Edited version of private advice

Authorisation Number: 1051844645919

Date of advice: 4 June 2021

Ruling

Subject: Disposal of property - income vs capital - losses

Question

Is the loss made 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 periods:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You work in Information Technology for at least X hours per week.

You had been planning to start a property trading business.

Your aim was to build up relationships with multiple Real Estate Agencies in order to acquire off-the-plan apartments at lower than market price that could not be settled by foreign buyers or held by developers.

You then planned to sell the apartments shortly after settlement of your purchase, at the current market price, to make a profit based on the price differential.

You attended multiple seminars hosted by real estate agents, regularly visited open for inspections, sales events and developed relationships with multiple real estate agencies.

Your research told you that as at the time of entering into the purchase contract, annual growth in the property market equated to X% for houses and X% for units.

On Month 20XX, the official cash rate dropped to X%, the lowest cash rate on record.

During 20XX, stricter policies applied to foreign buyers of Australian property.

You concluded that:

•         The trend of property markets is steadily rising over years, which is supported by low borrowing rates

•         The strict policies on foreign buyers may cause difficulties for settlement. The foreign buyers tend to resell their off-the-plan contracts with lower than market price.

You purchased an off the plan apartment (the Property) for $X, after receiving a X% sale discount.

Contracts were entered into to purchase the Property.

At that time the average price for similar properties was $X.

You planned to sell the Property upon completion. Based on your research of current market trends you expected to be able to sell it for an amount which represented a X% growth rate.

Based on these estimations you would make a profit of approximately $X.

Your exit strategy was to speak to the developer to buy back the Property or at most limit losses to your initial deposit.

As your purchase settlement was due to be completed you realised that you stood to make a loss.

You advertised the Property with Real Estate Agent A but no offer was received.

You tried to rescind the contract to purchase the Property.

Before a rescission request could be sent to the vendor you were required to find a replacement buyer for the Property and a reason for the rescission. You could not do this.

You then advertised the Property for sale with Real Estate Agent B but no offer was received.

You tried to sell the Property via Real Estate Agent C and negotiate with the developer but this attempt was not successful.

Settlement for the purchase of the Property was completed.

You did not want to crystallise your losses immediately so you rented the Property out.

You continued to try and sell the Property during the time it was being rented out.

As soon as first rental contract expired after X months, you put the Property back on market with professional photographs taken and premium advertisements. You attempted for X months.

It was advertised with a price range. Two offers were received for less than the bottom end of the advertised price. You did not accept these offers.

You then tried to sell via Real Estate Agent C again. Multiple buyers were shown through the Property while it was tenanted. You did not receive any offers.

You tried to sell via real Estate Agent D. Again potential buyers were shown through the Property while it was tenanted. You did not receive any offers.

X years after you purchased the Property you entered a contract to sell it.

Settlement for the sale of the Property took place.

You made a loss from the sale.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 995-1

Reasons for decision

Summary

Based on the information that you provided, the Property was purchased with the intention of making a profit through resale. While your plans did not work out the way you intended, and the end result from the project was that you made a loss, the intention to make a profit was not abandoned. Therefore, it is viewed that your activity was a profit-making undertaking and any loss you made on the sale of the Property will be deductible under section 8-1 of the ITAA 1997

Detailed reasoning

Profit-making undertaking

Where a taxpayer enters into an isolated business transaction with an intention to make a profit or gain, the profit or gain will be ordinary income under section 6-5 of the ITAA 1997. Similarly, if the taxpayer's intention or purpose was to make a profit or gain but a loss was made, the loss is deductible under section 8-1 of the ITAA 1997 if the loss was incurred in carrying on a business or in a business operation or commercial transaction.

Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income provides guidance in determining whether profits from isolated transactions are assessable under section 6-5 of the ITAA 1997 as ordinary income.

Paragraph 1 of TR 92/3 outlines that isolated transactions are:

a)            those transactions outside the ordinary course of business of a taxpayer carrying on a business; and

b)            those transactions entered into by non-business taxpayers.

The ruling outlines at paragraph 6 that whether a profit from an isolated transaction will be ordinary income will depend on the circumstances of the case, however a profit from an isolated transaction will be ordinary income when:

(a)          the intention or purpose of a taxpayer in entering into the transaction was to make a profit or gain; and

(b)          the transaction was entered into, and the profit was made in the course of carrying on a business operation or commercial transaction.

Paragraph 13 of TR 92/3 outlines the following factors which may be relevant when considering whether an isolated transaction amounts to a business operation or commercial transaction. In addition to those factors, for the purposes of determining whether the activities undertaken in relation to real property and development equate to a profit-making undertaking or scheme, Miscellaneous Taxation Ruling MT 2006/1 aligns itself with TR 92/3 and provides a list of factors which, if present may be an indication that a business or profit-making undertaking or scheme is being carried on.

