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1 Is the gain made from the sale of XXX a capital gain pursuant to subsection 104-10(4) of the Income Tax Assessment Act 1997 ('ITAA 1997')?

1 Yes. Question 2 Is the gain from the sale of XXX assessable as ordinary income pursuant to section 6-5, and consequently, will section 118-20 apply to reduce the capital gain to zero? Answer 2 No. Question 3 Will section 118-25 apply to XXX? Answer 3 No. This ruling applies for the following period : Income year ended 30 June 20XX The scheme commenced on: XX XX XXXX

Background The Taxpayer is a trust controlled by the Family. The Family has a long history of property related ventures. From XXXX, XXX and XXX began developing properties with the intention to hold them for long-term rental income. However, from XXXX to XXXX, they developed and sold several properties to build up a capital base to be able to retain assets. After establishing a capital base, assets have since been acquired and developed with the intention of long-term income generation. With this capital base, the Family acquired five assets. In addition, the Family has a broader commercial property portfolio. When the Family acquires commercial properties, a special purpose vehicle is generally established to own the asset. Over recent years, the Family has slowly repositioned by diversifying further into operational companies to supplement their rental income. As interest rates have risen, the Family have found it harder to satisfy bank covenants, particularly in terms of interest cover ratios.

While the Family are still developing real estate assets, the additional income afforded by operational companies has assisted them in being able to hold long term assets and meet interest cover ratio requirements. The sale of XXX in December XXXX was the first step in the Family's repositioning. Although the Family had intended to retain this property as part of the Family's income producing commercial property assets, and after rejecting several unsolicited offers, the Family received an unsolicited offer that far exceeded what the Family believed the property to be worth. XXX On XX XX XXXX, the Taxpayer acquired XXX. At the time of purchase, XXX was vacant land. XXX was purchased with the intention to develop the site and build long term commercial assets to be held by the Family. Since its purchase, XXX has been recorded in the financial accounts of the Taxpayer as a non-current investment asset. In XXXX and XXXX, the following lease agreements were entered into with tenants for XXX: a.            XXX; 10 year lease plus 2 x 5 year options. Includes an incentive of $Xk plus warm shell fit out.

b.            XXX; 15 year lease plus 4 x 5 year options. Includes an incentive of a warm shell fit out. c.             XXX; 10 year lease plus 1 x 10 year option. Includes an incentive of 3 months free rent and warm shell fit out. d.            XXX; 5 year lease plus 2 x 5 year options e.            XXX; 10 year lease plus 2 x 10 year options. Includes an incentive of a warm shell fit out. Construction and development of XXX commenced on XX XX XXXX, and was completed on XX XX XXXX. The Taxpayer has derived substantial rental income from XXX, returning the following gross rental income in its income tax returns: In XXXX, XXX was replaced with XXX following the tenant's request to exit the lease due to poor performance. The XXX lease is for 10 years, with a 1 x 10 year option. In XX XXXX, XXX was used by the Family as security for the financing of the acquisition of properties located at XXX and XXX. A condition of the approval of this financing was that any security taken by the bank would be unable to be sold without alternative security being offered. The Family anticipated that XXX would not be sold and therefore used it as security. XXX and sale of XXX

In XXXX, the Family considered purchasing shares in XXX. The Family considered the acquisition of the shares in the XXX would allow the Family to increase their income and assist with meeting bank covenants. The Family approached the bank for support, but the bank was unwilling to extend finance for the amount requested. As a result, the only option left for the Family was to sell an asset. The Family judged XXX as the best asset to sell given the quality of the tenants in place. The Family entered into a due diligence period to review the XXX. During this due diligence period, the Family put XXX up for sale. The purchase of the remaining shares in the XXX by the Family was conditional on the sale of XXX, as this was the primary way in which the Family were financing the purchase of the shares. The XXXX sale process was conducted via a public expression of interest campaign that was run by a real estate agency that specialises in commercial property. Prior to engaging the real estate agency, XXX had never been taken to the market during the Taxpayer's period of ownership, nor had the Taxpayer received any solicited offers to buy XXX during its period of ownership.

