Edited version of private advice

Authorisation Number: 1051517104358

Date of advice: 19 June 2019

Ruling

Subject: Property losses

Question 1

Are you entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for the expenses incurred for the development approval, engineering surveying reports, and architect design services?

Answer

No

Question 2

Are you entitled to a capital loss for the deposit for land which was not brought?

Answer

Yes

Question 3

Are you entitled to a capital loss for the expenses incurred for the development approval, engineering surveying reports, and architect design services?

Answer

No

This ruling applies for the following period

Year ending 2018

The scheme commenced on

1 July 2017

Relevant facts and circumstances

You placed a deposit on a vacant block of land with the intention of building and selling a block of residential units.

Prior to the proposed settlement, you also incurred substantial expenses for:

·        The Development Approval; to go to council specifically for approval of the development.

·        Engineering and surveying reports: which dealt specifically with the land

·        Architect design services were specifically for the proposed building.

None of these expenses were associated with the contract.

You then needed to extend the settlement date, which the vendor agreed to, pending an additional fee, which you did not pay.

The contract was not extended and lapsed.

You forfeited the original deposit on the land, as well as the associated costs incurred up until then.

As you had not secured the land, the project did not proceed.

Your actual involvement was intended to learn alongside your mentor who has done a number of projects himself.

You were also going to do the marketing/selling of the lots.

You are not in the business of property development, and you have not purchased land, and built and sold individual lots in the past, but you do anticipate doing so in future.

You currently work as a retail employee, and do not conduct any business.

You have prepared a budget of costings for the proposed construction and sale of the units.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 6-5(1),

Income Tax Assessment Act 1997 section 8-1,

Income Tax Assessment Act 1997 section 102-20,

Income Tax Assessment Act 1997 section 108-5,

Income Tax Assessment Act 1997 section 104-10,

Income Tax Assessment Act 1997 section 110-25,

Income Tax Assessment Act 1997 section 995-1.

Reasons for decision

Question 1

Summary

The Development Approval, engineering surveying reports, and architect design services are not deductible under section 8-1 of the ITAA 1997 as they were not incurred in gaining or producing your assessable income, or necessarily incurred in carrying on a business or proposed business for the purposes of gaining or producing assessable income.

Detailed reasoning

Subsection 6-5(1) of the ITAA 1997 states that your assessable income includes income according to ordinary concepts. This 'ordinary income' includes amongst other things, income from salary and wages and business operations.

Section 8-1 of the ITAA 1997 allows you to claim a deduction for a loss or outgoing that is incurred in gaining or producing your assessable income, or necessarily incurred in carrying on a business to gain or produce assessable income. These deductions are limited by the exclusion of losses or outgoings that are capital, private or domestic in nature.

Generally, expenditure which produces some asset or advantage of a lasting or enduring character for the benefit of the business will be considered capital expenditure. As stated in Sun Newspapers Ltd and Anor v Federal Commissioner of Taxation 61 CLR 337, an enduring benefit does not require that the taxpayer obtains an actual asset, it may be a benefit which endures, in the way that fixed capital endures.

In your case, the costs you incurred in the development approval, engineering surveying reports, and architect design services for the failed development of your property are non-recurrent expenses of a capital nature made for the purpose of obtaining an enduring benefit, that is, allowing the construction of the apartment units on your land.

Questions 2 and 3

Section 102-20 of the ITAA 1997 states that a capital gain or capital loss is made only if a capital gains tax (CGT) event happens. The gain or loss is made at the time of the CGT event.

The relevant CGT events in your case are D1 and C2.

CGT event D1 occurred when you entered into the contract to purchase the property.

CGT event C2 occurs when the asset ends, that is, the contract to purchase the property ended.

As a result of you placing a deposit for the purchase of the block of land it is considered that you acquired contractual rights. These contractual rights are CGT assets. (section 108-5 of the ITAA 1997)

Cost Base

CGT is the tax you pay on any capital gain or capital loss you make. A capital gain or capital loss may arise if a CGT event happens to a CGT asset that you own (section 102-20 of the ITAA 1997).

The most common CGT event is CGT event A1, the disposal of a CGT asset (section 104-10 of the ITAA 1997).

For most CGT events, the cost base of a CGT asset is important in working out if you have made a capital gain. For working out the amount of a capital loss for these events, the reduced cost base of a CGT asset is relevant.

The cost base of a CGT asset consists of five elements (section 110-25 of the ITAA 1997).

1. The first element is made up of the money paid or required to be paid to acquire the CGT asset (subsection 110-25(2) of the ITAA 1997). The costs you incurred in the development approval, engineering surveying reports, and architect design services for the failed development of your property do not fall under acquisition costs. The deposit you paid on the contract to purchase the land is part of the first element of the cost base, and as such will be a CGT carry forward loss which may be offset against a future capital gain. The costs you incurred in the development approval, engineering surveying reports, and architect design services for the failed development of your property do not fall under costs paid to acquire the CGT asset.

2. The second element will include incidental costs of acquiring the asset, or costs in relation to the CGT event. Examples are agent's commission, advertising to find a seller or buyer, fees paid to an accountant (subsection 110-25(3) of the ITAA 1997). The costs you incurred in the development approval, engineering surveying reports, and architect design services for the failed development of your property do not fall under incidental costs.

3. The third element consists of non-capital costs incurred in connection with their ownership of a CGT asset. Examples are interest, rates, repairs and insurance premiums. You can include non-capital costs of ownership only in the cost base of assets acquired after 21 August 1991 (subsection 110-25(4) of the ITAA 1997). The costs you incurred in the development approval, engineering surveying reports, and architect design services for the failed development of your property do not fall under non-capital costs.

4. The fourth element of the cost base includes capital expenditure you incurred to increase an assets value, such as the construction of a veranda. The expenditure must however be reflected in the state or nature of the asset at the time of the CGT event (subsection 110-25(5) of the ITAA 1997). ). The costs you incurred in the development approval, engineering surveying reports, and architect design services for the failed development of your property do not fall under capital expenditure because it must be reflected in the state or nature of your investment property when a CGT event occurs to the property (i.e. when you sell the property).

5. The fifth element includes capital expenditure you incur to preserve or defend their title or rights to the asset (subsection 110-25(6) of the ITAA 1997). ). The costs you incurred in the development approval, engineering surveying reports, and architect design services for the failed development of your property do not fall under preserving or defending the title of your investment property.

A net capital loss is not deductible from your assessable income. However, it can generally be offset against capital gains made in later income years.

As you did not purchase and take up title of the land your other expenditure, that is, the development approval, engineering and surveying reports, and the architects designs, do not constitute any of the five elements of the cost base of the property, the loss of the funds expended on them does not constitute a CGT event, and so there is no carry forward loss for them.

It is not considered you were conducting a business, and had you been, the costs incurred prior to exchanging contracts for the purchase of the land would have been at a point too soon.