Private ruling: Income tax deductions
Date of advice: 30 April 2025
Published: 7 July 2025
Ruling period: Year ended 31 December 20XX
Date scheme commenced: 1 January 20XX

Ruling: Q1: Is the loss incurred by Company A on the realisation of units in the joint venture unit trust (the Trust) deductible to Company A as head entity of the tax consolidated group (TCG) under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes.

Relevant facts and circumstances: Company B is undertaking a multi-stage land development. Company A and Company B entered into a joint venture through their respective wholly owned subsidiaries, using a special purpose unit trust (the Trust), to undertake a property development (the Project). Each company holds 50% of the units in the Trust. Broadly, under the terms of the development agreements that govern the Project, upon settlement of the underlying properties of the development, a developer's fee will be paid to the Trust (effectively representing the net cash proceeds from sales of underlying properties). The net cash proceeds (net of any expenses incurred by the Trust) are then distributed by the Trust to Company A and Company B in proportion to their units in the Trust (i.e. 50%/50%). The Project and day to day operation of the Trust Company A and Company B entered into a unitholder agreement (the Agreement) that sets out the terms of the joint venture. In particular, the Agreement establishes a management committee that has oversight of the operation of the Project and is the decision making body for the unitholders in relation to the joint venture. Both Company A and Company B have representation on the management committee. The management committee has met regularly since formation of the joint venture. Income Tax related issues of the Trust and Company A Unit holders derive their share of the net income of the Trust, being cash distributions from the property development activities being undertaken through the Trust under the development agreements. The Trust will be wound up upon completion of the Project, and the proceeds of sale of properties of the development, after repayment of liabilities, will be distributed in accordance with unit holdings. The distribution of profit and the wind-up of the Trust will thus likely occur as part of the single course of events. Cash distributions received from the trust are taxable in the hands of Company A. Upon sale of all the properties developed under the Project, the Trust will be wound up. Company A is expected to recognise a loss (Loss) from the realisation of units in the Trust accordingly. Company A's tax base of the units in the Trust is broadly comprised of the initial acquisition price and various costs incurred by Company A in respect of its investment in the Project (e.g. certain legal fees).

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 8-1(1) | Income Tax Assessment Act 1997 subsection 8-1(2)

Reasons for decision: Detailed Reasoning - Issue 1: Income Tax: The consolidation provisions of the ITAA 1997 allow certain groups of entities to be treated as a single entity for income tax purposes. Under the single entity rule (SER) in section 701-1, the subsidiary members of an income tax consolidated group are taken to be parts of the head company. As a consequence of the SER, the actions and transactions of subsidiary members of the Company A income tax consolidated group (TCG) are treated, for income tax purposes, as having been undertaken by Company A as the head company of the TCG. | Summary: Losses incurred by Company A on realisation of units held in the joint venture trust (the Trust) are deductible under subsection 8-1(1) of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: The general deduction provision in section 8-1 of the ITAA 1997 allows a deduction for a loss or an outgoing to the extent that it is incurred in gaining or producing assessable income (paragraph 8-1(1)(a)), or necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income (paragraph 8-1(1)(b)). However, a loss or an outgoing is not deductible to the extent that it is of capital, or of a capital nature (paragraph 8-1(2)(a) of the ITAA 1997). Company A incurred an outgoing on the acquisition of units in the Trust, and will recognise a loss on the realisation of the units. Company A derives assessable income on its units as a result of both its participation in the management of the Trust and as a direct result of its unit holding. Accordingly, the loss from the realisation of units in the Trust is incurred in gaining Company A's assessable income as a property developer and satisfies the positive limb of section 8-1 of the ITAA 1997. Such a loss is not deductible, however, if it is a loss of capital or of a capital nature, in accordance with paragraph 8-1(2)(a) of the ITAA 1997. If expenditure produces some asset or advantage of a lasting character for the benefit of the business, it may point to being considered to be capital expenditure. Using a joint venture unit trust, in a property development project, allows resources and risks to be shared between the joint venture partners, whilst undertaking the project. The trustee of the unit trust holds the assets of the joint venture on behalf of the joint venture partners. The joint venture partners' ownership of units gives them an interest in the assets of the trust but not a divisible interest in any particular asset. The income of the unit trust is taxed in the hands of the unitholders, so each joint venture partner is taxed in accordance with their own tax characteristics. In a build and sell type of project, the trust derives income through the sale of the properties built through the project. In this respect, acquisition of units in a joint venture trust that undertakes such a project, allows the joint venture partners to derive income in respect of that project, which is of limited duration. The benefit or advantage secured cannot be said to be of a lasting or enduring nature. Therefore, the loss incurred by Company A from the realisation of the units it holds in the Trust will not be a loss or outgoing of capital or of a capital nature under subsection 8-1(2).