (revenue versus capital) Questions 3,4 and 5 Summary

The profit or gain derived from the sale of Property A and Property B is not considered to be a profit from either carrying on a property development business or an isolated profit-making commercial transaction, and therefore will not be included in your assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997). However, despite the profit or gain not being treated as ordinary income, it will be treated as an assessable capital gain in accordance with section 102-5 of the ITAA 1997. Detailed reasoning Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of an Australian resident includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year. Section 6-10 of the ITAA 1997 states your assessable income also includes some amounts that are not ordinary income, which is assessable as statutory income. There are 3 ways the proceeds from a property development can be treated for taxation purposes: •                     Assessable ordinary income under section 6-5 of the ITAA 1997 as income from carrying on a business of property development;

•                     Assessable ordinary income under section 6-5 of the ITAA 1997 as income from an isolated commercial transaction with a view to profit; or •                     A mere realisation of a capital asset, assessable under Parts 3-1 and 3-3 of the ITAA 1997 as statutory income. Carrying on a business Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? (TR 97/11) provides the Commissioner's view on whether a taxpayer is carrying on a business. Although TR 97/11 deals with the issues in determining whether a taxpayer is carrying on a business of primary production, the same principles can be applied to the question of whether a taxpayer is carrying on any type of business including property subdivision and development. Paragraph 13 of TR 97/11 states that the following indicators are relevant in determining whether a taxpayer is carrying on a business: (a)            whether the activity has a significant commercial purpose or character; (b)            whether there is repetition and regularity of the activity;

(c)            whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business; (d)            whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit; the size, scale and permanency of the activity; and (e)            whether the activity is better described as a hobby, a form of recreation or a sporting activity. Whether a business is being carried on depends on the impression gained from looking at all the indicators against the case facts and whether these indicators provide the operations with a commercial flavour. Isolated commercial transactions Taxation Ruling TR 92/3: Income tax: whether profits on isolated transactions are income (TR 92/3) provides guidance in determining whether profits from isolated transactions are ordinary income and therefore assessable under section 6-5 of the ITAA 1997. The term 'isolated transactions' in paragraph 1 of TR 92/3 refers to: •                     those transactions outside the ordinary course of business of a taxpayer carrying on a business, and

•                     those transactions entered into by non-business taxpayers. Whether a profit from an isolated transaction is ordinary income is a question of fact and depends very much on the individual circumstances of the case. Paragraph 6 of TR 92/3 provides that profits from an isolated transaction is generally income when both of the following elements are present: •                     the intention or purpose of the taxpayer in entering into the transaction was to make a profit or gain; and •                     the transaction was entered into, and the profit was made, in the course of carrying on a business or in carrying out a business operation or commercial transaction. Paragraph 13 of TR 92/3 outlines the following factors which may be relevant when considering whether an isolated transaction amounts to a business operation or commercial transaction: •                     the nature of the entity undertaking the operation or transaction; •                     the nature and scale of other activities undertaken by the taxpayer; •                     the amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained;

•                     the nature, scale and complexity of the operation or transaction; •                     the manner in which the operation or transaction was entered into or carried out; •                     the nature of any connection between the relevant taxpayer and any other party to the operation or transaction; •                     if the transaction involves the acquisition and disposal of property, the nature of the property, and •                     the timing of the transaction or the various steps in the transaction. In considering the taxpayer's intention, TR 92/3 states that it is not the subjective intention or purpose of the taxpayer that is relevant. Rather, it is the taxpayer's intention or purpose discerned from an objective consideration of the facts and circumstances of the case. TR 92/3 also states that it is not necessary that the intention or purpose of profit-making be the sole or dominant intention or purpose for entering into the transaction. Rather, a taxpayer may have multiple intentions or purposes and all that is required is that sale for a profit be 'a not insignificant' intention or purpose ( McCarthy v. FC of T [2021] AATA 1511 ( McCarthy

) and McCurry v. FV of T (1998) 39 ATR 121; 98 ATC 4487 ( McCurry )). In McCarthy , the taxpayers demolished the dwelling on a property, subdivided it and then sold the two vacant lots for a profit. The taxpayers argued that the development was of such a small scale it was not a commercial transaction. However, the Tribunal held that it was the sort of transaction that a person in business might undertake and therefore it was a commercial transaction. The taxpayers in McCarthy

also argued that their original intention had been to hold the property as a rental investment to generate income but due to financial reasons they had to change their plan to hold the property long-term. The Tribunal stated that a taxpayer's stated intention must be considered in light of all the evidence and what eventually transpired. It also stated that a profit-making purpose does not have to be the sole or even the predominant purpose for entering into a transaction; it just has to be a not insignificant purpose. The Tribunal concluded that even if the taxpayer originally had another purpose for entering into the transaction, the possible subdivision and sale of the property was also a live option that the taxpayers considered at the time. Therefore, the Tribunal found that the profit made on the sale of the two subdivided lots was assessable as ordinary income under section 6-5 of the ITAA 1997. In McCurry

, the taxpayers purchased a property, demolished the existing dwelling on it, and built three townhouses which were placed on the market a year after construction was completed. The taxpayers claimed that their original intention had been to construct townhouses to rent out and that they were only sold because of the financial difficulties they were encountering. The Federal Court in McCurry held that: •                     The development was a sufficiently businesslike venture to constitute a commercial transaction. •                     A taxpayer may have more than one intention or purpose in mind when entering into a property development. •                     When considering intention, the court is entitled to have regard not only to the taxpayer's stated intention but also the surrounding facts and to the events which actually occurred, as those events, by hindsight, can throw light on the considerations the taxpayer had at the time the transaction was entered into. The court stated: 'That which a person does is a guide to that which he had in mind to do'.

