Private ruling: Loss on isolated transaction - deduction according to ordinary concepts
Date of advice: 18 August 2022
Published: November 2022
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 May 20XX

Ruling: Q1: Is the loss on the sale of the Property deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes. After considering all the facts and circumstances of the case, the Commissioner is satisfied that you had a profit-making intention in purchasing the Property. It is considered that the loss made on the sale of the Property is an isolated transaction and is deductible under section 8-1 of the ITAA 1997.

Relevant facts and circumstances: A plan was developed to purchase a block of land to build two townhouses in a joint venture with a Builder. The project was always intended to be a dual development with the purpose of making a profit. You met with a mortgage broker regarding finance. You also met with the Builder to discuss and agree requirements of new house building project. You purchased a Property and commenced planning with the Builder. The Property was positioned in a strongly sought-after location and close to a school for boys. The reason to buy the property was not influenced by the proximity to the boys school. You relied on guidance from the Builder as to how the joint venture would work. The venture outline was: • You would provide the land and incur all the design, consulting and planning costs. • The Builder's 50% share of the costs would be reimbursed on completed and sale, with the interest cost of these treated as a contribution to the venture. • You would pay the rates and taxes. • The Builder would supply all building and project management services as its contribution to the joint venture. • Each party would pay the build costs of their designated townhouse. The project was to be funded by private funds in the form of a line of credit on your previous property. The Builder's share of the costs would be paid from the sale of one of the townhouses. You did not decide if your townhouse would be your main residence or sold for a profit because the project was too far from completion to decide. You obtained indications of the likely final value of the townhouses from real estate agents to confirm a profit on the project. You carried out design planning with the Builder and architect and costing of the project. An application was lodged with the Council. You engaged consulting engineers and the house demolition was completed. A real estate agent estimated sale prices for each unit. A draft agreement with the Builder and building contract was received. As the project progressed, the estimated costs of the build became greater than expected due to planning changes and site issues. When the project was costed, it was estimated you would be left with a mortgage. You met with the Builder and decided it was not a viable project due to the increasing costs and reduced profit margins. The project was abandoned due to lack of projected profit. The joint venture agreement was never entered into. The Property sold for a loss. Your costs for consulting and architect fees were not reimbursed. You are registered for GST due to your other business activities. Input tax credits have been claimed for all the project development costs. The Property was sold as a taxable supply.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 8-1