We have compiled a compendium of feedback to our Web Guidance product The Dividing Line that was published for public comment.

A copy of the feedback is available for download.

If you have accessibility needs and require a copy of this document in an accessible format please email Property and Construction

What this guidance is about

1. The purpose of this guidance is to facilitate consultation between the Australian Taxation Office (ATO), tax professionals, industry associations and taxpayers engaged in property transactions. The guidance aims to provide insight and transparency into our decision making on a range of property development scenarios that we are seeing.


2. This product provides guidance only and as all arrangements are different we encourage you to seek professional advice; ATO advice and also to refer to our view in ATO products such as Rulings, Determinations and Tax Alerts. Ongoing consultation and feedback on issues identified in this paper may lead to the development of further public advice products.


3. Our intention is to update this guidance according to your feedback and as new arrangements emerge. We may also provide additional guidance to include Goods and Services Tax and other tax obligations.


4. This guidance has two main sections. The first details the issues that we are seeing and our general position. The second provides a range of examples, based on circumstances we have recently encountered, to illustrate how we have dealt with those issues.

Go to Table of contents

PART A: The factors we take into account in making a decision

Is an agreement to develop and sell your land a ‘mere realisation’ or a disposal either in the course of a business or as part of a profit making undertaking or plan?

5. 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.


6. 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.


7. 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.


8. 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.


9. Outside of the capital/revenue discussion, we are also providing examples of timing issues relating to the recognition of income and deductions, property development agreements (PDAs), and land banking activity.


10. We have published a relevant concern in Taxpayer Alert TA 2014/1: Trusts mischaracterising property development receipts as capital gains. This Alert focusses on the recognition of profits from property developer activities as a mere realisation of capital rather than an allocation of ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997), to trust beneficiaries.


11. We also note for completeness that Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income (TR 92/3) and 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 provide public advice relevant to this issue.



Go to Table of contents

Capital vs Revenue Characterisation

12. When we make decisions on the character of a transaction we take into account all the surrounding facts and circumstances in accordance with the legislation and established case law.


13. It is important to weigh all the facts and indicia together, and not in isolation. The test we apply is whether, on the balance of probabilities, it is more likely than not that the relevant tax provisions apply to the facts of the particular case.


14. It is not simply a matter of tallying how many indicia point in each direction (e.g. that a taxpayer acquired land with the requisite profit making intention or purpose). Some factors will be more influential than others, and some will, because of the particular circumstances, point more strongly to a particular conclusion.


15. Where it is necessary to ascertain intent (e.g. in relation to whether the sale of a property was part of a profit making undertaking or scheme), that determination is required to be made objectively (i.e. based on a broad consideration of the person’s circumstances).


16. The following list of indicia is not exhaustive and may change over time:
    • 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

a. The landowner has held the land for a considerable period prior to the development and sale

17. The longer the land has been held prior to embarking on the development, the stronger the inference that there was no original intention of profitable resale or the existence of a development business.


18. We will consider whether the landowner had an original intention to hold the land for a period, then develop and sell it at a later point in time. The intention to develop/profitably sell in the future can be one of multiple intentions of the landowner (i.e. it is not necessary that the intention or purpose of profit making was the sole or dominant intention or purpose for entering into the transaction).


19. We will also consider whether the landowner has done something at a later point in time to venture the property into a business or profit making undertaking, such as engaging architects, surveyors or real estate agents.

b. The landowner has conducted farming, or other non-development activities, prior to beginning the process of developing and selling the land

20. This factor may indicate with some force that the property is a capital asset, and was not originally acquired to conduct a development business or to profitably resell.


21. The longer the ‘other’ activity has been carried on, the more likely the landowner did not have an original intention of development or profitable resale.


22. The greater the active involvement of the landowner in that ‘other’ activity, the more likely the asset is a capital asset. If the activity is passive, such as ‘agistment’ or ‘share farming’, this factor will carry less weight.


23. Where landowners argue that ‘other’ activities were carried on to support their position that the property is capital, we will independently verify that the activities have been carried on, and ensure that those activities have substance, (i.e. they are not designed to create the appearance that farming/non-development activities are being carried on). We will consider the income earned from those other activities.


24. However, this factor does not exclude the possibility that the landowner may later change their mind (i.e. purpose) and venture the land into a profit making business or venture.

c. The landowner originally acquired the property as a private residence or for recreational purposes

25. This factor may indicate that the property is held on capital account and, unless the landowner has changed their purpose, the sale may be a ‘mere realisation’ of the asset.


26. We will consider whether the land correctly fits the purpose for which the landowner says it was acquired. If the landowner’s stated original purpose is inconsistent with the nature of the land, we will query whether a business or profit making purpose exists.


27. We will consider whether the landowner had this immediate purpose and also a longer term purpose of profitable resale/development. If this longer term purpose is a substantial purpose, then the sale may be more than a ‘mere realisation’, even if the profitable sale was not the main purpose of acquisition of the land (i.e. it is sufficient if profit making is a significant purpose).

d. The landowner originally acquired the property as an investment, such as for long term capital appreciation or to derive rental income

28. This may indicate that disposal of the property is a ‘mere realisation’ of the asset and on capital account.


29. Where the property was acquired as an ‘investment’ (rather than, for example, farming or as a private residence), we will investigate whether the investment purpose included an exit strategy that involved profitable resale by development, or sale to a developer.


30. We will consider whether any enquiries and/or applications were made to the local Council prior to or soon after acquisition about sub-division or re-zoning of the land. This may indicate that the property was acquired with an intention of development even if it is rented out for a period of time.


31. We will also consider the other circumstances (such as proximity to an urban fringe). If the investment was truly speculating on land that would in the future serve as development land, the profits are more likely be on revenue account.

e. The land has been acquired near the urban fringe of a major city or town
32. This is an indicator that the land may have been acquired for a purpose of development/profitable resale.


33. We will consider the relevant size of the land and the use to which the land was put between acquisition and sale.


34. We will also consider planning conditions, such as the urban growth boundaries of major cities and any evidence of possible future rezoning of the land that existed at the time the land was acquired. The landowner’s original intention may be to wait until the urban growth boundary catches up, before developing and/or selling.


35. Where the urban fringe has crept up to a parcel of land which was acquired before suburban expansion into the area could have been reasonably contemplated, this factor will not point to development/profitable resale. This will in most circumstances mean that the acquisition is well before any redevelopment/change in purpose.

f. Where the property has recently been rezoned, whether the landowner actively sought rezoning

36. If the landowner, or someone on the landowner’s behalf, lobbied or actively took steps to persuade the relevant planning authority to rezone the land, this may indicate that the landowner was engaged in a profit making undertaking or business, as that is likely to make the property more valuable as a development site.


