Applicant 6115 of 2013 vs Federal Commissioner of Taxation
Due to council zoning restrictions the taxpayer was unfortunately set-back in his attempt to build a poultry farm upon purchasing the land in 1990. He was informed of the council's environmental concerns prior to the finalization of the land purchasing contract, but ventured on regardless of the expected complexities.
From this point forward the tribunal member informs readers that the evidence suggests the taxpayer's key purpose for holding the land was for the purpose of subdivision and an eventual sale at a future date. The taxpayer was eventually successful in his endeavor, selling the subdivided blocks between 2005 and 2008. The taxpayer was disappointed that the Commissioner disallowed the inclusion of legal and brokering costs in the cost of purchasing the land (the 'cost base') because the taxpayer failed to apportion those costs correctly. However, the key focus of this case was on the regular expenses incurred in maintaining the operation of land including interest expenses, losses on forfeited loans and various legal expenses he incurred during the 15 year period in question.
Section 8-1(1) of the Income Tax Assessment Act 1997 (ITAA 97) provides that you can deduct expenses that are incurred gaining or producing assessable income. Holding passive investments such as a block of land produce no assessable income on a frequent basis, therefore the taxpayer required a better story.
Case law has established that prior to gaining assessable income, taking actions to build up an income producing business shows intent to produce assessable income, which is deemed acceptable under s 8-1 and therefore expenses are deductible in such cases. The taxpayer's argument was that for the entire 15 year period, he intended to commence a turkey farming business at the first available opportunity. For reasons explained at length during the judgement, the tribunal rejected this proposition and went as far as labeling the taxpayer as an unreliable and evasive witness.
The other main point of contention concerned a loan from the taxpayer to a company (OCS) in which he held shares in and was a director. The tribunal agreed with the taxpayer that when OCS deregistered, GCT event C2 occurred (cancellation of an intangible asset) to the forfeited loan. However, the tribunal referred the taxpayer to s 108-20(1) which provides that in working out a capital gain any loss made from a "personal use asset" is disregarded. They concluded that the debt did not arise in the course of producing assessable income or from carrying on a business and therefore the net loss from CGT event C2 was to be disregarded and the taxpayer was unable to claim that back against income he eventually made from selling land in Wanneroo at a different point in time.
The tribunal found in favor of the Commissioner on every point in this case. The senior tribunal member was unimpressed by the taxpayer's evasive nature and unreliability in cross examination.
Lessons from the AAT this week
- If you want to claim general deductions on land you plan to sell, it must be done in the course of carrying on a business, and is best not done in retrospect.
- If you want to include expenses in the cost base of a CGT asset, keep records and apportion them correctly.
- Loaning money to a related party and then cancelling the loan is unlikely to be seen as part of an income producing activity.
If you are planning on undertaking any of the above activities see a tax specialist beforehand to ensure that you are taking a course of action that matches your motives.
The case [2015] AATA 244: http://www.austlii.edu.au/au/cases/cth/AATA/2015/244.html
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