This article was written with the assistance of Patricia Martins, Legal Executive / Project Manager.
The Administrative Appeals Tribunal (AAT) recently held in FLZY and Commissioner of Taxation that profit arising from the sale of a building by a family trust gave rise to a capital gain despite the property building, development and investment activities undertaken by the privately held family group (Group). The decision demonstrates the importance of considering the taxpayer’s purpose and intention when acquiring and developing real estate in the broader factual context of the activities undertaken by taxpayer or a privately held group.
In 1999, the Doma Group successfully tendered for the purchase of a Canberra office building (leased to a Commonwealth agency) and a carpark (half of which was licensed for use by Commonwealth employees). At the time of purchase the Group intended retaining the properties as commercial investments producing rental and other income.
When the Commonwealth no longer required the use of the carpark, the group was unable to legally license the carpark for use by private individuals or companies due to ACT Building Code restrictions which were not applicable to the Commonwealth. The consequent closure of half of the car parking spaces significantly reduced the income-generating potential of the carpark.
In February 2004, after having considered a number of alternatives for the car parking site, the Group successfully lodged a Development Application for the construction of the “Glasshouse”, an eight storey office building on the site. Finance documentation prepared in August 2006 indicated that the building ‘will be retained on completion for investment’.
When the applicant received an offer of $72.3 million for the Glasshouse in August 2006 from Mirvac (an offer price significantly higher than its valuation), the family decided to sell the site, considering that the Canberra commercial office property market was overheated. The taxpayer treated the gain from the sale of the Glasshouse as a capital gain eligible for application of the general CGT 50% discount.
The Commissioner contended that the gain was on revenue account and taxable as ordinary income, as the taxpayer carried on “a business of the acquisition, development and disposal of properties or, alternatively, a business which included investing in property assets”.
The AAT rejected the Commissioner’s contention, stating that it was appropriate to examine the activities of the Group overall, rather than the activities of the family trust alone, and stated that “the relevant, but quite discrete, activities carried on by the Group have been:
(a) the acquisition, development and sale of residential properties;
(b) the acquisition and development of residential properties to hold as capital assets for the purpose of the derivation of rental income;
(c) the acquisition, development and sale of commercial properties;
(d) the acquisition of commercial properties to hold as capital assets for the purpose of the derivation of rental income; and
(e) the acquisition and development of commercial properties to hold as capital assets for the purpose of the derivation of rental income.”
The AAT concluded that based on the evidence provided by the applicant:
- the site of the carpark was, at the time of acquisition, earmarked for activity (d);
- the decision to develop the site was made a few years after the acquisition, but the purpose was still to retain the developed site and derive rental income from it;
- while the Group did acquire, develop and dispose of properties in the ordinary course of business, it did not undertake all these activities with respect to all of its properties; and
- the Group could not be characterised as “carrying on a business which included investing in property assets” as this characterisation, “ignores the discrete nature of the Group’s different activities and the specific allocation of a given property to an identified activity.”
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