It is difficult for taxpayers to abandon an initial profit-making intention after acquisition of the land
Can a taxpayer abandon a profit-making scheme?
In TR 92/3, the ATO provides guidance on whether profit made on the disposal of real property must be made by the means initially intended for the transaction to constitute a profit-making scheme. Unfortunately, in relation to this issue, the ATO’s view is that an assessable revenue profit does arise if a taxpayer enters into a commercial transaction with a purpose of making a profit by one particular means but actually obtains the profit by a different means. Thus, a profit-making scheme can arise where a taxpayer contemplates making a profit by sale but may ultimately obtain it by other means (e.g., compulsory acquisition, a company liquidation, or a distribution in-specie). The ATO relies on the decision in Moana Sand Pty Ltd v FCT [1988] FCA 401 (‘Moana Sand’s case’) to support its view.
In that case, the taxpayer acquired land for two purposes:
(a) selling the sand that was on the land, and
(b) thereafter holding the land until it became ‘ripe’ for subdivision, when it would be sold to another family company for subdivision or to a third party (whichever gave the largest financial return).
The profit arising on disposal of the land by means of compulsory acquisition was found by the Court to be income according to ordinary concepts. The ATO argues that this case provides authority for the argument that there need not be any correlation between the means by which the taxpayer intends to profit and the means ultimately giving rise to the profit.
The practical upshot of this view is that, according to the ATO, it is very difficult for taxpayers to abandon an initial profit-making intention after acquisition of the land so as to convert a revenue asset into a capital one. For example, take a taxpayer who acquires land for the purposes of developing residential units for sale, but subsequently decides not to sell the units and decides instead to hold the units for rental purposes and does so for many years. On sale of a unit(s), the ATO would likely argue the profit arose as part of a profit-making scheme (i.e., the disposal would be more than a mere realisation of a capital asset). Refer, for example, to TD 92/126.