37. Where the authority has imposed a rezoning on the land without any action by the landowner, this may indicate that the eventual sale is a ‘mere realisation’, as the rezoning may cause factors other than profit to motivate the sale (such as a substantial increase in municipal rates).

g. A potential buyer of the property made an offer to the landowner before the landowner entered into a development arrangement

38. Where the landowner has rejected an opportunity to dispose of the land outright, and has instead entered into a development arrangement to pursue a greater profit, it may indicate that the landowner has ventured the land into a development business or profit making undertaking.


39. The decision to enter into a development arrangement demonstrates that (subject to the terms of that arrangement) the landowner has made a choice to expose themselves to the risks and rewards associated with developing the land.


40. Sale of land in a ‘more enterprising manner’ does not necessarily take the sale beyond a ‘mere realisation’. We will consider the terms of the related agreements and the anticipated activities, risks and rewards of the parties before forming a view that the landowner has commenced a business or embarked on a profit making undertaking. We may examine why the landowner rejected the opportunity to dispose of the land outright.

h. Landowner unable to find a buyer for the land without subdivision

41. Where the landowner has tried, but failed, to secure a sale of the land, the entry into a development arrangement to sell the land is more likely to be considered a step towards ‘mere realisation’ than in circumstances where the land could be sold as a whole (as sale by subdivision is the only way of selling the land).


42. This circumstance must be weighed with the terms and conditions agreed to in the relevant agreements.

i. 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

43. Any active steps that the landowner takes to facilitate a subdivision and sale may indicate that the land has been ventured into a property development business, or that the landowner has commenced a profit making undertaking with regard to the land.


44. The more deliberately, determinedly and business-like the pursuit of the planning approval or rezoning, the more likely the activities indicate the requisite purpose. For example, challenges to planning decisions in court, or the putting forward of new proposals when a previous proposal is rejected, may indicate the carrying on of a business or profit making undertaking, especially if the landowner was seeking to subdivide the land into more lots.


45. The closer the proximity in time of the applications to the date of acquisition of the land, the more likely the applications enable an inference of an original purpose of profit making or conducting a land development business to be drawn.

j. The landowner has registered for GST on the basis that they are carrying on an enterprise of developing land

46. Registering for GST on that basis indicates that a property development business has commenced. Depending on the timing of registration this may indicate the property was originally acquired as part of the business or has been ventured into a profit making undertaking.


47. Where the landowner is registered, the subsequent development and subdivision costs incurred would be creditable acquisitions where the landowner is carrying on a property development enterprise.

k. The landowner has registered a related entity for GST that will participate in (or undertake) the development of the land

48. Sometimes landowners will register such an entity for GST and attempt to claim input tax credits for items it supplied to the development.


49. This indicates the intention to carrying on business by the related entity.


50. We will consider whether the business activities of the related entity can cause the same business purpose to be imputed to the landowner.

l. The landowner has a history of buying and profitably selling developed land or land for development

51. This is a strong indicator that the landowner is carrying on a business or is engaged in a profit making undertaking. The more substantial the past history, the more likely the conclusion that the sales are more than ‘mere realisations’.


52. This might include a history of acquisitions near the urban fringe where the intention is to wait for the land to come within the urban growth boundary and rapidly increase in value.


53. Where the landowner establishes related entities to acquire and profitably sell parcels of broadacre land, we may rely on that history to establish that the current activity is part of a broader business. We will consider factors such as commonality of control and any blending of funds in order to consider whether such an argument can be sustained.


54. The landowner may also demonstrate a history of acquiring land, which on a longer term view can be construed as being more than ‘mere realisation’.

m. The operations are planned, organised and carried on in a businesslike manner

55. Where the landowner undertakes activities in relation to the land in a businesslike way, with a view to profit, keeping proper accounts and devoting time to managing the operation, they are more likely to be found to be carrying on a business.


56. This might be relevant from the time of acquisition of the land.


57. The indicators as to when a business is being carried on are contained in Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? (TR 97/11).

n. The landowner has changed its use of the land from one activity to another (e.g. farming to property development)

58. A clear and definitive change of activity may indicate that a business has commenced in relation to the land.


59. We will take into account what has been represented by landowners to third parties other than the ATO. For example, if the landowner has borrowed to fund the land acquisition or alter the development, we will consider whether the stated purpose of the loan was development and resale.


60. Where a new business activity commences, the land will stop being held as a capital asset, and most likely will start being held as trading stock (e.g. if the use of the land changes such that it becomes held for the purpose of sale in the ordinary course of a business). The landowner may have to recognise a capital gain in respect of this transition (see CGT event K4 in section 104-220 of the ITAA 1997). If the new activity into which the land is ventured does not constitute a business (e.g. it constitutes a profit making undertaking or scheme) the land will not be held as trading stock (i.e. CGT event K4 will not apply).


61. Conversely, where a landowner stops holding a particular parcel of land for the purpose of sale in the ordinary course of its business (e.g. the landowner has determined to retain units in an apartment complex to derive rent), the deemed disposal rule in the trading stock provisions (i.e. section 70-110 of the ITAA 1997) requires consideration.

o. The scope, scale, duration and degree of complexity of any development

62. The larger and more complex the development, and the longer it takes to develop and sell the land, the less likely the eventual sale will be a ‘mere realisation’ of the land.


63. This is because more significant developments are more likely to require active involvement, a businesslike application of skill and the taking on of risk (including the risk of an elapse of time while the development proceeds and is finalised), even where the arrangement attempts to formally limit the landowner’s active role.


64. The more work being done to the land, the more readily one might conclude that the landowner is engaged in a business or has a profit making intention. Where you have developed and improved the land to such a marked degree that you have change the nature of the land it makes it more difficult to claim it’s a mere realisation. By way of illustration:
    • Where you subdivide the land into low density large allotments, where there is minimal land clearing and excavation works, with minimal expenditure on roads and services, the landowner can more easily argue that the works go no further than mere realisation.
    • By contrast, as the density of allotments increases, the required activity, expenditure and improvement to the land increases exponentially. For example, in high density allotments there will be extensive expenditure on land clearing, excavation works, construction of road networks, engineering works around the provisions of stormwater, sewerage and other amenities to service all these allotments. As the density increases Councils may also require the provision of open space, parkland, schools and/or retail centres to service these allotments. In such cases the land has been developed and improved to such a marked degree, that a large component of the value of what is ultimately sold is for the development works and not merely the land.

p. Who initiated the proposal to develop the land for resale

65. Where the landowner has been approached by an outside party to enter into a development arrangement that would eventually lead to the sale of the land, it is slightly more likely that the sale will be a ‘mere realisation’ than if the landowner has actively sought a developer to develop the land (e.g. after an unsuccessful attempt to sell the land prior to any development, a real estate agent engaged to sell the land introduces a developer to the landowner).

q. The sophistication of any development or other pre-sale arrangements

66. The more complex and legally sophisticated the arrangements that the landowner enters into as part of the process of ultimately selling the land, the more likely that the landowner is acting in a business-like manner. This may indicate that a business is being carried on, either from the time of acquisition or from a later time.


