Principles of Taxation Law 200869: Land Sale Advice for Rob Joseph

This report provides taxation advice to Rob Joseph, the owner of a demolition business, regarding the potential sale of land he inherited and subsequently purchased. It analyzes two options: selling the land to a property developer and subdividing and selling the land through a land developer. The report discusses relevant legislation, cases, and rulings to determine whether the profits from each option would be treated as income or capital gains. It concludes that selling the entire property would likely be treated as a capital receipt, while subdividing and selling the land would be considered carrying on a business of land development, resulting in ordinary income.

Running head: TAXATION LAW
Taxation Law
Name of the Student
Name of the University
Authors Note
Course ID

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Table of Contents
Answer to question 1:.................................................................................................................2
Answer to Option 1:...............................................................................................................2
Answer to Option 2:...............................................................................................................3
References:.................................................................................................................................7

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Answer to question 1:
Answer to Option 1:
The current case study provides the scenario that the Rob has inherited the business
that contained the small plot of land. An adjacent plot of land was purchased by Rob so that
he can set up the plant of concrete recycling by paying stamp duty and legal fees. Due to the
rapid residential development Rob failed to set up the concrete recycling plant. On noticing
the current boom in the residential property if Rob takes into the account the option 1 of
selling the land to the property developer for $3,000,000 and $1,500,000, the profit made
from thereon will not be treated as income.
One should note that objective or intention of a person is not held as subjective
purpose to ascertain the determination of a person1. For example, when a profit is made from
the transaction which is beyond the ordinary course of business and do not enters in the
transaction with the intention of deriving profit then the profit made from such transaction is
not held into the revenue account.
Whenever it is noticed that the land is acquired as the inheritance or as the gift then it
is generally not believed that the property is obtained for the purpose of resale at profit. It is
only during the circumstances when the property is bought as the portion of business, a profit
making undertakings or possessing the characteristics of business if found will be considered
under the revenue account. The decision made in “McCorkell v FC of T (1998)” held that a
land was inherited by the taxpayer so that the taxpayer can carry out orchard in Victoria2.
Nevertheless, the neighbours complained regarding usage of pesticide led to the conclusion
1 Woellner, Robin, et al. "Australian Taxation Law 2016." OUP Catalogue (2016).
2 Barkoczy, Stephen. "Foundations of taxation law 2016." OUP Catalogue (2016).

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of orchard activities. The taxation commissioner in its judgement held that the profits that
was derived from the sale of land was treated on capital account and not an income.
In the other instance of “Casimaty v FC of T (1997)” the judgment of court included
that the profits derived upon the subdivision of land and selling the subdivided lots was not
held as income within the statutory standing of “section 25 (1) and 25 (A)”3. The main
reason for not treating the profit as income because the profit was not made from the
performing the business of subdividing and sale of land or from conducting any profit making
schemes or undertaking. Rather the profit was made by the taxpayer from the mere realisation
of the land. With the deteriorating health the taxpayer was left with no option but to sale the
profit and avoid the financial hardships.
The owner of land usually undertakes the decision of selling the whole property as the
single sale to the developer. Therefore, such kind of single sale which is not bought by the
taxpayer with the purpose of resale for profit or development would be held as capital receipt.
In the present situation of Rob, the receipts that would be obtained on undertaking the
option 1 of selling the entire property will not be held as income rather it will be treated on
capital account. Citing the judgement of “McCorkell v FC of T (1998)” on undertaking both
the option of selling the property will not be held as business or commercial transaction4. The
property that was inherited by Rob accounts as acquisition and sale of investment despite the
significant intention of Rob while acquiring the property was to make profit5. The profit that
would be made on undertaking the option 1 does not amounts to carrying on of a business
3 Davison, Mark, Ann Monotti, and Leanne Wiseman. Australian intellectual property law.
Cambridge University Press, 2015.
4 Sadiq, Kerrie. Australian Tax Law Cases 2018. Thomson Reuters, 2018.

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activities and selling land or conducting any profit making scheme. The profit that would be
made upon selling the capital asset constitutes mere realisation of land and therefore not
taxable as income within the legislative standings of “section 25 (1) or section 25A of the
ITAA 1997”.
Answer to Option 2:
In an another situation if Rob makes the decision of subdividing and selling the land
through the land developer and further spend a sum of $500,000 to sell the land for a sum of
$500,000 then his activities would account as the carrying on the business of land
development. As defined under the “section 6-5, ITAA 1997” profits which is derived upon
selling the subdivided land will be treated as ordinary income within the ordinary concepts or
may be held as profits from the undertaking inside the legislative standing of “section 15-15
of the ITAA 1997”6. However, the activities must amount to separate business processes or
commercial transactions.
As per the “taxation ruling of TR 92/3” any profits derived from the isolated
transactions are treated as income in accordance with the ordinary meaning or usage of
making is dependent on the situations of a case7. Nevertheless, profits that are made from the
5 Evans, Chris, John Minas, and Youngdeok Lim. "Taxing personal capital gains in Australia:
an alternative way forward." Austl. Tax F. 30 (2015): 735.
6 Feld, Lars P., et al. "Taxing away M&A: The effect of corporate capital gains taxes on
acquisition activity." (2016).
7 Bankman, Joseph, et al. Federal Income Taxation. Aspen Casebook, 2018.

