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Ruling

Subject: isolated transaction

Question

Are you entitled to claim the loss you made from your activity of house renovation?

Answer

Yes

This ruling applies for the following period

Year ended 30 June 2012

The scheme commences on

1 July 2011

Relevant facts and circumstances

You purchased a house in late 2010 with the intention of renovating it and selling it for a profit. The house was sold in mid 2011 and you incurred a loss.

You borrowed 100% of the purchase price from the bank. The bank did not obtain a building inspection before settlement.

You were aware the house was damaged when you bought it and that was the reason you purchased it cheaply. The house had severe damage which was more extensive and cost more to rectify than you thought it would.

You hired trades people to do the renovation work.

This is the first house you have bought with the intention of renovating and making a profit. You do not consider yourself to be in the business of house renovating. You also own a rental property.

You did not live in the house nor did you rent it out whilst you owned it.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Reasons for decision

Taxation Ruling TR 92/3 provides the Commissioner's views on whether profits from isolated transactions are assessable income. Taxation Ruling TR 92/4 discusses situations where losses on isolated transactions are deductible. TR 92/3 and TR 92/4 are intended to be read together and the principles outlined in TR 92/3 apply to a taxpayer who has made a loss, instead of a profit, from a transaction or operation.

The term 'isolated transaction' is defined in these rulings as:

o those transactions outside the ordinary course of business of a taxpayer carrying on a business; and

o those transactions entered into by non-business taxpayers.

As stated at paragraph 16 of TR 92/4, a loss from an isolated transaction will generally be deductible when both of the following are present:

· in entering into the transaction the taxpayer intended or expected to derive a profit which would have been assessable income; 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.

You have stated that you bought your property with the intention to renovate and sell the house at a profit. This intention will satisfy the first test. 

You are not carrying on a business of renovating houses, so we need to determine if the house renovation activity you engaged in amounted to a commercial transaction.

Generally, a transaction has the character of a commercial transaction if it would constitute the carrying on of a business except that it does not occur as part of repetitious or recurring transactions.

Paragraph 13 of TR 92/3 lists some of the factors that have evolved from case law that may be relevant in considering whether an isolated transaction amounts to a business operation or commercial transaction. These are summarised below:

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

· The nature and scale of the activities undertaken

· The amount of money involved in the transaction and the magnitude of the profit that was sought or obtained

· The nature, scale and complexity of the operation or transaction

· The manner in which the operation or transaction was carried out. For example, whether professional agents and advisers were used and whether the operation or transaction was in a public market.

· The nature of any connection between the taxpayer and any other party to the operation or transaction. For example, the relationship may suggest that the operation was essentially a family dealing

· The nature of any property disposed of. For example, if the property has no use other than as a subject of trade, it is easier to infer the transaction was commercial in nature

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

In your case there are several factors which indicate the house renovating activity was a commercial transaction. You bought the house with the sole purpose of renovating it to make a profit. You engaged trades people to do the renovation work. The house was purchased, renovated and sold within a relatively short period of time. The house was not used for any other purpose (for example, as a rental property) whilst you owned it.

The loss has been incurred in undertaking an isolated commercial transaction. You can include the loss in the calculation of your taxable income for the 2012 financial year.