ATO Interpretative Decision
ATO ID 2002/483
Income Tax
Loss from isolated sale of propertyFOI status: may be released
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This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Whether a loss incurred on an isolated sale of property is deductible under subsection 51(1) of the Income Tax Assessment Act 1936 (ITAA 1936).
Decision
No. The taxpayer and the taxpayer's spouse (the taxpayers) incurred a capital loss on the disposal of the property. The capital loss is subject to the capital gains tax provisions of Part IIIA (ITAA 1936) and is not deductible under subsection 51(1) of the ITAA 1936.
Facts
The taxpayer's spouse (the spouse) was retrenched from employment and the taxpayers intended to commence a small property development business. The spouse completed a real estate course at a Technical College whilst still employed.
The taxpayers identified land they wished to purchase. The taxpayers' involvement in the project consisted of visiting the site to meet with real estate agents and project home builders, organising finance and giving instructions to their solicitors on the purchase and disposal of the property. The taxpayers did not check with the local council or other statutory authorities whether the land was subject to development conditions or restrictions that could affect the viability of the proposed project. The taxpayers subsequently exchanged contracts for the purchase of the land.
The taxpayers did not undertake a costing analysis of the project until after contracts have been exchanged. Once complete, the costing analysis indicated that the project was not going to be profitable. The taxpayers sold the land without making any improvements to the land. The taxpayers did not undertake any similar projects following the disposal of the land.
Reasons For Decision
A loss from an isolated transaction is deductible under subsection 51(1) (ITAA 1936) if:
- (a)
- in entering into the transaction the taxpayer intended or expected to derive a profit which would have been assessable; and
- (b)
- the transaction was entered into, and the loss was made, in the course of carrying on a business or in carrying out a business operation or commercial transaction.
(See Taxation Ruling 92/3 and Taxation Ruling 92/4.)
As no assessable income was actually derived in this case, it is necessary to establish that there was an expectation to produce assessable income (Ronpibon Tin N.L and Tongkah Compound N.L. v. FC of T (1949) 78 CLR 47). The taxpayers failed to demonstrate how their proposed property development activities would ever result in a project which would have produced assessable income. The taxpayers did not seek any advice on how to run a property development business profitably, therefore a profit motive cannot readily be drawn from the facts.
Similarly, whether or not the transaction occurred in the course of carrying on a business is to be determined on the basis of objective facts, having regard to all the circumstances of a particular case (see Magna Alloys & Research Pty Ltd v. FCT (1980) 11 ATR 276 at 285, 287; 80 ATC 4542; McCurry v. FCT (1998) 39 ATR 121 at 127; 98 ATC 4487). By itself, the taxpayer's state of mind is not something which establishes that the transaction was entered into in the course of carrying on a business.
Based on the facts, the transaction is an isolated transaction. This is because: there was an absence of a repetitive element (see Jones v. Leeming (1930) AC 415 at 430; Crow v. FCT (1988) 19 ATR 1565 at 1573; 88 ATC 4620; Ferguson v FC of T 79 ATC 4261 at 4265; 9 ATR 873); the project was simple and involved little activity from the taxpayers (Statham & Anor v. FC of T 89 ATC 4070; 20 ATR 228) and the project was approached in a haphazard way. (See Taxation Ruling TR 97/11 and Taxation Ruling TR 92/3 for elements indicating 'significant commercial characteristics'). In these circumstances the sale of the property is a mere realisation of an asset (see FCT v. Myer Emporium Ltd 163 CLR 199 at 213; Statham & Anor v. FC of T 89 ATC 4070 at 4077; 20 ATR 228; Case W59 89 ATC 538 at paragraph 60; 20 ATR 3728). The loss is therefore not deductible under subsection 51(1) (ITAA 1936); rather, it is a capital loss that is subject to the capital gains tax provisions of Part IIIA (ITAA 1936).
Date of decision: 4 March 1998Year of income: 1997
Legislative References:
Income Tax Assessment Act 1936
subsection 51(1)
Part IIIA
Case References:
Ronpibon Tin N.L and Tongkah Compound N.L. v. FC of T
(1949) 78 CLR 47
89 ATC 4070
20 ATR 228 Jones v. Leeming
(1930) AC 415 Crow v. FCT
(1988) 19 ATR 1565
88 ATC 4620 Ferguson v. FC of T
79 ATC 4261
9 ATR 873 Magna Alloys & Research Pty Ltd v. FCT
(1980) 11 ATR 276
80 ATC 4542 McCurry v. FCT
(1998) 39 ATR 121
98 ATC 4487 FCT v. Myer Emporium Ltd
163 CLR 199
(1987) 87 ATC 4363
(1987) 18 ATR 693 Case W59
89 ATC 538
Related Public Rulings (including Determinations)
TR 92/3
TR 92/4
ATO ID 2001/55
Keywords
Capital losses
Carrying on a business
Disposal of real estate
Isolated transactions
Partnership losses
Profit making purpose
Real estate transactions
ISSN: 1445-2782
| Date: | Version: | |
| You are here | 4 March 1998 | Original statement |
| 4 July 2008 | Archived |