Private ruling: Capital gains tax - income tax - isolated transactions
Published: June 2012
Ruling period: Year ending 30 June 2012.
Date scheme commenced: 1 July 2010.

Ruling: Q1: Is the loss you made on the attempted purchase of the land deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes.

Relevant facts and circumstances: You attempted to purchase a property from a Government auction. You had attended seven or eight unreserved Government auctions prior to the attempted property purchase. You reviewed the Government Gazette every Thursday to search for advertised auctions of land. One week or so before the auction you would make enquiries as to whether the advertised auction was scheduled to proceed. If the auction was to proceed, you would assess the land, its value, encumbrances, money owed on the property and you would set yourself a budget for the purchase. You have previously purchased one other property from a Government auction before you purchased this property. You employed the services of solicitors to compel the bank to produce the duplicate certificate of title to the property you bought at the sheriff's auction. You employed the services of a solicitor to stop the sale and transfer of the property from being set aside. You have spent money on legal fees. The transaction took place at a public auction.

Relevant legislative provisions: Income Tax Assessment Act 1997 Part 3-1 and | Income Tax Assessment Act 1997 Section 8-1.

Reasons for decision: Detailed Reasoning - Isolated transactions: Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income or are necessarily incurred in carrying on a business for the purposes of gaining or producing such income, except where the outgoings are of a capital, private or domestic nature. Taxation Ruling 92/3 (TR 92/3) provides the Commissioner's views on whether profits from isolated transactions are assessable income. Taxation Ruling 92/4 (TR 92/4) discusses situations where losses on isolated transactions are deductible. TR 92/3 and TR 92/4 are intended to be read together and the principles outlined in TR 92/4 apply to a taxpayer that has made a loss, instead of a profit, from a transaction or operation. The term 'isolated transaction' is defined in these rulings as: · those transactions outside the ordinary course of business of a taxpayer carrying on a business; and · those transactions entered into by non-business taxpayers. As stated at paragraph 16 of TR 92/4, a loss from an isolated transaction will generally be deductible when both of the following are present: · 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. In very general terms, a transaction has the character of a commercial transaction if it would constitute the carrying on of a business except that it does not occur as part of repetitious or recurring transactions. The intention of the taxpayer is determined by an objective consideration of the facts and circumstances of the case. Profit-making does not need to be the sole or dominant purpose for entering into the transaction, but it must be a significant purpose. The purpose must exist at the time the transaction or operation was entered into and in the case 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. Paragraph 13 of TR 92/3 lists some of the factors that have evolved from case law that may be relevant in considering whether an isolated transaction amounts to a business operation or commercial transaction. These are explained further at paragraph 49 and summarised below: (a) the nature of the entity undertaking the operation or transaction. For example, if the entity is a corporation with substantial assets rather than an individual, this may be an indication that the operation or transaction was commercial in nature; the nature and scale of the activities undertaken; (c) the amount of money involved in the transaction and the magnitude of the profit that was sought or obtained; the nature, scale and complexity of the operation or transaction; (e) the manner in which the operation or transaction was carried out. For example, whether professional agents and advisers were used and whether the operation or transaction was in a public market (f) the nature of any connection between the taxpayer and any other party to the operation or transaction. For example, the relationship may suggest that the operation was essentially a family dealing; (g) the nature of any property disposed of. For example, if the property has no use other than as a subject of trade, it is easier to infer the transaction was commercial in nature; (h) the timing of the transaction or the various steps involved. For example, if the transaction involves the acquisition and disposal of property, then holding the property for many years may indicate the transaction was not business or commercial in nature. As no assessable income was actually derived from the attempted purchase of the property and following the principles found in TR 92/3 and TR 92/4, it is necessary to establish that there was an expectation to produce assessable income; (a) you are an individual who has attempted to purchase the property; (b) you had attended seven or eight unreserved Government auctions prior to the attempted property purchase. You also reviewed the Government Gazette every Thursday to search for advertised auctions of land. One week or so before the auction you would enquire as to whether the advertised auction was scheduled to proceed. If the auction was to proceed, you would assess the land, its value, encumbrances, money owed on the property and you would set yourself a budget for the purchase; (c) you paid money for the right to receive the property with an unencumbered value that was higher than the encumbered value. The encumbrances of the property at the time of the auction included money owed to a bank under a registered mortgage on the property and money owed to the local Council for arrears on rates. You stood to make a substantial profit from the transaction; (d) you have previously purchased one other property from the Government auctions before you purchased this property. The property you purchased and the property you attempted to purchase do not appear to have any scale of complexity that would lead to an inference that the transaction was commercial or business in nature; (e) you employed the services of solicitors to compel the bank to produce the duplicate certificate of title to the property you bought at the Government auction. You also employed solicitors to stop the sale and transfer of the property from being set aside. The transaction took place at a public auction; (f) prior to the Government auction you had no dealings with the owner of the property; (g) the property traded was at both the time of purchase a residential block containing a house. It could be used as a subject of trade or as a residence; (h) you never acquired the property so the timing of the disposal and acquisition is not relevant in determining whether the transaction was business or commercial in nature. The overall impression from these factors discussed above as they apply to your situation is that your attempted purchase of the property at the Government auction constitutes a business operation or commercial transaction. It is found that: · the transaction was an isolated transaction · the entering into of the transaction was for the purpose of making a profit or gain, and · the transaction and the profit, if made, would have been made in carrying out a business operation or commercial transaction. Therefore, the loss that you have incurred is deductible under section 8-1 of the ITAA 1997.

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