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Whether a loss on the sale of a new house built on subdivided land is deductible under subsection 51(1) ( Income Tax Assessment Act 1936 (ITAA 1936)).

The loss is deductible under subsection 51(1) (ITAA 1936) as: (a) the taxpayer is considered to be carrying on a business and the relevant transaction is not an isolated business transaction that is outside the ordinary course of the business; (b) the cost of producing the house and land package was incurred by the taxpayer in carrying on a business of property development for the purpose of making a profit; and (c) the losses and outgoings as a result of these activities are allowable deductions in terms of subsection 51(1) (ITAA 1936).

The taxpayer purchased land containing an existing dwelling in the mid-1990s with the stated purpose of subdividing the land, building a new house on the vacant subdivided land and then selling the house and land at a profit. The new house was completed and sold in early 1995 resulting in a loss.

The taxpayer has performed a number of property developments.

In Crow v FC of T 88 ATC 4620; 19 ATR 1565, it was held that the purchase of the various properties and the subsequent subdivision and sale of parcels of land involved transactions which were repetitive and systematic and had the characteristics of a continuing business of land development. The court was satisfied that the taxpayer bought and sold the land for the purpose of making a profit. The taxpayer's activities properly answer the description of the carrying on of the business of land development and the profits thereof constitute income for the purposes of subsection 25(1) (ITAA 1936).

The taxpayer has performed a number of property developments including the transaction which indicates the characteristics of a continuing business of land development. The facts indicate that the intention of the taxpayer in entering into the relevant transaction was to make a profit. His activities are therefore viewed as carrying on a business of land development and the profit there from would constitute income for the purposes of subsection 25(1) (ITAA 1936). The loss was incurred in gaining or producing the assessable income as 'it is both sufficient and necessary that the occasion of the loss be found in whatever is productive of the assessable income or, if none be produced, would be expected to produce assessable income' ( Ronpibon Tin N.L. and Tongkah Compound N.L. v FC of T (1949) 78 CLR 47).

Taxation Ruling TR 92/3 states that it is not completely clear what the High Court meant in referring to 'profits or gains made in the ordinary course of carrying on a business'. It was considered that there are two types of profits or gains which would come within that description: (i) a profit or gain arising from a transaction which is itself a part of the ordinary business of a taxpayer; or (ii) a profit or gain arising from a transaction which is an ordinary incident of the business activity of the taxpayer, although not a transaction entered into directly in its main business activity.

The evidence here suggests that a business in property development exists. This indicates that any activity of this nature would be in the ordinary course of this business. The transaction should not to be looked at in isolation, but determined by the overall activities of the person ( Crow v FC of T 88 ATC 4620; 19 ATR 1565). The transaction is not an isolated business transaction, but a transaction within the ordinary course of business ( FC of T v Whitfords Beach Pty Ltd (1982) 150 CLR 355).

The capital gains tax provisions do not apply to allow a capital loss. To the extent that the loss is an allowable deduction, there is a reduction in the cost base pursuant to section 160ZK (ITAA 1936)