The ATO seems to be always looking over the shoulder of property developers to make sure they are complying with their tax obligations.

The considerations facing the ATO are many and varied, but can include topics such as whether an agreement to develop and sell land is a “more realisation” or a disposal either in the course of a business or as part of a profit making undertaking or plan.

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 (for example, applying the appropriate CGT discount or the small business CGT concessions) or the property is a pre-CGT asset.

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:

  1. where the land is sold in the course of a business or as an incident of business operations, or
  2. where the land has been acquired and sold as part of a profit making undertaking or scheme.

Whether a sale is a mere realisation or something more is determined by examining and weighing the facts and circumstances taken as a whole.

Outside of the capital/revenue discussion (more below), the ATO must also consider timing issues relating to the recognition of income and deductions, property development agreements (PDAs), and land banking activity.

A relevant discussion can be found in Taxpayer Alert TA 2014/1Trusts mischaracterising property development receipts as capital gains. This alert focuses 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.

Also note for completeness that Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income 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. Readmore