On XX XX XXXX, the Taxpayer entered into a contract to sell XXX for $Xm to an unrelated third party. This contract settled on XX XX XXXX. The funds from the sale of XXX were used to fund the purchase of the XXX shares. The cost base of XXX for CGT purposes is approximately $Xm. At the time of purchase, and absence any other factors, the Family's intention was to continue to hold XXX. However, consistent with the Family's repositioning outlined above, the Family considered the acquisition of the remaining shares in the XXX would allow the Family to increase their income and assist with meeting bank covenants.

ITAA 1997 section 6-5 ITAA 1997 section 6-25 ITAA 1997 section 70-10 ITAA 1997 section 104-10 ITAA 1997 section 118-20 ITAA 1997 section 118-25 ITAA 1997 section 995-1

Issue 1 Question 1 Summary CGT event A1 happened. The gain from the disposal will be a capital gain pursuant to subsection 104-10(4). Detailed reasoning Subsection 104-10(1) provides that CGT event A1 happens if you dispose of a CGT asset. Paragraph 108-5(1)(a) provides that a CGT asset is any kind of property. Examples of CGT assets in section 108-5 include land and buildings. It is uncontentious that XXX is a CGT asset for the purposes of section 108-5, and consequently, section 104-10. Subsection 104-10(2) provides that you dispose of a CGT asset if a change of ownership occurs from you to another entity. Where a contract was entered into for the disposal, subsection 104-10(3) provides that the time of the event is when you enter into the contract for the disposal. On XX XX XXXX, the Taxpayer entered into a contract to sell XXX. In accordance with section 104-10, CGT event A1 happened on XX XX XXXX.

Whether a capital gain or capital loss is made from the sale is determined by subsection 104-10(4), which provides that you make a capital gain if the capital proceeds from the disposal are more than the asset's cost base, and you make a capital loss if those capital proceeds are less than the asset's reduced cost base. Here, capital proceeds from the disposal of XXX are $Xm, while XXX's cost base is approximately $Xm. Accordingly, pursuant to subsection 104-10(4), there will be a capital gain made from the disposal of XXX. Issue 1 Question 2 Summary Section 118-20 will not apply to reduce the capital gain from the sale of XXX to zero. Detailed reasoning Section 6-25 provides that where more than one rule includes an amount in your assessable income, unless a contrary intention appears, provisions outside of Part 1-3 will prevail over the rules about ordinary income. Section 118-20 is an anti-overlap provision that reduces a capital gain you make if the same amount is included in your assessable income because of another provision in the ITAA 1997.

Section 118-20 is an example of a contrary intention described by section 6-25. Accordingly, if the profit or gain from the sale of XXX gives rise to both ordinary income pursuant to section 6-5 and a capital gain pursuant to section 104-10, the amount will only be assessable as ordinary income under section 6-5. Reflecting the High Court's decision in Federal Commissioner of Taxation v. The Myer Emporium Ltd ('Myer'), Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income ('TR 92/3') outlines the instances in which profits from isolated transactions are ordinary income. Together, paragraphs 15 and 16 of TR 92/3 provide that the sale of XXX may be considered ordinary income of the Taxpayer pursuant to section 6-5 if: a.            the transaction was entered into in the ordinary course of the Taxpayer's business; or b.            the transaction was entered into in the course of the Taxpayer's business with the intention to make a profit; or

c.             if the transaction wasn't entered into in the course of the Taxpayer's business or if the Taxpayer isn't carrying on a business, the transaction was entered into in carrying out a business operation or commercial transaction with the intention of making a profit. In contrast, where a transaction is the mere realisation of an investment or asset, any gain or profit will not be ordinary income. Profits or gains made in the ordinary course of business Although discussing primary production, Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? ('TR 97/11') outlines the relevant indicators when determining whether a business is being carried on. While there are no hard and fast rules in determining whether a taxpayer's activities amount to the carrying on of a business, cases that have considered the question of whether a business is being carried on have referred to the following indicators: •                     whether the activity has a significant commercial purpose or character; •                     whether the taxpayer has more than just an intention to engage in business;

