September 12, 2016
A taxpayer has been successful before the AAT in arguing that a commercial property it acquired and developed and later sold for a profit of some $40 million had been acquired as a capital asset to generate rental income, and not for the purpose of resale at a profit – despite the fact that the AAT indicated the taxpayer was essentially involved in “property development” activities on a broad analysis of its activities. As a result, the AAT found that the profit of $40 million was assessable as a capital gain and entitled to the CGT 50% discount. Re FLZY and FCT  AATA 348.
In coming to this conclusion, the AAT noted that even though the taxpayer’s property development business involved purchasing properties for resale at a profit, the business carried on by the taxpayer involved far more than this. A “wide survey and an exact scrutiny of the activities” of the taxpayer showed that over a 40-year period they involved everything from the acquisition, development and sale of residential properties to the acquisition and development of commercial properties to hold as capital assets for the purpose of deriving rental income. As a result, the AAT rejected the Commissioner’s basic claim that the taxpayer was carrying on “a business of the acquisition, development and disposal of properties for a profit”.
Moreover, the AAT found that in relation to the “discrete” transaction in question (which it was required to consider for the purpose of determining the issue), all the evidence pointed to the fact that the taxpayer intended to develop the original vacant car park into commercial property to lease to government agencies, for which there was growing demand at the time. This evidence included:
- the uncontradicted evidence of the father and son controllers of the business (who historically had adopted the approach of individually assessing the best profitable use of a particular property and then putting the property to that use);
- contemporaneous bank records (which noted that the building was to be “retained on completion for investment”);
- that a 15-year lease agreement was originally entered into; and
- that the intention to eventually sell (despite the father’s original resistance and his historical preference to generate income by rental returns) was because the offer to sell “was simply too good”.
In this regard, the AAT also noted that as part of the sale deal, the purchaser offered the taxpayer the opportunity to acquire substitute investment commercial properties – and that the three properties subsequently acquired by the taxpayer as part of this arrangement were still owned by the taxpayer, almost nine years after the relevant transaction. In arriving at its decision, the AAT noted that it is always possible that the owner of an asset will sell it, “but to elevate that possibility into an intention to make a profit by selling the property is to draw a long bow indeed” – particularly in the circumstances of this case and given the nature of the transaction in question.
Accordingly, the AAT found that while the transaction by which the property was disposed of was not a transaction undertaken in the ordinary course of the taxpayer’s business activities, having regard to the overall wide scope of its business activities, in terms of examining the specific transaction and its “discrete” nature, nor was the property acquired for the “purpose of profit-making by sale”. As a result, the AAT concluded that the profit from its sale was to be accounted for as a capital gain and not revenue profit.
This case is a good example of the need to maintain contemporaneous documentation should there be a dispute with the ATO. The ATO has recently reiterated its focus on trusts developing and selling properties as part of their normal business and incorrectly claiming the 50% CGT discount.