Private ruling: Property development loss.
Published: June 2012
Ruling period: Year ended 30 June 2010 | Year ended 30 June 2011
Date scheme commenced: 1 July 2004

Ruling: Questions and Answers: | For the years ended 30 June 2004 to 2011, did you carry on a business of property development? | No. | For the years ended 30 June 2004 to 2011, will the non-commercial business loss provisions in Division 35 of the Income Tax Assessment Act 1997 apply to your property development activity? | No. | For the years ended 30 June 2011, in relation to your property development, did you make a deductible loss from an isolated transaction? | Yes.

Relevant facts and circumstances: You are a medical doctor. After the year ended 30 June 2004, you purchased a suburban property, with dwelling. You subdivided the property into lots, sold the original dwelling, and employed contractors to construct townhouses for resale on the subdivided lots. You incurred a total loss of $X on this property development. In your tax returns, you accounted for this activity as a business. You also developed property in partnership with your spouse, after the year ended 30 June 2008 and disposing of that development after the year ended 30 June 2011, for which your share of net profit (over four years) was $X. Again, in your (partnership) tax returns, you accounted for this activity as a business. It is highly unlikely you will conduct another property development or any enterprise in your own name as you have established a private company for property development activities.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 35-5 | Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 8-1

Reasons for decision: Summary: Taxation Ruling TR 97/11 is about carrying on a business. Whether an entity is carrying on a business has been considered extensively by the courts, using the following indicators: · the nature of the activities, particularly whether they have the purpose of profit making; · the repetition and regularity of the activities; · organisation in a businesslike manner, including whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business; · the volume of the operations; and · the amount of capital employed. In deciding whether a person is carrying on a business, the above indicators are weighed up. However equal weighting may not be given to each indicator. The indictors that carry the strongest weighting are repetition and regularity of activities, organisation in a businesslike manner and volume of operations. Taxation Ruling TR 92/3 and Taxation Ruling TR 92/4 are about isolated transactions. Paragraph 1 if TR 92/3 explains the term 'isolated transactions' refers to: · those transactions outside the ordinary course of business of a taxpayer carrying on a business; and · those transactions entered into by non-business taxpayers. In explaining the essential character of an isolated translation, paragraph 9 of TR 92/3 states: · If a transaction or operation involves the sale of property, it is usually, but not always, necessary that the taxpayer has the purpose of profit-making at the time of acquiring the property. Regard a loss from an isolated transaction, paragraph 4 of TR 92/4 states: A loss from an isolated transaction is generally deductible under subsection 51(1) if: · in entering into the transaction the taxpayer intended or expected to derive a profit which would have been assessable income; and · 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. Importantly, the profit or loss from an isolated transaction is accounted for at the completion of the transaction. In your case, we consider you were not carrying on a business of property development because there is no repetition, regularity and permanency of the activity. This is the only property development you have personally undertaken. Further, the scale of the activity was relatively small, being only the subdivision of a single residential block of land and the construction of dwellings. The repetition, scale and volume of your activity is not of the same nature as is ordinarily carried on by a property developer that is carrying on a business. Whilst you were not carrying on a business of property development, the loss from the sale of your subdivision is still ordinary income because the loss is considered to be from an isolated commercial transaction. Given you have recently established a company for the purpose of property development and given your partnership accounted for the profitable development of property on revenue account, we are satisfied you had the purpose of profit-making, i.e., resale, at the time of acquiring the property.

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