•                     whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity; •                     whether there is repetition and regularity of the activity; •                     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; •                     whether the activity is planned, organised and carried on in a businesslike manner; •                     the size, scale and permanency of the activity; and •                     whether the activity is better described as a hobby, a form of recreation or a sporting activity. Where a taxpayer is carrying on a business, paragraph 32 of TR 92/3, citing the High Court's decision in Myer , states that there are two types of profits or gains that can be said to be made in the ordinary course of carrying on a business: a.            a profit or gain arising from a transaction which is itself a part of the ordinary business of a taxpayer (judged by reference to the transactions in which the taxpayer usually engages); and

b.            a profit or gain arising from a transaction which is an ordinary incident of the business activity of the taxpayer, although not a transaction entered into directly in its main business activity. Paragraph 32 of TR 92/3 gives the example of profits of insurance companies and banks on the sale of investments as ordinary incidents of a business activity that are generally income. In London Australia Investment Company Limited v. Federal Commissioner of Taxation ('London Australia Investment') , the High Court found that the sale of shares by a company whose business was to invest in shares with the primary purpose of obtaining income by way of dividends, because the conduct of the business required that the share portfolio be given regular consideration, with shares being sold frequently, the sale of the shares was a normal operation of the taxpayer's business of investing for profit. In Westfield Limited v Federal Commissioner of Taxation ('Westfield')

, the Full Federal Court held that the profits from sale of land acquired by the taxpayer and later sold in trying to secure a development contract was not ordinary income. The taxpayer's main activities were the construction, management, and letting of shopping centres, and the resale land was not in the ordinary course of the taxpayer's business or an ordinary incident thereof. Example 9 in TR 92/3 also provides an example of a taxpayer carrying on a business as the owner and operator of a motel. The taxpayer ran the motel before selling it for a profit. The example concludes that the profit on the sale of the motel is not income. It can be inferred from the facts that the motel was not acquired with a purpose of making a profit (as distinct from income from the carrying on a business), the sale of the motel was not made in the ordinary course of carrying on a business, and the motel was a structural asset of the business. Application to your circumstances The Taxpayer is a special purpose vehicle within the Family's group, settled for the purpose of holding XXX.

Since purchasing XXX in XXXX with the intention to develop the site and build commercial property, the Taxpayer has completed construction and development and has since derived rent from commercial tenants. The Taxpayer is also part of the broader group of the Family. Considering the indicators in TR 97/11, the Taxpayer is carrying on a business. The development of commercial property and subsequent derivation of commercial rent has significant commercial purpose or character, particularly when they are viewed in the broader context of the Family's group. There is also repetition and regularity of the Taxpayer's activities by other entities within the Family's group. The size, scale, and permanency of the Taxpayer's activities are also supportive of the Taxpayer carrying on a business. Multiple commercial buildings were developed, and the permanency of the activities is demonstrated by the derivation of ongoing rental income since the completion of construction and development. This is also demonstrative of the Taxpayer having more than a mere intention to carry on the activities.

The Taxpayer's activities are driven by a purpose of profit and increased cash flow, with the Family's business strategy shifting focus in XXXX towards deriving long-term rental income. The Taxpayer's activities cannot be described as a hobby or form of recreation and are better described as a business. Accordingly, the Taxpayer was carrying on a business. It is therefore necessary to determine what the Taxpayer's ordinary course of business is, and whether the sale of XXX falls within its ordinary course of business. The Taxpayer is an entity whose activities are the acquisition and development of convenience retail sites, and the subsequent leasing of those properties to derive long-term rental income. Although the Family has developed and sold properties from XXXX to XXXX, this was part of a business plan to build up a capital base to allow the Family to acquire assets with the intention of long-term income generation. The Taxpayer has owned XXX since XX XXXX, completed construction and development of XXX on XX XX XXXX, and has since derived rental income from commercial tenants who have entered into long term leases.

