Beware: the sale of a property held over the long-term for rental purposes is not always on ‘capital account’
In most cases, the sale of a property that was used for rental/investment purposes is taxed as a ‘mere realisation of a capital asset’ (i.e., solely on ‘capital account’), whether or not the property has been renovated or improved. This is because such properties are generally not acquired for a profit-making purpose or ventured into a profit-making scheme after acquisition.
In this regard, recall that, when dealing with property, a profit-making intention generally exists where the taxpayer has an intention to profit from its sale as opposed to, for example, acquiring the property with the intention of holding it for investment or private purposes. However, it is important to be aware that there are circumstances in which the sale of a property that has been used for long-term rental purposes nonetheless forms part of a profit-making scheme or business. Practically, issues typically only arise where the arrangement involves the construction of a building (or buildings). The following case A that assists in dealing with profits arising from the sale of a property that has been used for leasing purposes for some time prior to sale.
(A) August v FCT [2013] FCAFC 85
Description of activity:
This case involved the acquisition of blocks of land over time. Some properties on the land were
renovated and there was construction of buildings on others, tenants were sought (and lease agreements entered into). The properties were subsequently sold and one ‘strip’.
Outcome: Profit-making scheme
Comment:
In this case, what appeared to be a long-term investment (the Melba Shops were leased for a minimum of 2 years, and up to 8 years in some cases) was found to be a profit-making scheme due largely to the taxpayer’s objective intention in acquiring and developing the strip. Therefore, whilst it is certainly possible to undertake this type of transaction and hold it as a long-term investment, in this case, the ATO and Courts simply did not believe that was the taxpayer’s intention.
Mr August ha two problems in this case. The first was that, as a witness, the Court found the evidence he gave regarding the intention on acquisition and the sale of the Melba Shops was embellished, exaggerated, and inconsistent, who had undertaken the exact same developments in the past. These things were significant in the Court concluding that the property dealing was a profit-making scheme.