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Ruling

Subject: Expenses - investment loss

Question

Are you entitled to claim a deduction, under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997), against your other assessable income for the loss you incurred on your investment into a proposed residential development?

Answer: No

This ruling applies for the following period

Year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts and circumstances

You earn income through salary and wages.

You entered into a transaction with a developer to purchase land in a proposed residential development.

You paid an expression of interest fee and deposit.

You state that your intention in entering into the transaction was to sell the land as soon as you received title on it in order to gain a profit.

You state that you never intended to build a house on the land or reside there.

The property developer was subsequently placed into liquidation.

The property was subsequently sold, with secured creditors receiving most of the funds.

You (among others involved in the scheme), took legal action and you received some of your funds back. The settlement received was on the basis that you would take no further legal action. You suffered a loss from the investment.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 8-1

Taxation Administration Act 1953 Subsection 359-35(2) to Schedule 1

Reasons for decision

Summary

You are not entitled to claim a deduction, under section 8-1 of the ITAA 1997, against your assessable income for the loss incurred as a result of the investment, as this loss is considered to be a capital loss. You may be entitled to offset the loss against capital gains earned in this or future financial years.

Detailed reasoning

Section 8-1 of the Income Tax Assessment Act 1997 (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

· 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 an investment related to a land/property development. We will need to determine whether the loss:

o is deductible under section 8-1 of the ITAA 1997 against your other assessable income as you were carrying on a business of land/property development

o is deductible under section 8-1 of the ITAA 1997 against your other assessable income as you conducted an isolated commercial transaction with a view to profit

o is considered to be a capital loss.

Carrying on a business of land/property development

Based on the information provided, you are not considered to be carrying on a business of land/property development. Your only involvement with the activity consisted of an expression of interest fee and deposit on a lot that was part of the proposed development and, you state that you have not speculated in land developments in the past.

Accordingly, the loss is not considered to have been made in the course of carrying on a land/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:

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

o 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.

Paragraph 49 of TR 92/3 provides that generally, a transaction has a business or commercial character if the transaction would constitute the carrying on of a business except that it does not occur as part of repetitious or recurring transactions.

In your case, you state that you intention in entering into the transaction was to sell the land for a profit as soon as you received title to it and, that the arrangement entered into was a commercial transaction.

However, we consider that while there may have been an intention to make a profit, the arrangement was not a commercial transaction but instead had the character of a passive investment, as:

· you conducted the transaction as an individual

· you are not in the business of land/property developments and, you have not speculated in land/property development projects in the past

· the amount of money involved was relatively minor and would not have been sufficient to cover the full development costs of the lot

· you were not involved in the development of the land/property, other than providing some funds to the developer

· there is no indication that you utilised the services of a professional agent or advisor in the transaction

· the property had uses other than just as the subject of trade including, possible use as a future investment property once complete.

As such, we consider that the arrangement was merely a passive investment and not a commercial transaction. Therefore, if the sale of the property had resulted in a profit, the profit would not have been assessable as ordinary income, but instead, as a capital gain. Accordingly, as a loss was made on the realisation of the investment, the loss would be considered a capital loss and therefore is not deductible under section 8-1 of the ITAA 1997.