In determining whether activities relating to isolated transactions are a profit-making undertaking or are the mere realisation of a capital asset, it is necessary to examine the facts and circumstances of each case. This may require consideration of the factors provided in TR 92/3 and/or MT 2006/1. However, there may also be other relevant factors that need to be weighed up as part of the process of reaching an overall conclusion. No single factor will be determinative; rather it will be a combination of factors that will lead to a conclusion as to the character of the activities.

The direction provided within TR 92/3 indicates that profits in this context are more likely to be considered ordinary income if they are made in the ordinary course of carrying on a business. Further, ordinary income may be derived from an isolated transaction which becomes commercial in nature, or as a result of profits on a transaction in which the initial intention was to make a profit on sale.

Paragraph 40 of TR 92/3 states that it is not necessary that the intention or purpose of profit making be the sole or dominant intention for entering into the transaction, although it must be a significant purpose. Paragraph 41 of that ruling also states that if the transaction or operation involves the sale of property, it is usually necessary that the taxpayer has the profit-making intention or purpose at the time of acquiring the property.

Paragraph 14 of TR 92/3 outlines that it doesn't matter if the way you ultimately obtain a profit by a means specifically contemplated, either on its own or as one of several possible means, when you enter into the transaction. It is sufficient that you entered into the transaction with the purpose of making a profit by one means but made a profit by another means.

It is outlined at paragraph 49 of TR 92/3 that a transaction or operation will generally have the character of a business operation or commercial transaction if the transaction or operation would constitute the carrying on of a business except that it does not occur as part of repetitious or recurring transactions or operations.

Paragraphs 56 and 57 of TR 92/3 explains that a profit is income where it is made in any of the following situations:

•         a taxpayer acquires property with a purpose of making a profit by whichever means proves most suitable and a profit is later obtained by any means which implements the initial profit-making purpose; or

•         a taxpayer acquires property contemplating a number of different methods of making a profit and uses one of those methods in making a profit; or

•         a taxpayer enters into a transaction or operation with a purpose of making a profit by one particular means but actually obtains the profit by a different means.

Taxation Ruling TR 92/4 Income tax: whether losses on isolated transactions are deductible discusses the tax treatment of losses from isolated transactions and when they are deductible under section 8-1 of the ITAA 1997.

TR 92/4 should be read in conjunction with TR 92/3, with TR 92/4 outlining that the factors contained in TR 92/3 to profits apply equally to losses from isolated transactions.

Paragraph 4 of TR 92/4 states that a loss from an isolated transaction is generally deductible under section 8-1 if:

(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 loss made, in the course of carrying on a business or in carrying out a business operation or commercial transaction.

Therefore, a loss from an isolated transaction is generally deductible under section 8-1 of the ITAA 1997 where, when the taxpayer began the project they intended to make a profit and the loss was made in the course of carrying out the project.

Application to your situation

In the context of considering the above authorities and factors when determining whether your activities would be viewed as a profit-making undertaking, and consequently whether the loss you made is deducible under section 8-1 of the ITAA 1997, the following general observations of your situation can be made:

•         Your stated intention in relation to purchasing the Property was to acquire an off-the-plan apartment at lower than market price that could not be settled by foreign buyers or held by developers. You then planned to sell the Property shortly after settlement of your purchase, at the current market price, to make a profit based on the price differential.

•         Based on your research of current market trends you expected to be able to sell it for $X which represented a X% growth rate.

•         Based on these estimations you would make a profit of approximately $X.

•         You realised that when your purchase settlement was due to be completed, you would make a loss and after unsuccessfully trying to rescind your contract to buy the Property, you decided to simultaneously rent it out while trying to sell it.

•         When you did accept an offer to sell the Property, you had made a loss.

As outlined above, profit from an isolated transaction will be ordinary income when the intention or purpose of a taxpayer in entering into the transaction was to make a profit or gain.

In this case, your intention in purchasing the Property was to resell at a profit. Even though when the time came to sell you did not make a profit, your intention did not change in relation to reselling the Property.

As outlined TR 92/3, where your intention was and remains to purchase and resell the Property for the purpose of making a profit it will remain on revenue account.

Therefore, based on the information provided, the facts of your situation, and your stated intentions in relation to the Property, it is viewed that your activities in relation to the Property was a profit-making undertaking.

Accordingly, the sale of the Property is revenue in nature and the loss that you have made in relation to the disposal of your ownership interest in the Property will be deductible under section 8-1 of the ITAA 1997.