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Edited version of your private ruling
Authorisation Number: 1012562959677
Ruling
Subject: Revenue losses
Question 1
Will a loss on advances loaned by a trustee of a trust to a company be a loss on revenue account?
Answer
No
This ruling applies for the following periods:
Year ended 30 June 2012
Relevant facts and circumstances
· The taxpayer is a trustee of a discretionary trust.
· The taxpayer entered into joint ventures for the purpose of acquiring, developing, and subdividing lands for sale.
· The Joint Ventures appointed a resident company as a project manager and trustee to carry on the land development activities on behalf of the taxpayer.
· The taxpayer paid for the initial capital contribution to the company.
· The company prepares its financials on the basis it was carrying on a land development activities.
· The taxpayer holds shares in the company through a nominee.
· The Joint Ventures accounts have never been prepared to account for income and expenses.
· The taxpayer has never, for income tax purposes, accounted for income and deductions in the basis that Division 5 of the Income Tax Assessment Act 1997 applied to the property development projects.
· The taxpayer recorded payments to the company as advances under non-current asset in its financials for 2008-2011.
· The taxpayer has lodged all trust income tax returns for 2007-2011.
Relevant legislative provisions
Section 8-1(2) of the Income Tax Assessment Act 1997
Reasons for decision
Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) states -
8-1(1) You can deduct from your assessable income any loss or outgoing to the extent that:
(a) It is incurred in gaining or producing your assessable income; or
(b) It is necessarily incurred in carrying on a *business for the purpose of gaining or producing your assessable income.
8-1(2) However, you cannot deduct a loss or outgoing under this section to the extent that:
(a) It is a loss or outgoing of capital, or of a capital nature; or
(b) It is a loss or outgoing of a private or domestic nature; or
(c) It is incurred in relation to gaining or producing you exempt income of your non-assessable non-exempt income; or
(d) a provision of this Act prevents you from deducting it.
The scheme the taxpayer was seeking for this private ruling to apply has taken place. We have sought clarification of material facts because in these circumstances the application of a relevant provision depends on a question of facts.
The taxpayer has fully accepted the Statement of Facts we have put together in relation to the scheme.
The scheme the taxpayer has participated in was land development projects which now have come to an end.
In support of the taxpayer's argument that the losses were on revenue account the taxpayer relies on the Commissioner's view as set out in Taxation Ruling (TR) 92/3 Income tax: whether profits from isolated transactions are income. TR 92/3 should be read in conjunction with TR 92/4 Income tax: whether losses on isolated transactions are deductible.
Paragraph 4 of the TR 92/4 provides that a loss from an isolated transaction is generally deductible under section 8-1 if:
(a) in entering into the transaction the taxpayer intended or expected to derive a profit which would have been assessable income; 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
Paragraph 35 of the TR 92/3 is the equivalent of paragraph 4.
A profit from an isolated transaction is therefore generally assessable income when both of the following elements are present:
(a) The intention or purpose of the taxpayer in entering into the transaction was to make a profit or gain
(b) The transaction was entered into, and the profit was made, in the course of carrying on a business or in carrying out a business operation or commercial transaction
The taxpayer made payments in 20XX for their contribution in the land development projects to the company.
Assuming both elements in paragraph 35 of the TR 92/3 are met, paragraph 51 of the TR 92/3 explains, that the profit will be income if a taxpayer earns a profit by the exact means it contemplated at the time of entering the transaction. Conversely, there will be a loss on revenue account if the loss results from the very means contemplated.
The company has prepared its financials of the basis it was carrying on the business of property development. The financials relevantly state:
· The detailed Statement of Financial Position for the relevant years recorded unsecured financial liabilities - Loan
· The company recognised the land and subdivided properties in revenue account as trading stock.
The taxpayer owns shares in the company through a nominee. As a shareholder in a company, the taxpayer is not entitled to share the profit or losses on a flow through basis.
We have concluded that the exact means by which the profit was to be earned by the taxpayer was by way of dividends from the company and not by way of a return of the advances made by the taxpayer.
Generally a loss on a loan is not deductible under section 8-1(2)(a) because it is a loss of a capital nature unless the taxpayer is in the business of lending money.
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