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isolated transactions is generally treated as having the nature of income provided the below
stated elements are met;
a. The purpose or intention of a person that enters into the transaction is to derive profits
or gains thereon,
b. The contract was entered into by a person with the objective of deriving profit in the
ordinary business course or carrying out the business functions or any form of
commercial transactions.
As held in “FC of T v Whitfords Beach Pty Ltd (1982)” the issues associated to the
business income was whether or not subdividing and selling the land amounts to ordinary
income or capital transactions8. The taxpayer in this case changed the land zoning and
developed the subdivided land for residential purpose and finally sold the numerous
subdivided lots for a significant amount of profit. The taxation commissioner imposed tax
liability on the taxpayer for the profits which was derived from the sale of subdivided plots of
land. By referring to the “section 25 (1) of the ITAA 1997” the commissioner of taxation
held that the profits made from the subdivided land is taxable under “section 26 (e) of the
ITAA 1997” since it amounted to carrying on the business of land development and from
carrying on the business of profit making schemes9.
In an another example “FC of T v Crow (1988)” the federal law court verdict stated
that profits derived from the sale of subdivided land was held as chargeable income because
8 Schmalbeck, Richard, Lawrence Zelenak, and Sarah B. Lawsky. Federal Income Taxation.
Wolters Kluwer Law & Business, 2015.
9 Lee, Natalie. Revenue law: principles and practice. Bloomsbury Publishing, 2015.

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the taxpayer was performing the business of land development10. In this situation the
acquisition of property and subdividing the same for the purpose of resale constituted the
transactions that were repetitive and systematic in character that carried the nature of constant
land development business. The activities that were performed by the taxpayer describes that
he carried the land development business. The profits made thereon constitutes income within
the meaning of ordinary conceptions under “section 6-5 of the ITAA 1997”.
In the present case of Rob, he appoints the property agent to further subdivide and
develop the land for residential purpose. Citing the “Taxation Ruling of TR 92/3” the
primary intention of Rob while entering into the transaction was to generate profit. The
transactions will be entered into and profits derived thereon would amount to profits made in
the due course of business or commercial transaction. Referring to the judgement made in
“FC of T v Whitfords Beach Pty Ltd (1982)” profits that would be generated following the
adoption of second on will be held as income from the subdivided lands11. The profits from
the sale of numerous plots of land would be held chargeable for Rob within the ordinary
meaning of the “section 6-5 of the ITAA 1997”.
Rob here would make profit upon the sale of subdivided land because he has gone
further than the concept of merely realizing the capital asset and his activities of engaging
sales agent as well as subdivision of land represented the activities of performing the business
of land development. The acquisition, development and sale of land would be held as
business processes of commercial transactions12. The nature development activities that
10 Buenker, John D. The Income Tax and the Progressive Era. Routledge, 2018.
11 Miller, Angharad, and Lynne Oats. Principles of international taxation. Bloomsbury
Publishing, 2016.
12 James, S. R. "Accounting and Taxation: Australia." Wolters Kluwer, 2016.

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would be undertaken by Rob reflects that transactions are carrying the nature of commercial
character.
With reference to the second option, the subdividing of land and extensive
development is more than just a mere realisation of the capital asset. Profits which would be
generated from the disposal of subdivided plots is taxable within the second limb of “section
26 (a)” as profits derived from the profit producing scheme.

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References:
Bankman, Joseph, et al. Federal Income Taxation. Aspen Casebook, 2018.
Barkoczy, Stephen. "Foundations of taxation law 2016." OUP Catalogue (2016).
Buenker, John D. The Income Tax and the Progressive Era. Routledge, 2018.
Davison, Mark, Ann Monotti, and Leanne Wiseman. Australian intellectual property law.
Cambridge University Press, 2015.
Evans, Chris, John Minas, and Youngdeok Lim. "Taxing personal capital gains in Australia:
an alternative way forward." Austl. Tax F. 30 (2015): 735.
Feld, Lars P., et al. "Taxing away M&A: The effect of corporate capital gains taxes on
acquisition activity." (2016).
James, S. R. "Accounting and Taxation: Australia." Wolters Kluwer, 2016.
Lee, Natalie. Revenue law: principles and practice. Bloomsbury Publishing, 2015.
Miller, Angharad, and Lynne Oats. Principles of international taxation. Bloomsbury
Publishing, 2016.
Sadiq, Kerrie. Australian Tax Law Cases 2018. Thomson Reuters, 2018.
Schmalbeck, Richard, Lawrence Zelenak, and Sarah B. Lawsky. Federal Income Taxation.
Wolters Kluwer Law & Business, 2015.
Woellner, Robin, et al. "Australian Taxation Law 2016." OUP Catalogue (2016).