In determining whether a property development business was being carried on, the tribunal concluded that acquiring development approval before selling land was a key determining factor.
The taxpayers purchased two blocks of land with the intention to substantially develop, but soon-after abandoned their plan to perform substantial developments, and instead sold out of the project, but not before obtaining a few valuable development rights for the land that may have increased its value significantly. The taxpayers compared themselves to Kratzmann in the High Court [1970]:
"It is, however, a matter for decision whether the difference between the purchase price and the selling price of the land—less the expenses of doing what the taxpayer did towards carrying out his scheme—is to be regarded as a profit from the carrying on or the carrying out of the taxpayer's scheme. What happened was that the taxpayer, for financial reasons, gave up the idea of developing the land as had been intended and sold it, so making a profit.
For the Commissioner it was argued that, because the purchase was part of a profit-making scheme, any profit arising from the purchase was a profit from the carrying on or carrying out of that scheme. It seems to me, however, that the profit here arose not from the purchase but from the sale and because the sale was not part of the profit-making scheme the profit did not arise ``from the carrying on or carrying out'' of that scheme. Indeed, the profit in question did not arise until the scheme had been abandoned."
Later cases on this issue include Myer [1987] and Westfield [1991], where the principle of acquiring an asset with the intention of making a profit was considered to be a determining factor in the question of whether or not a business was being undertaken.
The Commissioner's contention in the case was simple:
"The Commissioner says the taxpayer may have preferred to undertake a comprehensive development in company with other parties but the evidence in the email – and common sense – suggests from the outset that the taxpayer regarded the possibility of a profitable resale after obtaining relevant approvals as an acceptable outcome. On that view, the taxpayer was in the business of acquiring property for redevelopment but without a fixed view of how that redevelopment was to occur. " (p 9)
That the taxpayer had a profit making intention. Rather than abandoning this profit making scheme (as per Kratzmann), the taxpayer simply moved to "plan B", which was to make profit from the land in some other form.
The judge concluded:
"A range of successful outcomes must have been in contemplation. That range presumably included (and certainly did not exclude) the possibility of a profitable sale after obtaining a development approval. This case is different to the situation in Westfield, where a profitable resale of the land did not form any part of the taxpayer’s objective, even if the taxpayer knew that was one possible outcome of the transaction." (p 22)
The case is here [2015] AATA 130: http://www.austlii.edu.au/au/cases/cth/AATA/2015/130.html
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