Edited version of private advice

Authorisation Number: 1012685026477

Ruling

Subject: Isolated commercial transactions

Question 1

Will the sale of the property be an isolated commercial transaction capable of giving rise to assessable income or deductions under the Income Tax Assessment Act 1997?

Answer

No

This ruling applies for the following period(s)

Income year ended 30 June 2014

The scheme commences on

1 January 200X

Relevant facts and circumstances

You purchased an old property for the purpose of resale.

Your aim was to completely rejuvenate the house and garden as a 5 year project and then sell at a profit.

You had relevant skills from building your own house.

Over the next five years you spent your spare time outside of casual employment working on the property.

Improvements made to the property included:

• landscaping

• painting interior and exterior

• new bathroom fittings and fixtures

• new kitchen fittings and fixtures

• floor treatments

• installation of a new hot water system

• a new covered deck.

Housing prices plummeted due to the financial crisis and with no sign of improvement you sold the property in 20xx at a loss.

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 Income Tax Assessment Act 1997 (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 under section 8-1 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.

On the facts provided it is clear that you will not be carrying on a business of renovating or restoring properties.

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.

Applying the factors to your case as follows:

• all the transactions were conducted by you in your individual capacity rather than by a corporation or business entity

• the purchase and resale of properties is not part of your normal business activity

• you carried on the work yourself outside of casual employment

• the overall scale of the activity is small involving a single residential property

• there was not subdivision or major construction activity

• you held the property for an extended period of years.

When analysed in the context of TR 92/3 and TR 92/4, the nature of the property involved, the nature of the property and the activities undertaken are not indicative of an isolated commercial transaction.

Even though the property was purchased with the sole intention of making a profit, it is concluded that the transactions are not commercial in nature, any losses consequently will not be deductible under section 8-1 of the ITAA 1997. However the expenses incurred will be taken into account in the calculation of the reduced cost base under the CGT provisions.