Isolated Transactions and the Applicable Purpose of the Taxpayer

Discuss About The Litigation Costs And Access To Tax Justice?

The contemporary case study is based on the ascertainment of whether the sale of land would be considered as the mere realisation of the land or whether the sale of land will be accounted as the isolated transaction[1]. From the current situation, it is observed that Mr Phillips had twelve hectares of land which he intended to sale in the current tax year. According to the “Taxation Ruling of TR 92/3” profits that is generated from the sale of the isolated transactions would be considered as the isolated transactions and therefore they would be considered as the taxable proceeds under “Subsection 25 (1) of the ITAA 1936”.

The term isolated transactions can be defined as the isolated transactions if those transactions are not inside the normal course of trade of the taxpayers performing on of a trade. It also comprises of the transactions that are entered by the taxpayers. Citing the reference of “FC of T v The Myer Emporium Ltd (1987)” the federal court passed its decision by stating that the amount that is concerned in the subject constituted a income from the transaction that though not inside the normal course of business of the taxpayers[2]. However, the taxpayer entered into the transactions with the with objective of deriving profit and was in the business course of the taxpayer.

As evident from the present study of Mr Phillips an assertion can be bought forward that the sale of land has resulted in profit, which is although not in the ordinary course of the business, but was also entered in with the objective of deriving profit. Whether the profit from the isolated transaction can be considered as the income in terms of the normal concepts and the use of humanity is largely dependent on the situations of this case[3]. However, it can be defined that the profit from the isolated transactions is usually regarded as the income since the elements of the isolated transactions were present in the case of Mr Phillips since the intention or the purpose of the taxpayers was to gain profit.

An important consideration to the present case is that the applicable purpose or the objective of the taxpayer is not considered as the individual purpose of the taxpayer. Instead it is intention of the taxpayer or the objective that is determined from the objective that is under considerations of the evidences and conditions of the case. In the present case of Mr Phillip, it is not compulsory that the ultimate objective or the drive of the profit making to be the solitary or leading purpose for going into the transaction. It is adequate if the income generation forms the significant objective of the transaction.

Computation of Capital Gains, Profit, and Loss

As evident from the “Taxation Rulings of TR 92/3” it is not obligatory that the profit that is derived as a means of specifically contemplated when the taxpayer entered into the transactions[4]. In the present case of Mr Phillips it can be stated that that the deal was formed with the objective of deriving profit in the most advantageous manner. The views that has been expressed in the case of “FC of T v Whitefords Beach Pty Ltd (1982)” and “FC of T v. The Myer Emporium Ltd (1987)” that the profits from the isolated transactions can be considered as taxable proceeds and should be observed at in relation of the evidences that is defined in the case of Mr Phillips[5].

The selling of land by Mr Phillips and deriving profit from the transactions can be considered as the mere realisation of the transaction since it contained the purpose of the profit making objectives. An important considerations of the federal court has been stated in “FC of T v. The Myer Emporium Ltd (1987)” contained that the decision of selling an asset is undertaken afterward its acquirement with no kind of purpose at the time of the management then the profit from the sale would be treated as capital and its proceeds would be treated as mere realisation.

Considering the decision of the “FC of T v. The Myer Emporium Ltd (1987)” in the present case of Mr Phillips it can be stated that the profit from the meagre realisation of the investment is not considered as the revenue even though the taxpayer goes about the realisation in an resourceful manner[6]. The transaction entered into by Mr Phillips does not satisfies the element “paragraph 35” of the “Taxation Ruling of TR 92/3” and it can be considered as the mere realisation of the property.

Computations of Net Capital Gains for Mr Phillips
For the year ended 2017
Description	Law	Amount ($)	Amount ($)
Sale price	Section 26 (A) ITAA 1936	$4,000,000
Less: Cost of selling		$0
Adjusted sale price		$4,000,000
Purchase price		$500,000
Add: Cost of purchase and ownership		$13,000
Adjusted purchase price of asset		$513,000
Capital gain/(loss)	Section 26 (A) ITAA 1936		$ 34,87,000.00
CGT Old Regime
Indexed capital gain/loss			$3,487,000
Tax payable under old regime (marginal tax rate x indexation factor x capital gain)			$1,678,575
CGT New Regime
Tax payable under new regime (marginal tax rate x half capital gain)			$832,978

1. It has been assumed that sales proceeds would be considered assessable under “Section 26 (A) of the ITAA 1936”[7].
2. Capital gains that is derived under “Section 26 (a) of the ITAA 1936” would be treated as the mere realisation of the asset[8].

According to the Australian Taxation Office an individual making a subdivision of land and the income from the selling of subdivided land or ordinary income depends on the circumstances[9]. If a person subdivides the block of land such that the land on which a person resides and undertakes the decision of selling the newly created block of land, any profit is particularly treated as the capital gain that is subjected to capital gains tax. An important consideration in respect of capital gains has provided by the Australian Taxation Office.

The considerations contain that subdividing the land does not itself result in Capital gains tax if the person retains the ownership of the subdivided blocks of land. This represents that an individual does not marketing capital gains or capital loss at the time of subdivision[10]. An individual only makes capital gains when they sell the subdivided block of land. From the current case study, it is found that Mr Phillips subdivided the land for the purpose of sale and selling of subdivided block of land would be considered as the capital gains for the profit derived.

As held in the case of “Scottish Australia Mining Co Ltd v. F C of T (1950)” a capital gains or capital loss might occur if the CGT event takes place. “Section 108-5 (1) of the ITAA 1997” it provides descriptions that CGT asset as any form of kind property or legal or equal right which is not a property[11]. Land is regarded as the CGT asset and the sale of the asset is regarded as the CGT. From the current case study of Mr Phillips it can be stated that the taxpayer has realised a considerable amount of profit from the sale of the subdivided block of allotments. Additionally, it can be stated that Mr Phillips will be considered for assessment for the profits derived under “Section 26 (a) of the ITAA 1936”.  

On assuming that sales originated from the mere realisation of the asset then the profits derived by Mr Phillips would be considered for assessment under “Section 25 (1) of the ITAA 1936” in the form of income from performing or executing the profit making scheme[12].

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