67. This may involve Development Agreements with developers, agents, owners of adjacent blocks, relevant authorities or other service-providers. This could also extend to the acquisition of additional assets and facilities without which the development would not proceed, such as the acquisition of adjoining land, easements over adjoining properties for access, drainage, and so forth. This may indicate something more than a ‘mere realisation’.

r. The level of active involvement of the landowner in any development activities

68. The more actively involved in the various aspects of the development of the land, the more likely the landowner will be carrying on business.


69. Where the landowner is undertaking or project-managing a development him/herself, or is using a related entity, the level of active involvement of the landowner is likely to be high, and the business purpose is more readily inferred.


70. Where the activities or obligations to be performed by the landowner are more limited or passive, it is more likely that the ultimate sale will be a ‘mere realisation’. We will, however, carefully verify what is required of the landowner under any relevant agreements, including ascertaining who is really taking on the risk of the development to determine whether that development and hence the activities of that development are ultimately that of the landowner.


71. We note that the engagement of professionals is a normal part of the planning and approval process of the development. This is a consequence of the development approval process having become more complex, and also the Authorities’ (i.e. Local and State governments) aversion to risk (e.g. they require independent reports/assessments such as engineering, risk assessments, bushfire assessments, and so forth). Therefore, the engagement of professionals as a practical necessity to satisfy regulatory requirements (which vary significantly between different locations depending on the “intensity” of improvements required) does not, in isolation, indicate that the landowner’s role in the development is passive.


72. We may look to establish the landowner’s knowledge and experience in developing properties, or even in carrying on any business or businesses.

s. The level of legal and financial control maintained by the landowner in a development arrangement

73. The greater the control of the development that is, or can be, exercised by the landowner, the more likely it is that the landowner is carrying on business or is engaged in a profit making undertaking. For example:
    • Where the terms of the development arrangement concerning the decision making process for the development include a “tie-breaker” (or other dispute resolution provision) in favour of the landowner (or a representative of the landowner), this may indicate that a property development business is being carried on.
    • Where a landowner can control the timing of works and sales, the release of stages of land and the development of that land, this may indicate that the landowner is carrying on a development business or a profit making undertaking.
    • Where the landowner is financing the construction or controlling the draw-down on a loan facility, this is likely to indicate that the landowner is carrying on a development business.
    • Where the landowner grants a Power of Attorney that empowers the developer to sell the property and has no other involvement in the development, this may point toward the sale being a ‘mere realisation’.

t. The level of financial risk borne by the landowner in acquiring, holding and/or developing the land

74. Generally, the more financial risk assumed by a landowner in respect of the development, the more likely the landowner is carrying on a business or is engaged in a profit making undertaking.


75. Where the landowner has entered into a land development arrangement, whether the landowner bears financial risk will depend on the various payment terms. For example:
    • Where the landowner is paying the developer an agreed fee (i.e. the developer has limited exposure to the risks and rewards of the arrangement beyond its ability to undertake the works within the margin agreed with the landowner), this may indicate a property development business or profit making undertaking.
    • Where the landowner is exposed to potential losses from the development sales, this may indicate a property development business or profit making undertaking.
    • Where the arrangement provides that the landowner will mortgage the property to secure the payment of development costs and performance under the contract by the developer with third parties where necessary, this may indicate a property development business or profit making undertaking.
    • Landowners who take out insurance policies to manage risk, or update their current policies, sometimes make representations to their insurers that they are now a developer.


76. We carefully analyse Development Agreements to establish the actual substance of the arrangement. The agreement may state that the developer is bearing all the ‘risk’ associated with the development and that the landowner is merely holding the land and paying for the development services – yet the development work may be funded by the developer on-lending funds to the landowner at interest, and payment received via the sharing of profit after expenses.

u. The value of the development or other preparatory costs relative to the value of the land

77. The greater the costs incurred by the landowner in respect of the development, relative to the value of the underlying land, the more likely the development amounts to the carrying on of a business or a profit making undertaking:
    • Where development expenditures, such as subdivision costs, marketing fees and administrative costs are significant relative to the value of the undeveloped land, this may indicate that a business is being carried on, as the activity becomes less about ‘mere realisation’ and more about profiting from development works.
    • If these development expenditures are low relative to the value of the undeveloped land, profits from the sales of the property are more likely to be proceeds from a ‘mere realisation’.



Go to Table of contents

Property Development Agreements

78. PDAs between landowners and developers are common. A PDA will specify the arrangements between parties for the intended development. It may include details for control, fees, distribution of proceeds and other factors. The Commissioner forms a view both from the legal documents and the actions of the parties, particularly where the parties are related.


79. In any PDA we will carefully examine any profit sharing clause to determine if that contributes to a conclusion that the arrangement is a business. In this regard, a key focus is on what the “profit sharing” arrangement (e.g. the basis on which the developer is compensated pursuant to the PDA) indicates is the exposure of the respective parties to the risks and rewards associated with the development. Specifically, the greater the extent to which the mechanism(s) in the PDA for compensating the developer results in the landowner sharing in the risks and rewards of making improvements to the land with the developer, the stronger the inference that the land is no longer held on capital account.


80. One of the purposes of entering into a PDA can be to preserve the land to be developed on capital account (such that the sale is a ‘mere realisation’) throughout the period of development. Often, substantial and prolonged development activities have occurred and the parties intended to share in the profits (or losses) from the sale of developed land. This scenario does not support the sale of the land being on capital account.


81. In cases where the PDA attempts to show that:
    • the landowner retains legal ownership of the land; whilst
    • the developer is merely a service provider
    and this is not in line with the facts, the ATO will consider all surrounding facts and circumstances to establish the substance of the agreement and determine the risk, return, and the business model of all parties to determine the correct tax treatment.


