Edited version of your private ruling

Authorisation Number: 1012519669251

Ruling

Subject: Isolated transactions

Question

Does the construction and subsequent sale of a dwelling constitute an isolated transaction?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2013

The scheme commenced on

1 July 2012

Relevant facts and circumstances

You purchased a block of land on which you intended to build a dwelling and sell at a profit.

After receiving building approval, construction began in 20XX.

The property was completed in 20YY.

The property was listed for sale through local real estate agents and was sold and settled in the 20ZZ financial year.

There was never an intention to treat the completed property as a rental property.

You have only purchased one property with the intention of building a dwelling on it and on selling at a profit.

You have other properties which you use to earn rental income.

You have a home office from which you operated your property development activities and activities relating to your occupation.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 8-1

Reasons for decision

Summary

Your activity of purchasing land, constructing a dwelling and selling the completed property is considered to be an isolated transaction. Any profit made on the sale of the property is assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997). Conversely, any loss made will be deductible under section 8-1 of the ITAA 1997.

Detailed reasoning

Taxation Rulings TR 92/3 and TR 92/4, discusses the treatment of profits and losses resulting from isolated transactions.

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 profit from an isolated transaction is assessable under section 6-5 of the ITAA 1997, and a loss from an isolated transaction is deductible under section 8-1 of the ITAA 1997, when both of the following elements are present:

(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 profit or 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 an 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 making a profit from the sale of the completed dwelling

· you conducted the transaction as an individual

· you had not previously engaged in commercial property development

· the arrangement was entered into on a commercial basis - you engaged a builder to build the property

· whilst it took some time for construction to be completed, this is not considered to be significant enough to indicate the transaction was not commercial in nature.

We consider that the arrangement entered into was an isolated transaction to which TR 92/3 or TR 92/4 can apply. It was your primary intention to create a profit by building and selling the dwelling.

As such, any profit made on the sale of the property is assessable under section 6-5 of the ITAA 1997 in the year in which the property was sold. Conversely, any loss made will be deductible under section 8-1 of the ITAA 1997 in the year in which the property was sold.