Demos Pty Ltd (“DPL”) is a property developer. For the past 30 years it has purchased large lots of newly-released land located near proposed train stations in the outer western regions of Sydney for the purpose of development by subdividing and constructing a large number of apartments on the subdivided land. To finance the development, which normally costs around $50-$70 million per project, DPL sells the yet-to-be-completed apartments off-the-plan. Following a downturn in the property market, DPL sought out new sources of income. In 2018, it decided to purchase old run-down houses in the inner-city, renovate them and lease them out for very high rents. Due to tightening restrictions on bank lending, however, DPL was only able to borrow a total of $10 million and could only afford to acquire and renovate 6 properties. DPL engaged the services of a real estate agency that has experience with inner-city rentals to help it identify suitable properties and find appropriate tenants for the newly-renovated dwellings. In early 2020 the directors of DPL decided that the company should again concentrate on its core business activity of property development in the Western Suburbs region, as this provided better financial returns and lower risks than owning and maintaining rental properties in the inner-city. By 30 June 2020, DPL had sold its portfolio of renovated houses in the inner-city for a la
rge profit. With reference to relevant legislation, case law or tax rulings, advise whether DPL can treat as ordinary income the profits it made from the sale of its inner-city properties? NOTE: You are not required to consider any capital gains tax consequences arising in relation to the above facts.