•                     Although the taxpayers may originally have had the intention to rent out the townhouses on completion, having regard to all the facts and events that occurred, it was considered that they also had in mind the possibility of selling the developed property at a profit. •                     The profit on the sale of the townhouses was profit from an isolated commercial transaction and therefore assessable as ordinary income. Mere realisation Where the sale of land is a 'mere realisation', rather than sold in the course of carrying on a business or an isolated profit-making transaction, the sale is on capital account and CGT rules will generally apply. These proceeds are not ordinary income. As stated in paragraph 36 of TR 92/3, the courts have often said that the profit on the mere realisation of an investment will not be income, even where the taxpayer goes about the realisation in an enterprising way. Capital Gains Tax

Profits from the sale of property may be treated as statutory income under the CGT provisions contained in Part 3-1 of the ITAA 1997 as a mere realisation of a capital asset. Section 102-20 of the ITAA 1997 states that a capital gain or capital loss is made only if a CGT event happens. Most CGT events happen in respect of a CGT asset. Real estate property is a CGT asset (section 108-5 of the ITAA 1997). CGT event A1 happens if you dispose of a CGT asset. If profit from the sale of property gives rise to both ordinary income and a capital gain, section 118-20 of the ITAA 1997 will apply to reduce the capital gain to the extent that the profit from the sale of the property is otherwise included as assessable income under section 6-5 of the ITAA 1997. Application to your circumstances Given the facts in your case, especially the 'one-off' nature of the activity and it's relatively modest scale, we do not consider you were carrying on a business of property development. However, the profit will still be assessed as ordinary income under section 6-5 of the ITAA 1997 if it resulted from an isolated commercial transaction which was entered into with a view to making a profit.

In your case, you purchased two house and land packages which were sold after having rented each of these properties out for a significant period (X years for Property A and X years for Property B). The profits made on the sale of Property A and Property B will be assessable as ordinary income if you had a profit-making intention at the time of the transaction. You used Property A and Property B to produce rental income from when it was purchased up until late 20XX, a short time before each property was sold. You listed each property for lease through your real estate agent immediately after Property A and Property B was built. The information you have supplied to us, and all the surrounding circumstances indicate that your sole initial intention was to keep Property A and Property B long-term to use as rental properties. However, you had then encountered ongoing difficulties with your tenants which took a toll on your mental health, and this was the predominant reason you decided to eventually sell Property A and Property B. The difficulties you experienced with the tenants were ongoing and you believed would likely continue if you had kept renting out the properties.

You did not consider selling Property A or Property B at any other stage during the period you owned both properties. Borrowings This was a factor considered by the Federal Court in McCurry to conclude that, contrary to the claims made by the taxpayers, they would have had in mind the possibility of selling the developed property at a profit when entering into the development. The Federal Court stated: The project did not represent an investment of surplus funds, and it was likely that, at some stage, the property would have to be sold to repay to the Bank the moneys borrowed. However, in your case, you did not borrow any funds to purchase either property. The total funds for the purchase of Property A and Property B were provided by your parent as a gift. Therefore, in contrast to McCurry , as no funds were borrowed to purchase Property A or Property B, there was no requirement to sell either property at any stage during your ownership of Property A and Property B to repay or pay down any borrowings. Conclusion

As discussed previously, it is not the subjective intention of the taxpayer that is relevant but rather their intention as discerned from an objective consideration of the facts and circumstances of the case. Also, as stated in McCurry and McCarthy , what actually eventuated sheds light on the taxpayer's intention on commencement of the development. Having regard to all the objective facts and circumstances, including the events that transpired, we consider that, when you purchased Property A and Property B, your intention was to keep both properties for long-term use as rental properties. You encountered several difficulties with your tenants which took a toll on your mental health, and this was the reason you decided to sell Property A and Property B. You did not consider selling Property A or Property B at any other stage in the short-term during the period you owned both properties. Consequently, your profit on the sale of Property A and Property B is not assessable as ordinary income under section 6-5 of the ITAA 1997. That is, the sale of Property A and Property B is not considered to be an isolated profit-making transaction, but rather than the mere realisation of an asset.

Therefore, the profit on the sale of Property A and Property B will only be treated as a capital gain under section 102-5 of the ITAA 1997. Issue 4 Capital gains tax (CGT) discount Question 6 Summary As you have owned Property A and Property B for more than 12 months before they were sold, you can reduce any capital gain made on the disposal of Property A and Property B by 50%. Detailed reasoning Under Division 115 of the ITAA 1997 for a capital gain to be a discount capital gain the following requirements must be satisfied: •                     it is made by an individual, a trust, or a complying superannuation entity •                     a CGT event happens to an asset the entity owns •                     the CGT event happened after 11.45am (by legal time in the XXX) on 21 September 1999 •                     the asset was acquired at least 12 months before the CGT event, and •                     the indexation method was not used to calculate the cost base.

If these conditions are met, any capital gain made on the disposal of Property A and Property B can be reduced by applying the 50% CGT discount (as for an individual the capital gain is reduced by the discount percentage of 50%). The CGT discount in Division 115 of the ITAA 1997 does not require a choice to be made for its application but applies automatically if its conditions are satisfied. Application to your circumstances As you owned Property A and Property B for more than 12 months, and the other relevant conditions are satisfied in Division 115 of the ITAA 1997 for a discount capital gain, you can reduce the any capital gain made on the disposal of Property A and Property B by 50%.