Private ruling: Isolated transactions
Published: June 2012
Ruling period: Year ending 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Will losses incurred from the partnership's property development activity be deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes.


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

Reasons for decision: Summary: Proceeds from the sale of property for tax purposes are treated as either: · income according to ordinary concepts under section 6-5 of the ITAA 1997 derived: · in the course of carrying on a business, or · from an isolated transaction for the purpose of profit making, or · subject to capital gains tax. Whether the proceeds are treated as income or capital depends on the situation and circumstances of each particular case. | Detailed Reasoning - Carrying on a business: There is no evidence that the partnership is in the business of property development or has any prior experience of this type. Therefore, it is accepted that any losses from the sale of the property were not incurred in the course of carrying on a business. | Detailed Reasoning - Isolated profit making transaction: Profits arising from an isolated business or commercial transaction will be ordinary income if the taxpayer's purpose or intention in entering into the transaction is to make a profit, even though the transaction may not be part of the ordinary activities of the taxpayer's business ( FC of T v. Myer Emporium Ltd 1987 163 CLR 199; 87 ATC 4363; 18 ATR 693) (Myer Emporium). Taxation Ruling TR 92/3 considers the principles outlined in the Myer Emporium case and provides guidance in determining whether profits from isolated transactions are assessable under section 6-5 of the ITAA 1997 as ordinary income. TR 92/3 defines the term 'isolated transactions' as: · transactions outside the ordinary course of business of a taxpayer carrying on a business, and · transactions entered into by non business taxpayers. It is not necessary that the intention or purpose of profit-making be the sole or dominant intention or purpose for entering into the transaction. It is sufficient if profit-making is a significant purpose. Whether an isolated transaction is business or commercial in character will depend on the circumstances of each case. TR 92/3 lists the following factors to be considered: a) the nature of the entity undertaking the operation or transaction b) the nature and scale of other activities undertaken by the taxpayer c) the amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained d) the nature, scale and complexity of the operation or transaction e) the manner in which the operation or transaction was entered into or carried out f) the nature of any connection between the relevant taxpayer and any other party to the operation or transaction g) if the transaction involves the acquisition and disposal of property, the nature of that property, and h) the timing of the transaction or the various steps in the transaction. In this case, the partnership purchased the land and constructed the property for the sole purpose of selling at a profit. The property was listed for sale during construction with the estate developer and was subsequently listed with three more real estate agents when the property failed to sell. The property was rented out until a buyer could be found. The partnership has not been involved in any property development activities in the past. On balance, it would seem that the activities undertaken by the partnership were solely for a profit making purpose and would characterize an isolated transaction. | Detailed Reasoning - Losses from isolated transactions: Taxation Ruling TR 92/4 considers whether losses from isolated transactions are deductible. Essentially, if an isolated transaction results in a loss, that transaction has not produced, and will not produce, a profit which is income. Nevertheless, that loss may still be deductible if, in entering that transaction, the taxpayer intended or expected to derive a profit which would have been assessable income (paragraph 8). In this case, there was a real intention, and expectation, that the activity would produce a profit. Had a profit been produced, it would have been assessable under section 6-5 of the ITAA 1997 as revenue. Therefore, the resulting loss for the activity will be deductible under section 8-1 of the ITAA 1997.

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. | Relevant facts: The partnership acquired vacant land in 2008 with the intention of building a house and reselling at a profit. | Construction of the property commenced soon after purchase and was completed approximately six month later. | The property was originally listed for sale with the estate developer when construction began. | When there was no buyer interest, the selling price was reduced and the property was listed with three other real estate agents. | With no offers to buy, the property was rented to the date of eventual sale on over two years later, at a loss. | The partnership is registered for GST and GST has been paid on the sale.