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Ruling
Subject: loss from profit-making plan
Question
Are you entitled to a deduction under section 25-40 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Answer
No.
This ruling applies for the following period:
Year ending 30 June 2011
The scheme commences on:
1 July 2007
Relevant facts and circumstances
You entered into contracts to acquire two properties. The properties were registered under the developer and deposits paid.
Your intentions were to enter into contracts of sale to purchase two lots of land and when the house construction was complete and titles issued to on-sell these properties. You had no obligation to settle on any particular date as a settlement date for the properties was not determined.
When the construction of the houses was complete and their value on the market was declining the project manager advised you to rent the properties. You declined this advice as your intention was always to on-sell the properties when complete.
After several months dealing with the project manager and not coming to an agreement with the sale of the properties you refused to settle and appointed lawyers to terminate the contracts and recoup the deposits you paid for the two properties. An agreement was reached months later and you received a settlement of the matter. The costs incurred in reaching this agreement totalled resulted in a loss.
You had not provided a notice to the Commissioner of Taxation to enter into the contracts for the purpose of profit making by sale of a profit-making undertaking or plan at the time you lodged your 2007-08 tax return.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 25-40
Reasons for decision
Profit making undertaking or plan
A loss arising from the carrying on or carrying out of a profit-making undertaking or plan is deductible under section 25-40 of the ITAA 1997 if, had there been a profit rather than a loss, the profit would have been assessable under section 15-15 of the ITAA 1997.
Section 15-15 of the ITAA 1997 states:
(1) Your assessable income includes profit arising from the carrying on or carrying out of a profit-making undertaking or plan.
(2) This section does not apply to a profit that:
(a) is assessable as ordinary income under section 6-5; or
(b) arises in respect of the sale of property acquired on or after 20 September 1985.
Subsection 25-40(2) of the ITAA 1997 states:
· you cannot deduct a loss under subsection 25-40(1) if the loss arises in respect of the sale of property acquired on or after 20 September 1985.
Property is not defined in the ITAA 1997 and consequently takes its ordinary meaning.
The Macquarie Dictionary defines property as:
· that which one owns; the possession or possessions of a particular owner ownership; right of possession, enjoyment, or disposal of anything.
Therefore property refers to the objects of ownership and to the proprietary rights over those objects. Property in the sense of objects of ownership may be classified as:
(a) real property land and things affixed to land;
(b) personal property all property other than real property.
Subsection 25-40(3) of the ITAA 1997 states you can deduct a loss under subsection (1) insofar as it arises in respect of property, only if:
· you notified the Commissioner that you acquired the property for the purpose of profit-making by sale or for the carrying on or carrying out of any profit-making undertaking or plan(however described); or
· the Commissioner is satisfied that you acquired the property for either of those purposes.
Subsection 25-40(2) of the ITAA 1997 specifically denies a deduction in respect of the sale of property acquired on or after 20 September 1985.
The Commissioner will not allow your losses as the deposit was in relation to a property acquired after 20 September 1985. Under subsection 25-40(2) of the ITAA 1997 the loss cannot be claimed.