While the Family group has sold a number of properties/interests in properties, a distinction can be drawn from these sales to the sales in London Australia Investment . There is a lack of regularity in the Family's sales, and there is nothing to suggest that the Family's commercial property portfolio is reviewed regularly with the consideration to sell. Furthermore, for the Family's most substantial sale before XXX, being the sale of XXX, was sold after the Family received an unsolicited offer that far exceeded its valuation of the property. The facts here are similar to those found in example 9 of TR 92/3 and Westfield . In Westfield , land sold by the taxpayer, also the developer of commercial property, was not in the ordinary course or an ordinary incident of the taxpayer's business. In example 9 of TR 92/3, it is stated that the motel used in the taxpayer's business of operating a motel is a structural asset, and its sale is not in the ordinary course of carrying on a motel business.

Similarly, XXX can be said to be a structural asset of the Taxpayer. Like the motel in example 9 of TR 92/3, XXX was the key asset used by the Taxpayer to derive income in the course of carrying on its business. The sale of XXX was driven by a desire to reposition the Family's broader business plan, with the sale of. The sale of XXX was not driven by any incident that formed part of the ordinary course or ordinary incident of the Taxpayer's business. The Taxpayer cannot be said to be in the business of reselling commercial property, and similar to Westfield , the sale of XXX cannot be said to be in the ordinary course or an ordinary incident of the Taxpayer's business. Isolated transaction entered into with a profit making intention Because the sale of XXX was not entered into in the ordinary course or an ordinary incident of the Taxpayer's business, it is necessary to determine whether the sale of XXX was an isolated transaction entered into in carrying out a business operation or commercial transaction with the intention of making a profit.

Paragraph 47 of TR 92/3 provides that for a transaction to be characterised as a business operation or a commercial transaction, it is sufficient if the transaction is business or commercial in character. Whether this is the case will depend on the circumstances of the case. Paragraph 49 of TR 92/3 provides some general factors in considering whether a transaction amounts to a business operation or commercial transaction: a.            the nature of the entity undertaking the operation or transaction; b.            the nature and scale of other activities undertaken by the taxpayer; c.             the amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained; d.            the nature, scale and complexity of the operation or transaction; e.            the manner in which the operation or transaction was entered into or carried out. This factor would include whether professional agents and advisers were used and whether the operation or transaction took place in a public market;

f.              the nature of any connection between the relevant taxpayer and any other party to the operation or transaction. For example, the relationship between the parties may suggest that the operation or transaction was essentially a family dealing and not business or commercial in nature; g.            if the transaction involves the acquisition and disposal of property, the nature of that property. For example, if the property has no use other than as the subject of trade, the conclusion that the property was acquired for the purpose of trade and, therefore, that the transaction was commercial in nature, would be readily drawn; and h.            the timing of the transaction or the various steps in the transaction. If the transaction was entered into in carrying out a business operation or commercial transaction, the taxpayer must also have the intention or purpose to make a profit or gain in entering into the transaction. A taxpayer's intention is to be determined objectively from the facts and circumstances.

In addition, it is the taxpayer's intention or purpose at the time of entering into the relevant transaction, and if the transaction involves the sale of property, it is usually necessary that the taxpayer has the purpose of profit making at the time of acquiring the property. In Myer, the High Court stated the following: It is one thing if the decision to sell an asset is taken after its acquisition, there having been no intention or purpose at the time of acquisition of acquiring for the purpose of profit-making by sale. Then, if the asset be not a revenue asset on other grounds, the profit made is capital because it proceeds from a mere realisation. But it is quite another thing if the decision to sell is taken by way of implementation of an intention or purpose, existing at the time of acquisition, of profit-making by sale, at least in the context of carrying on a business or carrying out a business operation or commercial transaction. Paragraph 39 of TR 92/3, citing Whitfords Beach Pty Ltd v. Federal Commissioner of Taxation , states that where the taxpayer is a company, the purposes of those who control it are its purposes. Application to your circumstances

To determine whether the sale of XXX amounts to a business operation or commercial transaction, it needs to be compared to the general factors listed in paragraph 49 of TR 92/3. The nature of the entity undertaking the operation or transaction is a special purpose vehicle. The very nature of a special purpose vehicle is indicative that the entity and its operations may be commercial in nature. The nature and scale of the activities undertaken by the Taxpayer has a commercial flavour, being the derivation of commercial rent. The amount of rent is also substantial. While the sale of XXX is not complex, the nature and scale of the transaction is substantial, being a sale for $Xm. The transaction was carried out via an expression of interest campaign on the open market with a professional real estate agency that specialises in commercial property. The sale was to an unrelated third party. The nature of XXX is a property with a number of long-term commercial tenants, from which substantial commercial rent is derived. While XXX is not the subject of trade, it is an asset that facilitates trade by its commercial tenants.

