Taxpayer Alert 2014/1, issued last week, describes an arrangement whereby a trust undertakes property development activities as part of its normal business. The developed property, which could be either commercial or residential, is subsequently sold and the proceeds are returned on capital account, resulting in access to the general 50 per cent capital gains discount.
“The proceeds are not returned as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997), either on a gross basis (as part of a business of property development, where the underlying property constitutes trading stock for the purposes of section 70-10 of the ITAA 1997) or on a net basis (as part of a profit-making undertaking),” the ATO stated.
The ATO stated it considers that certain arrangements of this type give rise to various issues relevant to taxation laws.
Although this taxpayer alert was not issued specifically in relation to superannuation, DBA Lawyers director Daniel Butler told SMSF Adviser it is applicable to certain superannuation funds.
“There are quite a few super funds, being self-managed funds, which invest via a unit trust. For those super funds that invest via a unit trust, this taxpayer alert is very pertinent,” Mr Butler said.
“Because this taxpayer alert says if you are investing via a unit trust in property and you have an organised plan to buy property to subdivide and develop and then sell, this could be on revenue account, rather than capital account. And that might disqualify the super fund from claiming the one-third capital gains tax discount.”
Mr Butler said it would be “risky” for those that do a development and sell in a short period of time to claim any CGT discount.
“However, if there is a development where the properties are retained for long-term investment and rental purposes then the CGT discount should still be applicable,” Mr Butler said.
Mr Butler also noted the alert is unlikely to have much application to a pension fund.
“In a pension fund, if it’s revenue or capital, it’s still largely tax-free, so you don’t get the CGT discount because there’s no CGT being counted. So it doesn’t have a lot of application to funds that are in pension; it’s really to an accumulation fund,” Mr Butler said.