Edited version of private advice

Authorisation Number: 1052200300150

Date of advice: 6 December 2023

Ruling

Subject: Income - disposal of subdivided land

Question

Are you entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for the losses you made on the disposal of the subdivided lots?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 2023

The scheme commenced on:

1 July 2022

Relevant facts and circumstances

You acquired a residential property.

You never resided in or rented out the property.

You have never carried on a business of property development.

You do not own any investment properties.

You took out a short term loan to finance the purchase of the property.

Shortly after purchase a proposed plan and development application for subdivision of the property was lodged by a land surveying and development consultant on your behalf.

The services of the land surveying and development consultancy business were contracted to assist with the various stages on the subdivision of the property.

The dwelling on the property was demolished and removed soon after approval for the subdivision was obtained.

The subdivided lots have been sold (including GST calculated using the margin scheme).

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Reasons for decision

Broadly, there are three ways losses or proceeds from the sale of land can be treated for taxation purposes:

1)    deductible under section 8-1 of the ITAA 1997, on revenue account, as a result of carrying on a business of property development

2)    deductible under section 8-1 of the ITAA 1997, on revenue account, as a result of an isolated business transaction entered into by a non-business taxpayer or outside the ordinary course of business of a taxpayer carrying on a business, where the land was acquired or subsequently held for a profit-making purpose, and

3)    as a capital loss under the capital gains tax (CGT) provisions contained in Parts 3-1 and 3-3 of the ITAA 1997 on the basis that a mere realisation of a capital asset has occurred.

You can deduct from your assessable income any loss or outgoing to the extent that it is incurred in gaining or producing your assessable income, or it is necessarily in carrying on a business for the purpose of gaining or producing your assessable income (subsection 8-1(1) of the ITAA 1997). However, you cannot deduct a loss or outgoing to the extent that it is a loss or outgoing of a capital, private or domestic nature, or it is incurred in relation to gaining or producing your exempt income or your non-assessable non-exempt income, or a provision of the ITAA 1997 prevents you from deducting it (subsection 8-1(2) of the ITAA 1997).

Taxation Ruling TR 92/4 Income tax: whether losses on isolated transactions are deductible (TR 92/4) provides guidance in determining whether losses on isolated transactions are deductible under section 8-1 of the ITAA 1997. TR 92/4 should be read with Taxation Ruling TR 92/3 Income tax: whether profits from isolated transactions are income (TR 92/3) which deals with whether profits from isolated transactions are income and therefore assessable under section 6-5 of ITAA 1997 (paragraph 3 of TR 92/4).

A loss from an isolated transaction is generally deductible under section 8-1 of the ITAA 1997 if:

(a)  in entering into the transaction you intended or expected to derive a profit which would have been assessable income, and>

(b)  the transaction was entered into, and the loss was made, in the course of carrying on a business or in carrying out a business operation or commercial transaction (paragraph 4 of TR 92/4).

The relevant intention or purpose (of making a profit or gain) is not your subjective intention or purpose. Rather, it is your intention or purpose discerned from an objective consideration of the facts and circumstances of the case (paragraph 7 of TR 92/3).

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 (paragraph 8 of TR 92/3).

You must have the requisite purpose at the time of entering into the relevant transaction or operation. If a transaction or operation involves the sale of property, it is usually, but not always, necessary that you have the purpose of profit-making at the time of acquiring the property (paragraph 9 of TR 92/3).

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 (paragraph 12 of TR 92/3). In very general terms, a transaction or operation has 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 (paragraph 49 of TR 92/3).

In your case, you are not carrying on a business of property development and your activities amount to more than the mere realisation of a capital asset.

You engaged the services of professionals and embarked on the process of obtaining the relevant approvals for the subdivision very soon after acquiring the property and the term of the loan to finance its purchase was short. In addition, you never resided in or rented out the property and sold the subdivided lots within a short time frame. As such, you are considered to have entered a transaction or operation that had a business or commercial character, and it is accepted that you acquired the property with the intention of demolishing the existing dwelling on the land and subdividing it and selling those subdivided lots for a profit.

You are entitled to a deduction under section 8-1 of the ITAA 1997 for the losses you made on the sale of the subdivided lots.