In considering the factors listed in paragraph 49 of TR 92/3, the sale of XXX amounts to a business operation or commercial transaction. Accordingly, it is necessary to consider the intention and purpose of the Taxpayer in carrying out the sale of XXX. The relevant intention of the Taxpayer is to be determined from an objective consideration of the facts and circumstances. The following facts are relevant in considering the Taxpayer's intention at the time of acquiring XXX: a.            From XXXX, the controlling minds of the Taxpayer intended to develop assets with the intention of holding them for long-term rental income. i.                The controlling minds of the Taxpayer have in fact purchased and developed assets that it has derived long-term rental income from b.            XXX was purchased by the taxpayer on XX XX XXXX as vacant land. c.             Construction and development of XXX was completed in XXXX. d.            Since XXXX, the Taxpayer has entered into long-term leases with commercial tenants at XXX. The Taxpayer has derived substantial rent from these commercial tenants.

e.            In XX XXXX, the Family used XXX as security to finance the acquisition of several other properties. A condition of the approval for this finance was that the security would not be able to be sold without alternative security being offered. f.              The Taxpayer has treated the asset as a non-current asset for accounting purposes. g.            The decision to sell XXX was prompted by the Family purchasing an alternative asset. h.            The Family sought financing with their bank but were unable to obtain financing and were ultimately forced to sell an asset. The facts above support the conclusion that the Taxpayer's intention at the time of purchasing XXX was to develop the land and hold it long-term, deriving long-term commercial rent. The facts above indicate that the sale of XXX by the Taxpayer was the mere realisation of a capital asset as described by the High Court in Myer. Accordingly, any profit or gain from the sale will not be ordinary income under section 6-5, and section 118-20 will not reduce the capital gain determined under Question 1 to zero. Issue 1 Question 3 Summary Section 118-25 will not apply. Detailed reasoning

Subsection 118-25(1) provides that a capital gain or capital loss you make from a CGT asset is disregarded if, at the time of the CGT event, the asset is: (a)          your trading stock; or (b)          if you are a partner, trading stock of the partnership; or (c)           if you are absolutely entitled to the asset as against the trustee of a trust (disregarding any legal disability), trading stock of the trustee. Section 995-1 provides that trading stock has the meaning given by section 70-10. Subsection 70-10(1) states that trading stock includes: (a)          anything produced, manufactured or acquired that is held for purposes of manufacture, sale or exchange in the ordinary course of a business; and (b)          live stock. Although it discusses land, Taxation Determination TD 92/124 Income tax: property development: in what circumstances is land treated as 'trading stock'? ('TD 92/124')is instructive in when buildings or property may be treated as trading stock for income tax purposes. Paragraph 1 of TD 92/124 provides that land is treated as trading stock for income tax purposes if: a.            it is held for the purpose of resale; and

b.            a business activity which involves dealing in land has commenced. Application to your circumstances In answering Question 2 of this Ruling, it was determined that the sale of XXX was not in the ordinary course of the Taxpayer's business. The Family treated XXX as a non-current investment asset, and it was used to derive commercial rent. The Family's decision to sell XXX does not reflect a change in how the asset is treated. When XXX is considered against paragraph 1 of TD 92/124, XXX does not meet either of the conditions set out. XXX was not held for the purpose of resale by the Taxpayer, nor was the Taxpayer involved in a business activity that involves dealing in commercial property. Accordingly, XXX will not meet the definition of trading stock in subsection 70-10(1). Because XXX does not meet the definition of trading stock in subsection 70-10(1), section 118-25 will not apply.