82. Notwithstanding that entering into a PDA may be an important step indicating that the landowner has commenced a business of property development or a profit making undertaking or scheme, we will look to all the landowner’s circumstances to determine when the development commenced. Entering into the PDA or breaking the soil comprises only two indicators of a commitment to the development. Rather, the Commissioner considers the business of property development, being the "...business of developing, subdividing and selling the land commence(s) as soon as the intention to take steps for that purpose in relation to the entire land was formed and activities directed to that end were commenced..."(Whitfords Beach Pty Ltd v. The Commissioner of Taxation (Cth) [1983] FCA 94; 83 ATC 4277; 14 ATR 247). This will typically begin when the taxpayer commits to the project by engaging the relevant parties to undertake the planning/design work. Sometimes the planning/design aspects of the development will be organised and paid for by the developer who is then reimbursed by the landowner through the PDA (either expressly or as a consequence of the terms).


83. We will look to determine if your arrangement constitutes a general law partnership, a tax law partnership, joint venture or other contractual relationship. We will consider whether the parties (i.e. the landowner/s and the developer) are ‘joint venturers’ or whether at law they are merely acting in concert with each other for mutual short term advantage. In addition to the terms of the PDA, we will also take into account the substance of the arrangement and actions of the parties. All the facts will be weighed to determine whether a business of property development is being undertaken, jointly or otherwise (TR 97/11).


84. We will look to determine if an agency or joint venture relationship exists between the developer entity and the landowner entity. Under an agency relationship, we will consider the landowner to most likely be in the business of property development or undertaking a profit making venture, with the developer acting as an agent who completes the work on the landowner’s behalf. We will take into account the factors in TR 97/11 to assist us in making a determination. This is notwithstanding the fact that the landowner may suspend their dispositive powers in relation to the land by agreeing to a caveat in favour of the developer whilst the development is underway, and maintain a limited involvement whilst a sophisticated development of their land ensues.


85. We may consider a developer who undertakes the work to obtain planning permits on the land to be an agent of the landowner. Only the landowner can apply for a planning permit on their land, so any activity undertaken by a developer in this regard can only be legally done as agent of the landowner. Consequently, evidence of when the developer engages in the planning/design work will be evidence of when the developer as an agent of the landowner has commenced the property development activity. Correspondingly, this would be the point in time when the Commissioner may consider the landowner has ventured the property into a property development business. For completeness, where a landowner applies for rezoning and/or development approval to increase the value of its land, this does not in isolation mean that a subsequent sale of the land is not a mere realisation.


86. We will look to determine whether a separate trust has been created over the land on the basis that the land may be vested for the benefit of more than one party (being the developer and the landowner). Where the PDA ensures that the landowner retains legal title of the land, but the proceeds from the sale of that land (not just a predetermined amount for the landowner) are shared between the landowner and developer, the Commissioner will take this into account in making a determination of whether the landowner is in the business of property development, or a partner in a partnership with the developer (either a general law partnership or a tax law partnership).


87. We will look to determine the level of risk the landowner is adopting from the development in determining the correct tax treatment.


88. We will look to determine any change of intent that may trigger CGT event K4 (i.e. when an asset already owned by the taxpayer begins being held as trading stock). Trading stock includes anything produced, manufactured or acquired that is held for purposes of manufacture, sale or exchange in the ordinary course of business. Where a landholder who previously held the land on capital account (e.g. as a personal residence, farm, business premises, or rental property) ventures the land into a business of subdivision, development and sale, CGT event K4 will be triggered, and the land will become trading stock of the subdivision, development and sale business. Where we establish that CGT event K4 has occurred, we will examine the timing of that event, in particular determining when the landowner has committed to the development.


89. Where a CGT event occurs, for instance with the formation of a new tax law partnership, we will consider whether any subsequent land subdivision is a business and/or is an isolated transaction in the nature of profit making in accordance with TR 92/3.



Go to Table of contents

Timing of return of income and deductions

90. We look for the correct application of TR 2018/3 Income tax: tax treatment of long term construction contracts to determine an appropriate allocation of income and deductions over the life of a long term development. In this regard, TR 2018/3 is applicable to a taxpayer in respect of its performance of work pursuant to a long term construction contract (as described in paragraphs 2 and 3 of that ruling), not in respect of its activities regarding land it owns (e.g. developing land held as trading stock).


91. We are concerned where we see infrastructure and/or head costs deducted as incurred rather than allocated across lots, in accordance with the decision in Federal Commissioner of Taxation v. Kurts Development Ltd (1998) 86 FCR 337; (1998) 39 ATR 493; 98 ATC 4877 (which considered what expenditure forms part of the cost of land held as trading stock).


92. When we see developments that contain a mix of properties to be sold and properties to be held for long term rental/lease, we look to see whether the costs have been allocated on a reasonable basis between the properties sold and the properties retained.


93. Where we see property development occurring through a number of separate entities to separate the functions of landholding, construction and finance to effectively defer income recognition we will examine the arrangement to ensure income and deductions have been returned correctly.


94. Where financial outcomes appear artificial or divert from commercial norms, such as where tax losses are returned from commercially profitable ventures, we will examine the arrangement to ensure income has been returned correctly. If this is not consistent with the treatment prescribed in TR 2018/3 in these cases we may commission experts to provide valuations in line with the ruling.


95. Where we see claims made for cross-jurisdictional financing/marketing costs or non-arms-length cross border charges applied we may examine those claims to ensure they are compliant with the law.


96. Where we see the cost of construction or improvement of rental or leased properties claimed as an immediate deduction rather than capitalising the expense we may examine and disallow those claims.



Go to Table of contents

Land banking entities with associated development entities

97. We use the term ‘land banking’ where a group holds a significant land portfolio (that land may be vacant, used for another business such as farming, or include a dwelling). Where a group has a land banking entity as well as a building/development entity and the building entity does work for the land banking entity, we are concerned when we see invoicing or income recognition artificially deferred and/or the quantum of intra-group dealings is not appropriate (e.g. where the timing and/or quantum of development fees is not consistent with arrangements between unrelated landowners and developers for comparable projects). Our view on this arrangement is as follows:
    • The ATO view on recognising income in TR 2018/3 provides that the Commissioner accepts either the ‘basic method’ of income recognition or the ‘estimated profits method’ of income recognition in respect of long term construction contracts.
    • We expect to see a commercially realistic profit margin charged on a project, reflecting the commercial risks associated with the development of the property borne by the respective parties, including the timing of developments costs and proceeds.
    • We may consider the group high risk where tax losses or artificially small margins are consistently returned by related builders and developers. We may benchmark margins returned against similar arms-length projects and utilise the services of our valuers to assist us to ascertain appropriate internal rates of return.
    • In line with our usual position, where land is purchased with the purpose of resale at a profit, regardless of the length of time the land is held and the use of that land prior to sale, we consider that land should be held on revenue account.



Go to Table of contents

PART B: Examples

98. In the following examples we are attempting to illustrate the concepts previously discussed.



Example 1 – Greenfield development – mere realisation

99. Mr Farmer acquired a 200 hectare property in 1984 which he operated as a farm for many years.


100. Mr Farmer is getting older and wants to retire. He tried to sell the property for its market value of $30 million but was unsuccessful.


