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 that was part of a privately held family group (Group) gave rise to a discount capital gain despite the wider property building, development and investment activities undertaken by the Group. The decision demonstrates the importance of considering a taxpayer’s purpose and intention when acquiring and developing real estate within the broader factual context of the activities undertaken by a taxpayer and any related entities.
In 1999 the 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 to retain the properties as commercial investment properties to generate rental and other passive 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 particular building code restrictions in the ACT. 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 Group decided to sell the site. The taxpayer treated the gain from the sale of the Glasshouse as a capital gain eligible for the general CGT 50% discount.
The Commissioner contended that the gain was on revenue account and taxable as ordinary income, on the basis that 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 taxpayer alone, and stated that “the relevant, but quite discrete, activities carried on by the Group have been:
- the acquisition, development and sale of residential properties;
- the acquisition and development of residential properties to hold as capital assets for the purpose of the derivation of rental income;
- the acquisition, development and sale of commercial properties;
- the acquisition of commercial properties to hold as capital assets for the purpose of the derivation of rental income; and
- 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 taxpayer:
- the site of the carpark was, at the time of acquisition, earmarked as a capital asset to derive rental income;
- the decision to develop the site was made a few years after the acquisition, but the purpose remained 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.”
The decision also highlights the importance of a taxpayer being able to demonstrate its intention in holding a property at a particular point in time as a matter of evidence.
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