Edited version of private advice

Authorisation Number: 1051621043091

Date of advice: 20 December 2019

Ruling

Subject: Whether losses on isolated transactions are deductible

Question 1

Are you considered to have undertaken an isolated profit making undertaking or scheme in relation to the property development activity (the activity)?

Answer

Yes.

Question 2

Is the net loss on the sale of the property deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 2019

The scheme commences on:

1 July 2018

Relevant facts and circumstances

You entered into a contract to purchase a property for $X.

You purchased the property with the intention of obtaining development approval to demolish the existing residential dwelling, and construct a new dwelling to sell at a profit.

You quickly engaged architects to prepare a full suite of documents necessary to submit the development approval application to the local Council.

Soon after settlement of the property purchase the development approval application was lodged, which was subsequently approved soon after.

You obtained the majority of the construction documents, sought building quotes and attempted to obtain finance to commence construction of the new dwelling. However you were unable to find adequate finance to fund the project.

You listed the property with development approval for sale, in an attempt to recoup the costs already incurred, and repay the loan taken out to purchase the property.

You entered into a contract to sell the property for $X.

You never intended to rent the properties once construction was completed.

You provided evidence of projected income and expenses from the activity, showing a projected profit of approximately $X.

You made a net loss from the activity.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Reasons for decision

Taxation Ruling TR 92/4 discusses the treatment of 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 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.

Whilst TR 92/3 discusses whether profits on isolated transactions are income, TR 92/4 states that the factors equally apply to losses from isolated transactions.

The relevant factors are 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, we consider that it was your primary intention to create a profit by purchasing the property, demolishing the existing dwelling, and construct a new dwelling to sell.

As such, the net loss from the sale of the property is deductible under section 8-1 of the ITAA 1997 in the year in which the property was sold.