101. Without any approach by Mr Farmer the council rezoned the land in 2015 to allow residential development. After that point the land was valued at $60 million.


102. Soon after rezoning, Mr Farmer was approached by a developer with a proposal to develop the property into 1,100 vacant residential lots over a seven year period.


103. The developer offered Mr Farmer $80 million (intended to represent the market value of the property, increased to reflect the delayed receipt of funds from the sale of subdivided lots) plus 10% of any profit on sale of the lots.


104. The developer estimated that a minimum sale price of $300,000 per lot would be achievable on the sale of 1,100 subdivided residential lots.


105. Mr Farmer’s receipt of the $80 million, together with his 10% share of the profit was to occur progressively, by way of Mr Farmer retaining a portion of the sale proceeds from each sale (after having paid the balance of the proceeds to the developer, in consideration for the development work performed).


106. This offer was intended to compensate Mr Farmer for the delay in receiving the proceeds and to reflect the degree of uncertainty in the future land value increase.


107. Mr Farmer agrees with the in principle development proposal and instructs the developer to proceed with commencing the planning and permit application process.


108. The developer had subdivision plans drafted and lodged with Council on the landholder’s behalf.


109. The developer paid for the initial planning/permit process but Mr Farmer legally retains all rights to the land and permits as the land title owner.


110. The application was approved with the proviso that it be scaled back to 800 lots and some of the land provided to Council for parks and reserves and a future primary school.


111. The cost of constructing the parks and reserves (landscaping, playground, public toilets, club rooms, etc) became part of the overall development costs of the subdivision.


112. The cost of constructing the primary school is to be borne by the State Government


113. The developer undertakes the construction, marketing and sale activities in respect of the land, while the landholder continues to be the legal owner of the land.


114. The developer does not receive any payment prior to sale of the lots, but is entitled to a fee representing a portion of the sale proceeds from individual lots, calculated using a formula contained in the agreement.


115. The development agreement enables the developer to place mortgage over the land to help secure financing for the project (i.e. the subdivision, construction, marketing and sales costs are funded by the developer).


116. The development agreement also includes penalty and cancellation clauses for both parties to mitigate non-performance of the agreement by either party.


117. Mr Farmer has not undertaken any similar activities in the past and does not intend to undertake any similar activities in the future. The developer is at arm’s length and undertakes other projects.



Our position – Mr Farmer

118. Taking into account all of the facts, while this is a very large development, the landholder did not adopt any risk or participate actively in the development.


119. The risk of the project was effectively borne by the developer, with Mr Farmer guaranteed a minimum return of $80 million, which is reflective of the approximate market value of the property (i.e. the development agreement replicates, via Mr Farmer’s entitlement to $80 million representing the agreed value of the land, together with a 10% margin reflecting the uncertainty in the future land value increase, a sale by Mr Farmer at the time it was executed). While Mr Farmer’s does have an opportunity to share in profits of the project (i.e. the 10% margin) he is only at risk of not receiving the $80 million in the event the developed lots cannot be sold for that amount (i.e. the cost of the development is borne solely by the developer, who can only profit if the completed lots sold for more than $80 million, plus development costs and will be fully exposed to any losses that might result).


120. The sale consisted of a disposal of property at a point in time that included an element of compensation for delayed payment and recognised the difficulty of valuing property, which was still subject to uncertainties in respect of planning.


121. We consider the sale of the developed lots to be a mere realisation and on capital account (the proceeds are not subject to tax as the land was a pre-CGT asset).



Our position – Developer

122. As the land is not held by the developer, it does not become developer’s trading stock (Taxation Ruling IT 2670 Income Tax: meaning of “trading stock on hand”).


123. On the basis that the development agreement is a long term construction contract (as described in TR 2018/3), the developer should apply either the ‘basic approach’ or the ‘estimated profits basis’ of income recognition set out in TR 2018/3.


124. In this regard, where the developer chooses to apply the basic approach, the point in time at which developer derives income in respect of the development will be subject to the terms of the development agreement.



Go to Table of contents

Example 2 – Greenfield development, profit sharing and timing of CGT event K4

125. Mr Farmer acquired a 200 hectare property in 1984. He operated the property as a farm for many years.


126. Mr Farmer is getting older and wants to retire. He tried to sell the property for its market value of $30M but was unsuccessful.


127. Without any approach by Mr Farmer the council rezoned the land in 2015 to allow residential development. After that point the land was valued at $60M.


128. Soon after rezoning, Mr Farmer was approached by a developer with a proposal to develop the property into 1,100 vacant residential lots over a seven year period.


129. The developer estimated that a minimum sale price of $300,000 per lot would be achievable on the sale of 1,100 subdivided residential lots.


130. As remuneration for managing the project, the developer requested an 11% margin on the gross cost of construction/development, plus 22% of the development profit.


131. The developer’s receipt of its fee (i.e. development costs plus an 11% margin, together with 22% of the development profit) was to occur progressively, as those amounts are disbursed from Mr Farmer’s proceeds from lot sales.


132. Mr Farmer agrees with the in principle development proposal and instructs the developer to proceed with the planning and permit application process.


133. The subdivision plans were drafted and lodged with Council on the landholder’s behalf.


134. The developer paid for the initial planning/permit process and Mr Farmer legally retains all rights to the land and permits as the land title owner.


135. The application was approved with a requirement to scale back the development to 800 lots and provide some of the land to Council for parks, reserves and a future primary school. The cost of constructing the parks and reserves (landscaping, playground, public toilets, club rooms, etc) was borne as part of the overall development cost of the subdivision.


136. The cost of constructing the primary school will be borne by the State Government.


137. The developer undertakes the construction, marketing and sale activities in respect of the land, while the landholder continues to be the legal owner of the land.


138. The developer does not receive any payment prior to sale of the lots, but retains a portion of the sale proceeds from individual lots calculated using a formula contained in the agreement.


139. The development agreement enables the developer to place a mortgage over the land to help secure financing for the project (i.e. the subdivision, construction, marketing and sales costs are funded by the developer).


140. The development agreement also includes penalty and cancellation clauses for both parties in the case of non-performance of the agreement.


141. Mr Farmer has not undertaken any similar activities in the past and does not intend to undertake any similar activities in the future. The developer is at arm’s length and undertakes other projects.



Our position – Mr Farmer

142. While the ATO recognises that Mr Farmer’s original intention for acquiring the land was for farming, taking into account a wide survey of facts, we consider that Mr Farmer has entered into the carrying on of a business dealing in land at the point where he formed the intention to commence the property development project.


