Loss from isolated sale of property

Whether a loss incurred on an isolated sale of property is deductible under subsection 51(1) of the Income Tax Assessment Act 1936 (ITAA 1936).

No. The taxpayer and the taxpayer's spouse (the taxpayers) incurred a capital loss on the disposal of the property. The capital loss is subject to the capital gains tax provisions of Part IIIA (ITAA 1936) and is not deductible under subsection 51(1) of the ITAA 1936.

The taxpayer's spouse (the spouse) was retrenched from employment and the taxpayers intended to commence a small property development business. The spouse completed a real estate course at a Technical College whilst still employed.

The taxpayers identified land they wished to purchase. The taxpayers' involvement in the project consisted of visiting the site to meet with real estate agents and project home builders, organising finance and giving instructions to their solicitors on the purchase and disposal of the property. The taxpayers did not check with the local council or other statutory authorities whether the land was subject to development conditions or restrictions that could affect the viability of the proposed project. The taxpayers subsequently exchanged contracts for the purchase of the land.

The taxpayers did not undertake a costing analysis of the project until after contracts have been exchanged. Once complete, the costing analysis indicated that the project was not going to be profitable. The taxpayers sold the land without making any improvements to the land. The taxpayers did not undertake any similar projects following the disposal of the land.

A loss from an isolated transaction is deductible under subsection 51(1) (ITAA 1936) if: (a) in entering into the transaction the taxpayer intended or expected to derive a profit which would have been assessable; and (b) 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. (See Taxation Ruling 92/3 and Taxation Ruling 92/4.)

As no assessable income was actually derived in this case, it is necessary to establish that there was an expectation to produce assessable income ( Ronpibon Tin N.L and Tongkah Compound N.L. v. FC of T (1949) 78 CLR 47). The taxpayers failed to demonstrate how their proposed property development activities would ever result in a project which would have produced assessable income. The taxpayers did not seek any advice on how to run a property development business profitably, therefore a profit motive cannot readily be drawn from the facts.

Similarly, whether or not the transaction occurred in the course of carrying on a business is to be determined on the basis of objective facts, having regard to all the circumstances of a particular case (see Magna Alloys & Research Pty Ltd v. FCT (1980) 11 ATR 276 at 285, 287; 80 ATC 4542; McCurry v. FCT (1998) 39 ATR 121 at 127; 98 ATC 4487). By itself, the taxpayer's state of mind is not something which establishes that the transaction was entered into in the course of carrying on a business.

Based on the facts, the transaction is an isolated transaction. This is because: there was an absence of a repetitive element (see Jones v. Leeming (1930) AC 415 at 430; Crow v. FCT (1988) 19 ATR 1565 at 1573; 88 ATC 4620; Ferguson v FC of T 79 ATC 4261 at 4265; 9 ATR 873); the project was simple and involved little activity from the taxpayers ( Statham & Anor v. FC of T 89 ATC 4070; 20 ATR 228) and the project was approached in a haphazard way. (See Taxation Ruling TR 97/11 and Taxation Ruling TR 92/3 for elements indicating 'significant commercial characteristics'). In these circumstances the sale of the property is a mere realisation of an asset (see FCT v. Myer Emporium Ltd 163 CLR 199 at 213; Statham & Anor v. FC of T 89 ATC 4070 at 4077; 20 ATR 228; Case W59 89 ATC 538 at paragraph 60; 20 ATR 3728). The loss is therefore not deductible under subsection 51(1) (ITAA 1936); rather, it is a capital loss that is subject to the capital gains tax provisions of Part IIIA (ITAA 1936).