On 9 July 2018, the ATO released its ‘Draft Property and Construction Website Guidance’ (Guidance). The Guidance provides the ATO’s draft view on the capital and revenue distinction in the context of property developments.

The Guidance outlines the factors taken into account by the ATO when assessing whether the proceeds of a land development are on capital or revenue account, and provides examples of how the ATO views certain factual scenarios.

The consultation period for the Guidance ended on 17 August 2018, and the ATO intends to release a summary of the comments it has received by the end of August 2018. It is hoped that in reviewing the commentary it has received and when finalising the Guidance, the ATO will provide an explanation of how its views align with the applicable authorities.

While it is understandable that ATO website guidance would not ordinarily include significant reference to case authorities, the level of weight to be given to the Guidance at this stage is questionable. Particularly as, in some instances, the ATO appears to place more weight on the terms of the development agreement than the actual development that has taken place.

Further, the fact that the ATO’s conclusions can turn on a single factor in otherwise parallel circumstances, such as the terms of a property development agreement, provides little safe harbour for taxpayers.

The factors and the applicable law

Whether an agreement to develop and sell land is more than a ‘mere realisation’

The Guidance states that the ATO will consider whether an agreement to develop and sell land is:

  • a ‘mere realisation’ or
  • a disposal:
    • in the course of a business or
    • as part of a profit making undertaking or plan.

That is, there are three broad categories of dealings in land contemplated by the ATO.

Where a realisation of land is a ‘mere realisation’, the proceeds will be capital receipts, and not assessable as income according to ordinary concepts. On the other hand, where land is disposed of in the course of a business, or as part of a profit making undertaking or plan, the proceeds will be revenue receipts, and assessable as income according to ordinary concepts.

The distinction between capital and revenue

The Guidance lists 21 factors that are relevant to whether a sale of land will be a capital or revenue receipt. The ATO makes it clear in the Guidance that the factors are not to be ‘tallied’, and that some are more significant than others.

The table below categorises the factors:

Landowner’s conduct Whether the landowner has held the land for a considerable period prior to the development and sale
Whether the landowner has conducted farming, or other non-development business activities, on the land prior to beginning the process of developing and selling the land
Whether the landowner originally acquired the property as a private residence or for recreational purposes
Whether the landowner originally acquired the property as an investment, such as for long term capital appreciation or to derive rental income
The landowner has a history of buying and profitably selling developed land or land for development
The landowner has changed its use of the land from one activity to another (e.g. farming to property development)
Location and zone of the land Whether the land has been acquired near the urban fringe of a major city or town
Where the property has recently been rezoned, whether the landowner actively sought rezoning
The landowner applies for rezoning and planning approvals around the time or sometime after acquisition of the property, but before undertaking further steps that might lead to a profitable sale or entering into development arrangements
The market for the land A potential buyer of the property made an offer to the landowner before the landowner entered into a development arrangement
The landowner was unable to find a buyer for the land without subdivision
Whether the landowner is registered for GST The landowner has registered for GST on the basis that they are carrying on an enterprise in relation to developing the land
The landowner has registered a related entity for GST that will participate in (or undertake) the development of the land
The conduct of the development The operations are planned, organised and carried on in a businesslike manner
The scope, scale, duration and degree of complexity of any development
Who initiated the proposal to develop the land for resale
The sophistication of any development or other pre-sale arrangements
The level of active involvement of the landowner in any development activities
The level of legal and financial control maintained by the landowner in a development arrangement
The level of financial risk borne by the landowner in acquiring, holding and/or developing the land
The value of the development or other preparatory costs relative to the value of the land


It is clear that the ATO is concerned with the conduct of the landowner, and the manner in which the development is conducted. In the ATO’s view, developments managed in a ‘business-like’ way are more likely to give rise to proceeds on revenue account.

The ATO also considers that a development of significant scale, complexity, duration will be less likely to be a mere realisation of land. Similarly, a development in which the landowner is ‘significantly involved’ and bears the financial risk, will be more likely to give rise to proceeds on revenue account.

While many of the factors listed in the Guidance are taken from related case authorities, the ATO has provided no authority to support its conclusions regarding when any particular factor, or combination of factors, will determine that a development is more than a mere realisation of an investment.