143. Potentially this would be when he agreed to the developer commencing the planning and permit application process. At this point Mr Farmer has embarked on a definite and continuous cycle of operations designed to lead to the sale of the land.


144. At that point, CGT event K4 occurs and Mr Farmer will need to make a decision to carry the land forward at market value or cost for trading stock purposes (refer to section 70-30 of the ITAA 1997) with the resulting CGT implications.


145. A key factor which separates this case from Example 1 is that Mr Farmer is taking on a significantly greater proportion of the risk of the development, in particular being required to pay the developer the costs of the development, plus an 11% margin. That is, if the proceeds from the sale of developed lots do not exceed the project costs, plus 11%, the developer does not have any exposure to that loss. Correspondingly, Mr Farmer would be required to meet that loss out of any gains on the value of the underlying land. Consistent with the greater exposure to risk borne by Mr Farmer in this example, he also has a great opportunity for reward, being entitled to retain 78% of the development profit.), By contrast, in Example 1 Mr Farmer is guaranteed a return from the sale and the developer takes on the risk.



Our position – Developer

146. As the land is not held by the developer, it does not become developer’s trading stock (Taxation Ruling IT 2670 Income Tax: meaning of “trading stock on hand”).


147. On the basis that the development agreement is a long term construction contract (as described in TR 2018/3), the developer should apply either the ‘basic approach’ or the ‘estimated profits basis’ of income recognition set out in TR 2018/3.


148. In this regard, where the developer chooses to apply the basic approach, the point in time at which developer derives income in respect of the development will be subject to the terms of the development agreement.



Go to Table of contents

Example 3 – Greenfield project – creation of a partnership

149. Mr Farmer acquired a 200 hectare property in 1984 that he operated as a farm for many years.


150. Mr Farmer is getting older and wants to retire. He tried to sell the property for its undeveloped market value of $30M but was unsuccessful.


151. Without any approach by Mr Farmer the council rezoned the land in 2015 to allow residential development. After that point the land was valued at $60M.


152. Soon after rezoning, Mr Farmer was approached by a developer with a proposal to develop the property into 1,100 vacant residential lots over a seven year period.


153. The developer estimated that a minimum sale price of $300,000 per lot would be achievable on the sale of 1,100 subdivided residential lots.


154. Mr Farmer agrees in principle with the development proposal and enters into a development agreement with the following terms:


155. The developer pays an upfront fee to Mr Farmer known as a Participation Fee. The Participation fee is 50% of the current land value (i.e. $30 million)


156. The developer is entitled to a development fee of 50% of the net proceeds from the sale of the developed lots (after GST, construction costs, administration fees and selling fees).


157. The Agreement provides that the developer and Mr Farmer will jointly appoint a subsidiary of the developer to be the project manager (project manager) of the development. The subsidiary will be paid a project management fee and selling fee (from a joint bank account established by Mr Farmer and the developer) on settlement of each lot.


158. Mr Farmer continues to be the legal owner of 100% of the land. When the individual lots are sold, Mr Farmer agrees to take the necessary steps to transfer the legal title of the new subdivided lots to the purchaser and to deposit the proceeds into the joint bank account. It’s from this joint bank account that costs are paid, with any excess being shared equally by Mr Farmer and the developer.


159. Mr Farmer is required to allow the developer to place a mortgage on the property which cannot exceed 50% of the market value of the property.


160. The development agreement also includes penalty and cancellation clauses for both parties for non-performance of the agreement.


161. The development agreement specifically states the agreement is not a partnership agreement.


162. The project manager proceeds to commission the drafting of the subdivision plans, and lodges the application with Council on the landholder’s behalf.


163. The application was approved by Council with the subdivision to be scaled back to 800 lots with land provided to Council for parks and reserves and a future primary school.


164. The cost of constructing the parks and reserves (landscaping, playground, public toilets, and club rooms) became part of the overall development costs of the subdivision. The cost of constructing the school is to be borne by the State Government.


165. The project manager undertakes the construction, marketing and sale activities in respect of the land, while the landholder continues to be the legal owner of the land.


166. Mr Farmer has not undertaken any similar activities in the past and does not intend to undertake any similar activities in the future. The developer is at arm’s length and undertakes other projects.



Our position

167. In the context of the broader arrangement, the mechanism for the parties to receive income jointly supports a finding that the agreement is in fact a partnership (mostly like a general law partnership), despite the development agreement expressly stating that the arrangement between the parties does not constitute a partnership.


168. Although Mr Farmer retains legal title of the land, the income received from the sale of the lots is subject to the development agreement, which requires the proceeds to be shared equally by the parties, after the cost of the development are paid for. Therefore Mr Farmer has not received monies for his own benefit, but rather receives the monies on a constructive trust for the benefit of both himself and the developer equally. This is on the basis that it would be unconscionable conduct for Mr Farmer to deal with 50% of the proceeds other than on behalf of the developer. That is, the development agreement has in effect created a partnership given the terms and intended actions of the parties. Taxation Ruling TR 93/32 Income tax: rental property - division of net income or loss between co-owners recognises that there may be instances, albeit uncommon, where the legal and equitable interests in property are not the same and that there is sufficient evidence to establish that the equitable interest is different from the legal title.


169. With regard to the intentions of the parties, as indicated by the development agreement, both Mr Farmer and the developer have an opportunity to share equally in the net proceeds of the development, together with an equivalent exposure to potential losses associated with it (i.e. if the sale proceeds do not recover construction, administration, and sale costs as well as project management fees). This is consistent with the developer making an upfront payment to Mr Farmer (i.e. the $30 million Participation Fee) corresponding to 50% of the value of the land, the provision for the developer to use 50% of the land as security and the use of a joint account to receive sale proceeds and meet project costs.


170. We will look to the substance and facts beyond any statement/clause in the development agreement.



Go to Table of contents

Example 4 – A business from the start

171. Two investors acquired 5 large outer suburban blocks each over a period of time from 2009 to 2014.


172. In general, they acquired one block per year, where the acquisitions were funded with borrowings.


173. Their financial position is such that they will need to sell the whole parcel of land or part thereof to support their borrowings.


174. Most of the blocks had residential accommodation on them, and these properties were rented out to third parties.


175. When they borrowed the funds they informed the bank on the loan application that they intended to develop the properties at a later date.


176. The five blocks are adjacent to each other.


177. In 2015, the investors entered into an agreement with a developer to obtain a common title by amalgamating all five titles to create a single lot, develop the land, construct town-houses and then sell them.


178. The development process involved some common areas and land set aside for council facilities.


179. The owners worked with the developer in making some commercial and marketing decisions, but had limited day to day management of the project.



