If you are making plans in relation to a property venture then it is crucial to understand what the taxation implications are for your project. One of the keys to the taxation consequences will be whether the project is on revenue account or capital account.
If the property is purchased (or a new property is built) with the intention of deriving rental income over time, it will generally be treated as a capital asset where its ultimate sale will give rise to a capital gain or capital loss. If the capital asset is held for more than 12 months and owned by an individual or trust, then the gain will generally be eligible for the 50% Capital Gains Tax (CGT) discount.
On the other hand, if the property is purchased (or a new property is built) with the intention of making a profit from the sale of the asset, it will be treated as “ordinary income” on revenue account. This means that even if eligible individuals or trusts held the assets for more than 12 months, the 50% CGT discount will not apply on the eventual sale and the entire revenue amount will be assessable income. There is also likely to be a GST consequence to being on revenue account.
Importance of Intention
In recent cases, the taxpayer’s purpose or intention at the time of the property purchase and throughout the holding period was considered crucial in determining whether a project was capital or revenue based. And it is the taxpayer’s purpose or intention recognised from an objective consideration of the facts and circumstances of the case, rather than the subjective purpose or intention of the taxpayer. This is highlighted in Federal Commissioner of Taxation v. The Myer Emporium Ltd  163 CLR 199, where the High Court discussed profits or gains being recognised as “income” when derived from a business carried on with a view to profit (i.e. intention to make profit from the venture).
Likewise, the case August v. Federal Commissioner of Taxation  FCAFC 85 highlighted the importance of documenting such intentions irrespective of length of asset ownership. In that case, the taxpayer owned the properties and generally rented them for nearly 10 years before sale, but was still found to hold them on revenue account and therefore not be entitled to the 50% CGT discount.
The long period of ownership of an asset is usually a good indication of an asset being held on capital account. However, the Commissioner in August’s case challenged this concept arguing that the taxpayer’s intention throughout the holding period was to make a profit by buying, improving, leasing and then selling the properties at a higher value. Through investigation of various documents and evidence, the Commissioner was not satisfied that the properties were acquired on capital account as long term capital assets, and the Court held that the taxpayers purchased the properties with a profit-making intention.
If you would like to know more about tax implications on realising assets and how it may apply to your situation, please contact one of our experts at Hoffman Kelly.