Edited version of your written advice

Authorisation Number: 1012663850868

Ruling

Subject: Isolate Commercial Transaction

Question 1

Will your project of subdividing and constructing a duplex of units be an isolated commercial transaction capable of producing ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) or deductible losses under section 8-1 of the ITAA 1997?

Answer

Yes

Question 2

Will the overall loss from the project be deductable under section 8-1 of the ITAA 1997 in the financial year ended 30 June 2014?

Answer

Yes

This ruling applies for the following period(s)

Income year ended 30 June 2014

The scheme commences on

1 July 2013

Relevant facts and circumstances

You purchased a property on the 20xx which included land and an old residential building on a subdividable block. The building was restored and let out on a commercial basis leaving a vacant section of land.

It was always your intention to build on this land. You intended to live in one and immediately sell the others. This was a one off development.

You intended to complete the development in a timely manner but were delayed due to illnesses.

You had some experience project management.

You personally obtained an owner builders licence. Your personal involvement in the project was significant. You provided input into the design and were the party to liaise with the council and neighbours where appropriate.

You entered into the project with the overall intention of making a profit. You had a business plan when you purchased the property.

You would have made a profit on the project but for some unexpected costs.

You sold the property in the financial year ended 30 June 20xx.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 8-1

Reasons for decision

Generally the proceeds from transactions involving the sale of real property will be assessable as ordinary income under section 6-5 of the ITAA 1997 where they are income from a business activity or profits from an isolated commercial transaction. In those instances where the profits of the sale would have been ordinary income any losses will generally be deductible, however where you carry on a business those losses may be subject to deferral under the non-commercial loss provisions contained in Division 35 of the ITAA 1997. Alternatively, where the sale of real property is not part of a business or an isolated commercial transaction any profit or loss will be subject to the capital gain tax provisions.

Carrying on a business

The question of whether a business is being carried on is a question of fact and degree to be determined on a case by case basis. The courts have developed a series of indicators to determine the matter, which are summarised in Taxation Ruling TR 97/11. Although TR 97/11 specifically refers to primary production, the same principles apply to all businesses. Some indicators of carrying on a business which the courts have considered to be relevant include:

• whether the activity has a significant commercial purposes or character

• whether the taxpayer has more than just an intention to engage in business

• whether there is regularity and repetition of the activity

• whether the activity is of the same kind, and carried on in a similar manner, to that of ordinary trade in that line of business

• whether the activity is planned, organised and carried on in a businesslike manner such that it is described as making a profit

• the size, scale and permanency of the activity, and

• whether the activity is better described as a hobby, a form of recreation or sporting activity.

Although some of the indicators may suggest that you are in the business, when viewing your entire factual circumstances it is considered that the majority of the indicators would suggest that you are not in business of developing and selling property. Specifically we refer to the one of nature and limited scale of the development.

Isolated commercial transactions

Profits arising from an isolated business or commercial transaction will be ordinary income if the taxpayer's purpose or intention in entering into the transaction is to make a profit, even though the transaction may not be part of the ordinary activities of the taxpayer's business (FC of T v. Myer Emporium Ltd (1987) 163 CLR 199; 87 ATC 4363; 18 ATR 693) (Myer Emporium). 

Taxation Rulings TR 92/3 and TR 92/4 consider the principles outlined in the Myer Emporium case and provide guidance in determining whether profits from isolated transactions are assessable under section 6-5 of the ITAA 1997 as ordinary income or losses on isolated transactions are deductible under section 8-1 of the ITAA 1997.

TR 92/3 should be read in conjunction with TR 92/4.

TR 92/3 defines the term 'isolated transactions' as:

• transactions outside the ordinary course of business of a taxpayer carrying on a business, and

• transactions entered into by non-business taxpayers. 

It is not necessary that the intention or purpose of profit-making be the sole or dominant intention or purpose for entering into the transaction. It is sufficient if profit-making is a significant purpose.

If a taxpayer makes a profit from a transaction or operation, that profit is income if the transaction or operation is not in the course of the taxpayers business but:

• the intention or purpose of the taxpayer in entering into the profit-making transaction or operation was to make a profit or gain, and

• the transaction or operation was entered into, and the profit was made, in carrying out a business operation or commercial transaction.

In your case, it is accepted that your purpose or intention at all times was to make a profit or gain from the resale of the property.

The question in your case is whether or not your transactions can be considered commercial in character.

Whether an isolated transaction is business or commercial in character will depend on the circumstances of each case.  Where a taxpayer's activities have become a separate business operation or commercial transaction, the profits can be assessed as ordinary income within section 6-5 of the ITAA 1997. TR 92/3 lists the following factors to be considered:

a) the nature of the entity undertaking the operation or transaction 

b) the nature and scale of other activities undertaken by the taxpayer

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

d) the nature, scale and complexity of the operation or transaction

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

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

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

h) the timing of the transaction or the various steps in the transaction.

In consideration of the above indicators we have formed the view that the overall project was commercial in nature. We reference the follow facts in support of that position:

• you brought specific skills and experience relevant to the project

• you had a business plan to subdivide the vacant land, construct units and sell one of those units for a profit

• you obtained an owner builders license

• you would have made a profit but for the unexpected costs.

Further in support of this position is the case of McCurry v Commissioner of Taxation (1998) 98 ATC 4487; (1998) 39 ATR 121 which is on point with your circumstances. In that case the taxpayers purchased a property, after knocking down an old house on the property the taxpayers constructed three townhouses. The profit to the taxpayers on the sale of townhouses were held to be assessable income despite the fact that the taxpayer's family lived in two of the three units for a substantial period of time and that they contended the original purpose of constructing the units was to derive rental income.

As the property was purchased with the sole intention of making a profit and it is concluded that the transactions are commercial in nature, any profits from the resale of the properties will be assessable under section 6-5 of the ITAA 1997 and any losses will be deductible under section 8-1 of the ITAA 1997. In this situation your outgoings exceed the profits from the sale of unit and will consequently result in a loss which will be deductible in the same financial year as the unit was sold.