Our position

180. Weighing all of the facts together, it is arguable that the owners entered into carrying on a business from the time they acquired the first property, despite rental income being earned in the interim years. The properties at that point in time would be trading stock. In the alternative, it is arguable that they entered into a profit-making undertaking or scheme at that time (i.e. when they acquired the first of the adjoining lots) to develop the properties for sale. In this regard, it is sufficient that the intention to develop and profitably sell the land in the future was at least one of multiple intentions of the landowner (i.e. it is not necessary that a profitable sale was the sole or dominant purpose for entering into the transaction).



Go to Table of contents

Example 5 – Sale of property to developer

181. The owners acquired a 40 hectare property in 1993, which they used for non-commercial purposes over time, such as keeping horses and some family activities.


182. The owners decided to subdivide the property in 2015 to take advantage of the property being rezoned as residential in 2013.


183. They were not active in seeking that region to be rezoned.


184. The owners alone or together with their close relatives have on occasions undertaken other property developments via entities they control.


185. Here, they entered into an agreement with a relative to subdivide land, where the relative carried on a business of property development.


186. The owners and the developer established a company to subdivide and develop the property and sell the residences.


187. The owners sold the property to the company at market value, and brought the profit to account as a capital gain.



Our position

188. Prima facie, this is a straightforward CGT Event A1 at the time the owners sold the property to the company. However, it may become apparent that the owners are members of a wider group that has done this same thing several times before. Taking the wider group’s activities into consideration, the repetitive actions of the group could mean the sale forms part of a business, and hence the sale proceeds could be on revenue account. Thus, in isolation, the transaction is likely to be on capital account, but further investigation may identify related activities that may bring the arrangement into a revenue focus.



Go to Table of contents

Example 6 – Group with development and rental activities – sale of development leased for a significant period

189. The Developer Group is in the business of property development. They undertake construction projects for clients on the client’s land and also purchase properties for themselves on which they build homes/units/factories for resale (referred to as Spec developments). They also build homes/units/factories for long term rental and hold several properties which they have leased between 2 and 10 years.


190. The Developer Group is made up of several companies and trusts, with Construction Co Pty Ltd, being the main entity which undertakes the building and construction activities for the entire group. When the taxpayer group purchases a new property they establish and hold it in a separate discretionary trust.


191. The Developer Group purchased an industrial zoned property on which to construct a factory and created a new trust (the Trust) to hold that property. The Developer Group claim their intent for purchasing the property was long term rental.


192. Purchase of the property was not financed from the working capital of that part of the group that ordinarily undertakes development, but was financed by a third party in line with other longer rental/lease holdings of the group.


193. The Trust has no employees and engages the services of Construction Co Pty Ltd to construct and manage the development of the factory. Construction Co Pty Ltd charged the trust a commercial rate for the construction and achieved a commercial profit from the construction.


194. On completion of the factory construction, the Trust leased the property to a third party for a ten year arrangement in line with market value. After 5 years, due to financial circumstances, the trust disposed of the property.


195. The proceeds from sale were then used by the Trust to purchase another property for long term rental.



Our position

196. Taking into account all the facts we consider the sale of the factory occurred outside of the ordinary course of the Developer Group’s business of buying, developing and selling property, but rather is part of the Developer Group’s other business of long term investment. In reaching the conclusion that the sale of the property did not occur in the ordinary course of the Developers Group’s property development business, we considered the following factors significant:
     • The Trust appears to operate independently of the group’s property development business, as evidenced by the separate financing and arm’s length dealings with the Development Group.
     • Proceeds from the sale were not reinvested into the property development business, but reinvested by the Trust into another long term asset.
     • The property was held for 5 years prior to its sale, suggesting the property more closely aligns with the long term investment aspects of the group, rather than their property development activities.
     • As a commercial rate was charged by Construction Co Pty Ltd, the profit from the sale was mainly due to the capital appreciation of the property, not from the property development aspect.



Go to Table of contents

Example 7 – Group creates new trusts to purchase/develop properties to rent but sells developed property in the ordinary course of business

197. The Invest Group is in the business of building, construction and property development. They construct properties for clients on a contract basis and occasionally purchase properties which they develop for themselves by building spec homes/units/commercial premises for resale.


198. The Invest Group is made up of several companies and trusts, with Construction Co Pty Ltd being the main entity which undertakes the building and construction activities for the group. Whenever Invest Group purchases a new property, they establish a new discretionary trust to hold the property.


199. The Invest Group purchased an industrial zoned vacant block of land upon which to construct a factory. They established Factory Trust to hold the property.


200. The purchase was funded partially from the working capital of Invest Group and the remainder through third party borrowings.


201. Factory Trust has no employees and engages Construction Co Pty Ltd to construct and manage the development of the factory. Construction Co Pty Ltd charged Factory Trust a non-arm’s length rate for the construction (cost) and derived virtually no profit from the construction.


202. When the factory was completed Factory Trust leased the property to a third party under a 10 year term and, shortly thereafter, sold the factory. This occurred 14 months after the purchase of the vacant land.


203. On two previous occasions the Invest Group sold developed properties with leases in place to third party investors. Those properties were held in separate trusts. Proceeds from the sale were used to buy another property for redevelopment and sale. The Invest Group claim the initial intent for purchasing the property was long term rental.



Our position

204. Taking into consideration all the facts, we consider the sale of the factory occurred within the ordinary course of the Factory Trust’s business, or as a reasonable incident of the business and therefore is assessable as ordinary income. The conclusion has been reached that the Factory Trust is in the business of developing property for resale, based on a wide survey and exact scrutiny of the activities of the Invest Group and the role of the Factory Trust in that wider business group. Where a taxpayer carries on a business (of property development and sale), it is not necessary to establish purpose in relation to the individual sales in the course of that business.


205. Of particular note is the conclusion that Factory Trust was in the business of property development, which was reached after an objective assessment of the facts. In particular, the relationship the trust had with the remainder of the group, as evidenced by both the source of working capital/finance of the initial project and the subsequent injection of the proceeds from the sale into another property development project. The non-arm’s length dealings between Factory Trust and Invest Group also contribute to that conclusion.


206. Entering into a lease prior to sale does not, in itself, change the character of the sale which we consider to be in the ordinary course of business for the Factory Trust.



Go to Table of contents

Example 8 – Buying and selling businesses

207. A group of investors acquired 5 motels in and around a particular suburb in 2014 for $20,000,000.


208. The motels belonged to a group that was underperforming.


209. In the loan application to a bank to help fund the acquisitions, the investors indicated that they planned to build up a portfolio of 10 ‘soundly performing’ motels with a strong cash flow, and then potentially float the group in a public offering to raise further capital.


