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Property Development Businesses (2) - Kratzmann’s case (2)

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Decision in Kratzmann not a useful precedent (2)

In August’s case, one transaction considered by the Full Federal Court was the acquisition of a large block of land (the ‘Hume Property’), which was ultimately sold at a profit without having been developed or subdivided. It was argued by the taxpayer that, even if it was conceded that a profit-making scheme did exist in relation to the Hume Property (that scheme being to develop, lease and sell for a profit), based on Kratzmann’s case, the scheme had been abandoned. As such, the sale of the land was not part of the scheme.  

The Federal Court quickly dismissed the argument however, observing that the facts did not mirror those in Kratzmann’s case.  

In particular, the profit-making scheme conceded to in relation to the Hume Property did include the sale of the land, whereas in Kratzmann’s case, the profit-making scheme did not include the sale of the land. As such, Kratzmann’s case did not apply. Furthermore, the fact the sale occurred without the property being leased or subdivided also did not take it outside the profit-making scheme. Refer also to TD 92/126 and TD 92/127. 

It is evident from the above that it is difficult to apply Kratzmann’s case, as that case hinged on the sale of land in question not forming part of the profit-making scheme relating to the land. For completeness, note that the taxpayer in Rosgoe Pty Ltd v FCT [2015] FCA 1231 was able to successfully apply Kratzmann’s case in relation to abandoning a profit-making scheme that involved the development of a property. However, be aware that this decision has limited precedential value as the decision involved a review of a Private Binding Ruling (‘PBR’) objection (where the Court must accept the facts as stated in the PBR).  

In this case, the PBR facts stated that the property in question was acquired “…not for sale at a profit but rather for the carrying out of a profit-making scheme, which later came to be abandoned”. This description of the arrangement in the PBR meant that the arrangement fell squarely within Kratzmann’s case. It is important to be clear however, the Federal Court did not conclude whether or not the scheme had actually been abandoned.

 

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Written by Panbo Ye

I help people discover POWERFUL unknowns in Tax Ideas | Wealth Strategies | Retirement Planning | Finance Solutions!

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