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Edited version of your written advice
Authorisation Number: 1012733002318
Ruling
Subject: Property sale - isolated transaction vs business
Questions and Answers:
1. Are your losses from the subdivision and sale of your property from an isolated commercial transaction and therefore deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Yes.
2. Do the non-commercial loss rules contained in Division 35 of the ITAA 1997 apply to your losses?
No.
This ruling applies for the following periods:
Year ended 30 June 2011
Year ended 30 June 2013
The scheme commences on:
1 July 2010
Relevant facts and circumstances
During 200X, you entered into a contract to purchase vacant land. As written in the contract, your purchase was conditional upon you receiving council approval to subdivide the land. Soon after your purchase, you entered into an agency selling agreement.
However, due to the Global Financial Crisis, the property market became worse. Eventually, you sold the two subdivided lots during the years ended 30 June 20XX and 20YY for substantial losses.
For those two income years, you earned over $250,000 in employment income.
Your history of property sales on revenue account includes one transaction each in the years ended 30 June 200Y and 200Z, where on both occasions you subdivided a residential block into two, demolished the existing dwelling and constructed two separate dwellings for resale.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1
Income Tax Assessment Act 1997 Section 35-10
Reasons for decision
A business of property development is taken to have commenced when a taxpayer embarks on a definite and continuous cycle of operations designed to lead to the sale of the land and where the (original) acquisition of land was for a business purpose (Taxation Determination TD 92/124).
Taxation Ruling TR 97/11 lists the following general indicators, which have been developed by the courts of law to determine whether an activity constitutes the carrying on of a business:
n whether the activity has a significant commercial purpose or character;
n whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity;
n whether there is repetition and regularity of the activity;
n whether the activity is planned, organised and carried on in a businesslike manner;
n the size, scale and permanency of the activity; and
n whether the activity is better described as a hobby or form of recreation.
Where a transaction or operation would constitute the carrying on of a business except that it does not occur as part of repetitious or recurring transactions or operations , it is not a business but, instead, an 'isolated commercial transaction' (Taxation Ruling TR 92/3).
An isolated commercial transaction will generally occur when a taxpayer has the purpose of profit-making (resale) at the time of acquiring the relevant property (including newly constructed buildings) therefore giving the property no use other than as the subject of trade (Taxation Ruling TR 92/3).
Division 35 of the ITAA 1997 prevents losses of individuals from non-commercial business activities being offset against other assessable income in the year the loss is incurred. The loss is deferred.
Where the loss deferral rule does not apply due to meeting one of the tests in subsection 35-10(1), an additional income requirement test (of less than $250,000) must be met under subsection 35-10(2E) for the loss to be not deferred
In your case, we are satisfied your sales of land were isolated commercial transactions because you had the intention of resale when purchasing the properties (as you have demonstrated with your past revenue account transactions) and because the activity, together with your sales in the 200Z income year, did not have the repetition, scale and permanency to be a business.
It follows your loss is deductible under section 8-1 of the ITAA 1997. Not being a loss from a business, the rules in Division 35 of the ITAA 1997 will not apply to defer your loss.
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