210. The owners had no experience in the motel business, although they had operated a number of other businesses, including property development businesses.


211. The owners indicated that they initially intended to operate the motel businesses and make them profitable, not sell them.


212. However, the objective evidence indicates that they have a history of making substantial profits by acquiring underperforming businesses, enhancing the real assets (including refurbishing the premises) and selling them for a large profit.


213. For a short period of time, the motels were operated using the existing staff and management arrangements, then once the motels were refurbished by the owners, they were sold in 2016 using brokers that they had used in previous ventures.


214. The motels were sold for a substantial profit to another group of investors who had experience in operating motels.



Our position

215. Weighing all of the facts together, it is arguable that the owners were carrying on a business at the time they acquired the properties, and in the alternative, it is arguable that they entered into a profit-making undertaking or scheme at that time to develop the property for sale.



Go to Table of contents

Example 9 - Time of commencing development

216. An owner held 100 hectares of unimproved rural land acquired in 1983.


217. In 2010, the local Council, of its own accord, rezoned the land from ‘Farming’ to ‘Residential’.


218. Previously, in 2007, the owner had entered into a contract with an unrelated developer to sell the unimproved land for $10 million, which did not proceed to completion.


219. The developer attempted to gain Council approval to subdivide the land into 880 residential lots in 2008, but was unsuccessful.


220. A new developer was engaged in 2009 to lodge another application with the Council, but the contract with the developer fell through.


221. Later, another new developer was engaged, and after several attempts was successful at gaining approval for a smaller number of lots, with some land to be sold to the local Council in 2011.


222. After receiving approval from the Council, the owners sold the 2 lots to the Council for a total of $12 million.


223. The developer also developed the remaining land for sale.


224. The development agreement included fee clauses that required the owner to pay a development fee to the developer of 5% of the sale proceeds for each lot, in addition to agreed development costs.


225. Work done on the remaining lots included roads and drainage and some head works.



Our position

226. Weighing all of the facts together, it is arguable that the owners entered into carrying on a business in 2007 when they attempted to redevelop the land. Whilst there were some short periods of nil activity, they continued in this pursuit until successful in later years. In the alternative, it is arguable that they entered into a profit-making undertaking or scheme at that time to develop the properties for sale. The degree of financial risk borne by the landowner (i.e. the landowner is the party principally at risk if 95% of the sale price of the completed lots does not exceed the sum of the development costs and value of the land when the development commenced), together with the intensity of the subdivision, is also persuasive.



Go to Table of contents

Example 10 – Controlled discretionary trusts – Owner and developer

227. A couple set-up a family discretionary trust to acquire a 50 hectare farm and residence in 1996.


228. The husband had some experience in earth-moving businesses.


229. They are director/shareholders of the corporate trustee of the trust.


230. In 2009 they decided to retire and placed the property on the market.


231. They did not get their asking price of $3,000,000.


232. They were advised by the real estate agent about developing subdivided lots with an expectation of significantly higher sale proceeds, even after paying for the development costs.


233. On getting advice from their accountant, they set-up another discretionary trust, the developer trust, again with them both as director/shareholders of the corporate trustee.


234. They obtained finance for the development business using the land as security.


235. As the controllers of the trustee of the landowning trust, they then engaged the developer trust to complete certain works, including applying for the development permit, the subdivision, and constructing facility roads, water supply and sewage, and connecting the power.


236. This arrangement was entered into without a documented development agreement.


237. Whilst there was no formal plan, over the period of time they applied their business experience to engage builders, undertake earthworks and used a local service to assist in application processes with the local authority.


238. On some of the subdivided lots, builders were used to build ‘spec’ homes for the initial sales stage.


239. The developer trust, as directed by the owner trust, expended, $7,000,000 on development, including building the residences, and made $12,000,000 in sales over a 4 year period.



Our position

240. Weighing all of the facts, it is arguable that the owner had entered into carrying on a business, or in the alternative, it is arguable that the owner entered into a profit-making undertaking or scheme to develop the property for sale. The degree of control and risk are important factors for consideration.



Go to Table of contents

Example 11 – Residential suburban block development

241. A couple acquired a house on a large block of land in 2000 as a residence, which was located on a larger than standard block for the area.


242. In 2015, they decided to apply for the property to be subdivided into 3 lots for development, but they had a different purpose for each lot.


243. The established house was to be demolished and replaced by 3 townhouses, which could all be individually accessed from the street.


244. They intended to reside in one townhouse, rent one out and sell the other at a profit.


245. They engaged an architect to design the townhouses and configure the work to be done, and they entered into an agreement with a developer/builder to obtain the development permit and the subdivision of the land, and to do the work.


246. The development was funded using a bank loan using the property as security.


247. Despite the original intention, at a later point in time, they decided to sell all 3 townhouses for a substantial profit to a buyer who wanted to rent them all out.



Our position

248. Weighing all of the facts together, it is arguable that the townhouses that were built with the intention of sale for profit would be an isolated profit-making undertaking or scheme. More information is required to determine if and when the intention changed for each of the townhouses (e.g. the reason for the couple changing their plans with respect to the townhouses initially intended to be held for a residences and a rental property, respectively).



Go to Table of contents

Example 12 – Cul-de-sac

249. A residential cul-de-sac in suburban western-Sydney had several properties, all owned by independent individuals.


250. All residents held each of their residential properties as main residences, with the notion that the main residence exemption would be claimed if and when they sold their properties.


251. Two of the homeowners received an expression of interest from a developer to purchase and subdivide both of their homes (two adjoined lots subdivided into 10).


252. The homeowners were not in the market for selling their properties.


253. After additional research, the two homeowners resolved that selling all of the houses in the cul-de-sac in one transaction would result in significant profits (in comparison to selling just the two).


254. They then encouraged their neighbours to sell, claiming that the ‘main-residence exemption’ would apply and that the profits would be tax-free.


255. They asked the developer to conduct surveys and test the market, and to present them with the findings.


256. The developer acquired all the properties for an immediate payment and a commitment to pay substantially more subject to certain Council approvals - these were successful.


257. Only one of the residents involved had a rental property located elsewhere, and none had entered into a development agreement in the past, or intended to do so into the future.


258. To reduce costs, the group entered into an arrangement with a single solicitor to review and process the property sales.



Our position

259. In this case, by taking all of the facts into consideration, it is arguable that while the owners engaged in some organising and discussions to facilitate the arrangement, the low level of sophistication, the limited activities (such as meetings with the neighbors) and agreeing to let the developer undertake surveys and testing would not constitute a change of intention to that of a business or profit-making undertaking.



Go to Table of contents