Private ruling: property expenses
Published: July 2012
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: 1 .Are you entitled to a deduction under Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for interest expenses, property levies, rates and taxes incurred on the acquisition of two properties? | A2: No

Relevant facts and circumstances: In 200X you acquired an apartment off-plan. You intention was to make a profit on the resale of the property. The property settled in 20YY. Six months later you paid a refundable amount to be priority listed to view other off-plan apartments. You did not purchase any of these properties. In 20ZZ you purchased another off-plan apartment with the same intention. The property settled in 20YY. You listed both properties with real estate agents shortly after settlement. To date neither property has sold. You continually review property acquisition opportunities. You intend to acquire more properties/apartments at depressed prices and then sell them with a view to profit.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 70-10 | Income Tax Assessment Act 1997 Section 995-1 | Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 8-1

Reasons for decision: Summary: Trading stock is defined under section 70-10 of the ITAA 1997 as including anything produced, manufactured or acquired that is held for the purposes of manufacture, sale or exchange in the ordinary course of business. Therefore, in order for the properties to be considered trading stock you would need to be conducting a business of property development or conducting an isolated business transaction. In both instances the proceeds from the sale of the property would be considered ordinary income and assessable under section 6-5 of the ITAA 1997 and associated expenses, such as interest, property levies, rates and taxes incurred on the acquisition of the property, deductible under section 8-1 of the ITAA 1997. If you are not considered to be carrying on a business or conducing an isolated business transaction proceeds from the sale of the property would be considered statutory income under the CGT legislation, (sections 10-5 and 102-5 of the ITAA 1997), on the basis that the mere realisation of capital assets has occurred. The expenses associated with the acquisition of the property would form part of the cost base of the asset. | Detailed Reasoning - Carrying on a business: If you are carrying on a business of property development, the income you earn from your property development activities will be assessable as ordinary income under section 6-5 of the ITAA 1997, and any expenses you incur will be deductible under section 8-1 of the ITAA 1997. Business is defined at section 995-1 of the ITAA 1997 as including any profession, trade, employment, vocation or calling but does not include occupation as an employee. Various Courts and Tribunals have held that the following indicators are relevant when considering whether a business is being carried on: (a) whether the activity has a significant commercial purpose or character; (b) whether the taxpayer has more than just an intention to engage in business; (c) whether the taxpayer has a purpose of profit as well as a prospect of profit; (d) whether there is repetition and regularity to the activity; (e) whether the activity is of the same kind and carried on in a similar manner to businesses in your industry; (f) whether the venture is planned, organised, and carried on in a business-like manner; (g) the size, scale and permanency of the activity; and (h) whether the activity is better described as a hobby or recreation. In your case you have purchased to properties off the plan and paid a refundable amount to view a third off-plan apartment. Based on the facts provided, we do not consider that you are carrying on a business as a property developer. To reach this conclusion we applied the business indicators in TR 97/11. The scale of your activities and your level of involvement are not indicative of a business for tax purposes. | Detailed Reasoning - Isolated business transactions: The Commissioners view on whether profits from isolated transactions are assessable as ordinary income is found in Taxation Ruling TR 92/3 . Isolated transactions are transaction entered into by a non-business taxpayer or outside the ordinary course of business of a taxpayer carrying on a business, which is the commercial exploitation of an asset acquired for a profit making purpose. Paragraph 13 of TR 92/3 states some matters which may be relevant in considering whether an isolated transaction amounts to a business operation or commercial transaction are the following: 1. the nature of the entity undertaking the operation or transaction; 2. the nature and scale of other activities undertaken by the taxpayer; 3. the amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained; 4. the nature, scale and complexity of the operation or transaction; 5. the manner in which the operation or transaction was entered into or carried out; 6. the nature of any connection between the relevant taxpayer and any other party to the operation or transaction; 7. if the transaction involves the acquisition and disposal of property, the nature of that property; and 8. the timing of the transaction or the various steps in the transaction. | Detailed Reasoning - Mere realisation: The proceeds from the mere realisation of an asset are not ordinary income, even though the realisation is carried out in an enterprising way so as to secure the best price. However, an isolated business transaction entered into with a view to making a profit may give rise to income according to ordinary concepts. This would also apply if a capital asset is ventured in an undertaking or scheme which involves more than the mere realisation of the asset. The question is whether the gain has been made as a mere enhancement of values by realising a security, or in the operation of business in carrying out a scheme of profit-making ( Californian Copper Syndicate (Limited and Reduced) v. Harris (1904) 5 TC 159). The extent of the personal involvement of the taxpayer in much of the planning, organisation and management of the activities has been held to be a significant factor in the determination of whether a business transaction of a commercial nature was being carried on or not. See for example Stevenson v FC of T (1991) 91 ATC 4476; (1991) 22 ATR 56; (1991) 29 FCR 282 ( Stevenson ) where the degree of the taxpayers involvement was seen as an indicator of a business being conducted. See also Statham v FCT 89 ATC 4070, McCorkell v FCT 98 ATC 2199 and Casimaty v FCT 97 ATC 5 wherein a lack of personal taxpayer involvement was seen as relevant to the finding that a business was not being conducted. You are an individual who purchased two investment properties off the plan with the intention of on selling after settlement. You carried out no improvements or renovations to the properties, applied for no council or government permits and have had no involvement in construction of the apartments. You have yet to sell any properties. The scale and complexity of your activities in relation to the purchase and sale of the properties is more in line with the realisation of a capital asset rather than the carrying out a business activity. As such you are not entitled to a deduction for holding expenses such as interest property levies rates and land taxes under section 8-1 of the ITAA 1997. These expenses form part of the cost base of the properties.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | 2. Are the properties classified as trading stock for the purpose of section 70-10 of the ITAA 1997?