Edited version of private ruling

Authorisation Number: 1011901412965

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Ruling

Subject: Loss on the sale of your property

Question 1

Are you entitled to a deduction for the loss incurred on the sale of your property?

Answer

No

Question 2

Will the capital gains tax (CGT) provisions apply to the sale of the property to include the loss under section 102-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following periods

Year ended 30 June 2010
Year ended 30 June 2011

The scheme commenced on

1 July 2009

Relevant facts and circumstances

You are the trustee of a self-managed superannuation fund (your fund).

You entered into a verbal agreement with some of the directors of Company A. You are related to one of the directors.

Under the agreement you were to acquire vacant commercial land and construct suitable premises for Company A to lease from you or a related party.

You purchased the land and built a commercial premises.

A commercial lease was entered into with Company A.

The property was rented at market rates. You obtained advice from a real estate agent regarding the market rent for the property.

You entered an agreement to transfer the property to your fund. Settlement of the property transfer occurred.

You entered into the above arrangements with the purpose of creating an income producing asset to provide for your retirement.

It was always your intention for the property to be held by the superannuation fund. Due to the restrictions imposed on self-managed superannuation funds by the Superannuation Industry (Supervision) Act 1993 you were advised to build the premises yourself and then transfer the property to your fund.

You incurred a total loss on the transaction.

Upon commencing the arrangement, you expected to make a profit

You have not previously undertaken a commercial property development of this nature. Nor do you intend to undertake similar development in the future.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 102-5

Income Tax Assessment Act 1997 Subsection 102-10(2)

Income Tax Assessment Act 1997 Subsection 102-15(3)

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 104-10

Reasons for decision

Question 1

Summary

We consider that the loss from the sale of your property to your fund is capital in nature and therefore is expressly not deductible under section 8-1 of the ITAA 1997. The loss was not incurred in gaining or producing assessable income and it did not occur as a result of an isolated transaction entered into for the purpose of profit.

It follows that a deduction is not allowable under section 8-1 of the ITAA 1997 for the loss from the sale of the property.

Detailed reasoning

Section 8-1 of the ITAA 1997 allows you to deduct from your assessable income any loss or outgoing to the extent that:

· it is incurred in gaining or producing your assessable income, or

· it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.

No deduction is allowable if the loss is of capital, private or domestic nature or relates to the earning of exempt income or a provision of the taxation legislation excludes it.

You have made a loss from the sale of a property to your fund and have asked if the loss is deductible as an isolated transaction. As the transaction involved the development of property, we must first look at whether you were carrying on a business of property development.

Carrying on a business of property development

The question of whether a business is being carried on is a question of fact and degree. The courts have developed a series of indicator that are applied to determine the matter on the facts provided.

Taxation Ruling TR 97/11 provides the Commissioner's view of the factors used to determine if you are in business for tax purposes. Indicators include commercial significance or character, regularity and repetition, organisation, size, scale and permanency.

No one factor is decisive. The indicators must be considered in combination and as a whole. Whether a 'business' is carried on depends on the large or general impression.

Based on the information provided, you are not considered to be carrying on a business of property development as this the first time you have undertaken this type of activity and you do not intend to repeat the activity in the future.

Accordingly, the loss is not considered to have been made in the course of carrying on a property development business.

Isolated transactions

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

An isolated transaction refers to those transactions outside the ordinary course of business of a taxpayer carrying on a business and those transactions entered into by non-business taxpayers. A loss from an isolated transaction is generally deductible under section 8-1 of the ITAA 1997 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.

For a transaction to be characterised as a business operation or a commercial transaction, it is sufficient if the transaction is business or commercial in character (Federal Commissioner of Taxation v. Whitfords Beach Pty Ltd (1982) 150 CLR 355, 82 ATC 4031, 12 ATR 692). Whether a particular transaction has a business or commercial character depends on the circumstances of the transaction.

In determining whether the isolated transaction amounts to a business operation or commercial transaction, paragraph 13 of TR 92/3 outlines a number of factors that must be considered, as follows:

· the nature of the entity undertaking the operation or transaction. For example, if the taxpayer is a corporation with substantial assets rather than an individual, that may be an indication that the operation or transaction was commercial in nature

· the nature and scale of other activities undertaken by the taxpayer

· the amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained

· the manner in which the operation or transaction was entered into or carried out

· the nature of any connection between the relevant taxpayer and any other party to the operation or transaction

· if the transaction involves the acquisition and disposal of property, the nature of that property, and

· the timing of the transaction or the various steps in the transaction. For example, if the relevant transaction consists of the acquisition and disposal of property, the holding of the property for many years may indicate that the transaction was not business or commercial in nature.

In your case:

· you entered the arrangement with the intention of creating an income producing asset to provide for your retirement

· you conducted the transactions as individuals

· you had not previously engaged in commercial property sales or development

· you do not intend to undertake further property developments of a similar nature

· the amount of money involved in the transaction was significant although the intended profit was relatively minor

· you were associated with the company who leased the property and are the trustees of your fund who purchased the property from you

· the property consisted of a commercial warehouse and office which were always intended to be transferred to your fund after construction was complete

· the time from which you purchase the land to when the transfer to your fund occurred was relatively short.

We consider that the arrangement entered into was not an isolated transaction to which TR 92/4 can apply. It was your primary intention to create an income producing asset to provide for your retirement. The fact that the asset could be sold to your fund and generate a profit was a secondary purpose. We do not consider this purpose to be sufficient to transform the arrangement into a commercial transaction.

As such, we consider the loss on the sale of the property to be no different to a real estate investor selling a rental property and making a loss. The loss is considered to be capital in nature.

No deduction is allowable under section 8-1 of the ITAA 1997 for the loss incurred on selling the property to your fund.

Question 2

Summary

CGT provisions apply to the sale of the property to include the loss under section 102-5 of the ITAA 1997.

Detailed reasoning

CGT event

You can make a capital gain or capital loss if and only if a CGT event happens. The disposal of the property triggered CGT event A1. Under CGT event A1, a capital gain is made if the capital proceeds from the disposal are greater than the asset's cost base and a capital loss is incurred if the capital proceeds from the disposal are less than the asset's reduced cost base. You have provided information to the ATO indicating a capital loss was incurred on the disposal of the property.

Net Capital Loss

You work out if you have a net capital loss for the income year by using the following steps.

1. Add up the capital losses you made during the income year. Also add up the capital gains you made.

2. Subtract your capital gains from your capital losses

3. If the amount is more than zero, it is your net capital loss for the income year.

You cannot deduct from your assessable income a net capital loss for any income year. However, it can be applied against your capital gains for a later income year.

Where the market value of an asset needs to be determined, you can choose to:

· obtain a detailed valuation from a qualified valuer; or

· compute your own valuation based on reasonably objective and supportable data.

Note: The ATO may challenge valuations where appropriate.

Information regarding valuations is available in the ATO publication "Market valuation for tax purposes".