Edited version of your private ruling

Authorisation Number: 1012409744734

This edited version of your ruling will be published in the public register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.

Ruling

Subject: Income - isolated transaction

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

No.

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 Income Tax Assessment Act 1997?

No.

3 Is the interest expense associated with the purchase of the Property 2 deductible on a yearly basis?

No.

4. Is the interest expense associated with the purchase of the Property 1 deductible on a yearly basis?

In part.

This ruling applies for the following period

1 July 2012 to 30 June 2013

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 (Property 1) produced significant demand in the market. You were aware of the demand and arranged to be in the first viewing group. You acquired a property and were very confident of on selling for a significant profit given the high market demand.

Given ongoing demand for off plan properties and therefore likelihood of profits from resale you paid a refundable amount to be priority listed to view more off plan properties. You did not proceed to acquire one of these properties because you believed the pricing reduced the likelihood of profit on resale.

You purchased another off plan property in the Multiplex development (Property 2). You were able to negotiate an acquisition price at the significant discount and your sole intention was to sell the properly for a significant profit.

Both properties were financed through borrowings.

You had direct input in both properties in selecting various fit-out, décor and finishing.

Property 1 settled and you listed it for sale with a real estate agent.

Property 2 settled; you appointed a real estate agent to show and sell the property.

You late appointed a second real estate agent for Property 2. as a selling agent.

You had specific input in the marketing/advertising campaign for the properties and liaise on a weekly basis with the real estate agents. The properties have only 3-4 bedrooms and you have a spouse and children living in a seven bedroom house. At no stage did you intend to live in the properties. Practically, it would be impossible for you to live in either of the properties.

Both properties were listed for sale immediately. Property 2 is currently "under offer" subject to sale of another property. You have rented Property 1.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 8-1

Reasons for decision

Section 6-5 of the Income Tax Assessment Act 1997 (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

Determining whether a taxpayer is carrying on a business is considered on a case by case basis.

However, paragraph 13 of Taxation Ruling TR 97/11 sets out indicators relevant in determining whether a taxpayer is carrying on a business, they are:

· whether the activity has a significant commercial purpose or character; this indicator comprises many aspects of the other indicators;

· whether the taxpayer has more than just an intention to engage in business;

· whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity;

· whether there is repetition and regularity of the activity;

· whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business;

· whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit;

· the size, scale and permanency of the activity; and

· whether the activity is better described as a hobby, a form of recreation or a sporting activity .

Applying the relevant indicators it is considered you are not in the business of buying and selling properties.

Isolated transactions

Taxation Ruling TR 92/4 discussed whether losses on isolated transactions are deductible. TR 92/4 should be read with 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 15 of Taxation Ruling TR 92/3 states:

If a taxpayer carrying on a business makes a profit from a transaction or operation, that profit is income if the transaction or operation:

a) is in the ordinary course of the taxpayer's business - provided that any gross receipt from the transaction or operation is not income; or

b) is in the course of the taxpayer's business, although not within the ordinary course of that business, and the taxpayer entered the transaction or operation with the intention or purpose of making a profit; or

c) is not in the course of the taxpayer's business, but

i. the intention or purpose of the taxpayer in entering into the transaction or operation was to make a profit or gain; and

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

Paragraph 49 of TR 92/3 sets out some matters which may be relevant in considering whether an isolated transaction amounts to a business operation or commercial transaction as follows;

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 and 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:

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

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

c) the amount of money involved is substantial.

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

e) the scale of the activity was small (i.e. two residential units) and the manner of the transaction is not complex.

f) 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 purchased the properties off the plan and when construction was completed put both properties on the market.

You had direct input in both properties in selecting various fit-out, décor and finishing and had specific input in the marketing/advertising campaign for the apartments and liaised on a weekly basis with the real estate agents.

However, this degree of involvement is not over and above what an ordinary person would carry out when purchasing a property off the plan and/or selling a property. No other personal involvement is evident in any phase of the transaction.

You engaged a real estate agent to sell the Property 2. when construction was completed and later engaged a second real estate agent.

To date Property 2. has not been sold but it is under contract pending the sale of another property.

You engaged a real estate agent to sell Property 1 and although it is still for sale you have decided to rent the property.

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.

Rental income

Rent is considered as income according to ordinary concepts and is therefore assessable under section 6-5 of the ITAA 1997. It is derived, for tax purposes, when it is received.

Deduction for interest expenditure

Under section 8-1 of the ITAA 1997 you are entitled to deduct, from your assessable income, any interest expenditure to the extent that it is incurred in producing your assessable income.

If you take out a loan to purchase a rental property, you will generally be entitled to claim the interest on that loan, or a portion of the interest, as a deduction. However, the property must be rented, or available for rental, in the income year for which you claim a deduction.

You have rented Property 1 therefore you are entitled to claim a deduction for any interest expenditure you have incurred, for the period it was rented, in the financial year ended 2013.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).