Maxim Group

June 2007

Volume 2 Issue 5

Maxim Insight

Loss Not Deductible on Sale of Land

In a recent decision, the Federal Court upheld a previous ruling by the Administrative Appeals Tribunal (AAT), finding that a loss arising on the sale of land purchased as a capital asset was not deductible.

The taxpayer, a shelf company, purchased a block of land from a non-resident businessman who had previously obtained the necessary approvals to build a dormitory for rental to overseas students. Shortly after acquiring the land, the taxpayer entered into a lease of the dormitory with a third party. Land development opportunities were only later considered as a possible option.

The businessman then became the beneficial owner of the taxpayer company, with the shares held on trust by his Australian solicitor.

The taxpayer eventually sold the land at a significant loss and claimed a capital loss in its tax return. The taxpayer, upon receiving further advice, obtained an amendment to the tax return, treating the sale of the land as a sale of a revenue asset, for the purpose of claiming an ordinary tax loss.

Both Courts found that the loss on the sale of the land was not deductible as a revenue loss, because the sale was clearly of a capital asset. In coming to its conclusion, the Federal Court indicated that a profit making intention or scheme cannot just be a subsequent consideration, but must be a ‘not insignificant aspect’ of the taxpayer’s activities.

The Federal Court also upheld the AAT’s penalty decision. The taxpayer has appealed this decision to the Full Federal Court.

Timing of Asset Depreciation

In a recent Taxation Determination, the Tax Office provided guidance in relation to when a depreciating asset is considered to begin its decline in value.

The determination indicates that a depreciable asset does not begin to decline in value until it is installed and ready for use. Merely holding a depreciating asset in anticipation of using it in carrying on a business is not sufficient to constitute use of the asset and hence the business cannot commence to depreciate the asset.