Edited version of private ruling

Authorisation Number: 1011635532552

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Ruling

Subject: Capital gains tax - Disposal of property purchased for profit making purposes

Question: Is a deduction allowable for the loss you made in relation to property B?

Answer: Yes.

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts

You had resided at a property (property A) for more than five years and you had significant local knowledge through attending open house inspects and auctions. You had seen others prosper from both renovation and development with large capital gains due to the suburbs vicinity to the city, hospitals, specialist centres, public transport and the standard of both public and private schooling available in the area.

In the financial year 200X-0X you acquired a property (property B) in the same suburb with the intention of making a large profit.

Settlement occurred on mid year.

You have not undertaken any development activities in the past.

It was your intention to fully manage the project. You undertook the following tasks:

· purchase the property with an existing dwelling

· employed a company to gain the necessary approval to demolish the existing house as it was a "character controlled" precinct

· engaged a demolition company to remove and clear block of all vegetation

· engaged a company to conduct a full boundary and contour survey

· sought suitable design for block size to gain maximum return on investment through personal researching of multiple builders' quality of build and design

· engaged a company to draw up plans for block

· engaged a company to conduct soil tests on the property

· engaged a quantity surveyor to cost project, and

· you had detailed conversations at regular intervals with your bank manager regarding the ongoing progress of the undertaking.

You gained approval from the council to demolish the existing structure and begin the construction of the new building.

The demolition, architectural planning and council approval was completed and invoiced in early 2008.

The preliminary costings took six months to complete.

At the time no builder would lock themselves into a fixed price as it was taken off the plan and purely architectural.

Your funds to finance this operation were gained from you disposing of property A.

You purchased another property (property C) which became and is currently your main residence.

The costings received from the quantity surveyor were immensely higher than any other estimate you had received or research prior to the acquisition of property B. At the time the building industry was experiencing its peak as labour and building costs were higher than expected.

You approached your bank manager to obtain finance to develop the site and you were told initially that you would be eligible.

When the global financial crisis hit you were advised by your bank manager that it would be a futile exercise applying for a loan as the lending criteria had been substantially tightened. You did not apply for a loan.

Mid 2009, you were forced to dispose of property B at a substantial loss in order for you to meet your obligations. At this point the housing market was in a significant slump.

You have supplied copies of the following documentation to support your application and these documents are to be read with and forms part of the scheme for the purpose of this ruling:

Contour and detail survey - property B

Natural contours plan - property B

house plans

Soil Test Only Report

Price Finder information on the disposal of surrounding properties

Google information - map and real estate agent - property B.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Reasons for decision

Losses on isolated transactions

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for losses and outgoings incurred in the gaining or producing of assessable income unless they are capital, private or domestic outgoings. Section 8-1 of the ITAA 1997 replaced subsection 51(1) of the Income Tax Assessment Act 1936.

Taxation Ruling TR 92/4 provides guidance in determining whether losses on isolated transactions are deductible.

A loss from an isolated transaction is generally deductible if:

· in entering into the transaction the individual intended or expected to derive a profit which would have been assessable income for the reasons contemplated in Taxation Ruling TR 92/3, and

· 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.

From the information you have provided we accept that it was your intention at time of entering into the arrangement of property development solely for profit making purposes.

Therefore, you can include the costs you incurred in relation to property B as allowable deductions under section 8-1 of the ITAA 1997 in the year ended 30 June 201X.