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Ruling

Subject: Isolated transaction

Question

Are any profits arising from the sale of the two properties assessable as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

To the extent any losses or outgoings incurred in acquiring and holding the properties exceeds the sale proceeds of the properties, will the excess be deductible under section 8-1 of the ITAA 1997?

Answer

No.

Question 3

Is the interest expense associated with the purchase of the two properties deductible on a yearly basis?

Answer

No.

This ruling applies for the following period

Year ending 30 June 2013

The scheme commenced on

1 July 2011

Relevant facts and circumstances

You have followed the property market closely for many years by reviewing property sales prices on a weekly basis. At the time of acquisition of both properties there had been significant profits made in the market from off plan sales. To generate profit from sale was the sole motivation in acquiring the properties.

The off plan sales process of the first property acquired produced significant demand in the market. You acquired a property and were very confident of on selling for a significant profit given the high market demand.

You purchased another off plan property. The original off plan list price of this property when released to the market was higher. You were able to negotiate an acquisition price at a discount and your sole intention was to sell the property for a significant profit.

Both properties were settled and financed through borrowings.

The configuration of the properties would make it impossible for you to live in either of them.

Both properties were listed for sale immediately. At no stage have the properties been advertised for rent nor were they rented.

Reasons for decision

Section 6-5 of the ITAA 1997 includes in a taxpayer's assessable income, where the taxpayer is an Australian resident, all ordinary income derived by the taxpayer both in and out of Australia during an income year. Ordinary income is defined as income according to ordinary concepts.

Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income or are necessarily incurred in carrying on a business for the purposes of gaining or producing such income, except where the outgoings are of a capital, private or domestic nature.

Carrying on a business

Applying the factors outlined in Taxation Ruling TR 97/11, it is considered you are not in the business of buying and selling properties.

Isolated transactions

Taxation Ruling TR 92/4 discusses whether losses on isolated transactions are deductible. TR 92/4 should be read with Taxation Ruling TR 92/3 which provides guidance in determining whether profits from an isolated transaction are income and assessable under section 6-5 of the ITAA 1997.

Paragraph 16 of TR 92/3 state that if a taxpayer not carrying on a business makes a profit, that profit is income if:

· the intention or purpose of the taxpayer in entering into the profit-making transaction or operation was to make a profit or gain; and

· the transaction or operation was entered into, and the profit was made, in carrying out a business operation or commercial transaction.

Although you may have entered into the transaction to make a profit, it is necessary to consider if the transaction was commercial in nature. TR 92/3 outlines a number of factors which may be relevant in considering whether an isolated transaction amounts to a business operation or commercial transaction. It includes:

Although you may expect to make a profit, it is necessary to consider if the transaction was commercial. TR 92/3 also outlines a number of factors which may be relevant in considering whether an isolated transaction amounts to a business operation or commercial transaction. It includes:

(a) the nature of the entity undertaking the operation or transaction;

(b) the nature and scale of other activities undertaken by the taxpayer;

(c) the amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained;

(d) the nature, scale and complexity of the operation or transaction;

(e) the manner in which the operation or transaction was entered into or carried out;

(f) the nature of any connection between the relevant taxpayer arid any other party to the operation or transaction;

(g) if the transaction involves the acquisition and disposal of property, the nature of that property; and

(h) the timing of the transaction or the various steps in the transaction.

The factors are related to your case as follows:

· all the transactions are conducted by you as an individual rather than a corporation or business entity

· this is not your normal business activity and you are not normally involved in the purchase and sale of investment properties

· the amount of money involved is substantial

· the properties purchased are off the plan which do not have any scale of complexity that would lead to an inference that the transaction was commercial or business in nature 

· the scale of the activity was small and the manner of the transaction is not complex and at arms length

· you follow the property market by following the property sales on a weekly basis

The question is whether the gain has been made as a mere enhancement of values by realising a security, or in the operation of business in carrying out a scheme of profit-making (Californian Copper Syndicate (Limited and Reduced) v. Harris (1904) 5 TC 159).

The extent of the personal involvement of the taxpayer in much of the planning, organisation and management of the activities has been held to be a significant factor in the determination of whether a business transaction of a commercial nature was being carried on or not. See for example Stevenson v FC of T (1991) 91 ATC 4476; (1991) 22 ATR 56; (1991) 29 FCR 282 where the degree of the taxpayer's involvement was seen as an indicator of a business being conducted. See also Statham v FCT 89 ATC 4070, McCorkell v FCT 98 ATC 2199 and Casimaty v FCT 97 ATC 5 wherein a lack of personal taxpayer involvement was seen as relevant to the finding that a business was not being conducted.

You are an individual who purchased two investment properties off the plan with the intention of on selling after settlement. You do not normally buy and sell investment properties. You have minimal personal involvement as you purchased the properties off the plan, waited until the construction was completed and then put them on the market. No other personal involvement is evident in any phase of the transaction. To date neither property has been sold. The scale and complexity of your activities in relation to the purchase and sale of the properties is more in line with the realisation of a capital asset rather than carrying out a business operation or commercial transaction.

Any profit on the sale of the units is not assessable under section 6-5 of the ITAA 1997 and any losses are not deductible under section 8-1 of the ITAA 1997.

As the transaction is capital in nature the CGT provisions apply. Interest costs will form part of the capital calculation when the units are sold.

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