Edited version of private ruling

Authorisation Number: 1011763566475

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Ruling

Subject: Non-commercial losses

Question 1

Are your primary production activities separate business activities for the purposes of the non-commercial loss provisions in Division 35 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

If the primary production activities are separate business activities, will the Commissioner exercise the discretion in paragraph 35-55(1)(c) of the ITAA 1997 to allow you to include your loss from the sole trader primary production activity in your calculation of taxable income for the income year?

Answer

As it has been determined that the primary production activities are not separate business activities, it is not necessary to answer this question.

This ruling applies for the following period:

Year ended 30 June 2010

The scheme commences on:

1 July 2009

Relevant facts and circumstances

You have carried on a primary production business in partnership for a number of years.

You hold a majority interest in this partnership.

You have commenced carrying on the same type of primary production business as a sole trader.

The properties on which the businesses are carried on are in the same locality.

The same employees and equipment are used in both businesses.

The two enterprises have been grouped for GST purposes on the basis that both the common ownership by you and the similar nature of the business activities indicate the two business enterprises could be considered as one activity.

The partnership business is showing a net profit while your sole trader business is currently showing a loss.

For the income year, your share of net income from the partnership is greater than your loss from the sole trader business.

You will not satisfy the income requirement in subsection 35-10(2E) of the ITAA 1997.

The sole trader business will result in losses for several years.

You are reliant on the cash flow from the partnership business to fund the sole trader business for at least the next X years.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 35-10(2E)

Income Tax Assessment Act 1997 Subsection 35-55(1)

Income Tax Assessment Act 1997 Section 995-1

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA of the ITAA 1936 to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA of the ITAA 1936 applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

The Commissioner will exercise the discretion in paragraph 35-55(1)(c) of the ITAA 1997 for an applicant who does not satisfy the income requirement in subsection 35-10(2E) of the ITAA 1997 if certain requirements are satisfied for the year concerned.

For the discretion to be exercised, the business activity must have started to be carried on and, for the excluded years:

· because of its nature, it has not produced, or will not produce, assessable income greater than the deductions attributable to it and

· there is an objective expectation, based on evidence from independent sources (where available) that, within a period that is commercially viable for the industry concerned, the activity will produce assessable income for an income year greater than the deductions attributable to it for that year (apart from the operation of subsections 35-10(2) and (2C) of the ITAA 1997).

The note to subsection 35-55(1) of the ITAA 1997 states that paragraphs 35-55(1)(b) and 35-55(1)(c) of the ITAA 1997 are intended to cover a business activity that has a lead time between the commencement of the activity and the production of any assessable income.

In some cases, the question might arise whether an individual taxpayer is carrying on the one business, or whether they are carrying on separate and distinct business activities for non-commercial loss purposes. Taxation Ruling TR 2001/14, which discusses non-commercial business losses, provides guidelines at paragraphs 40 to 54 and 83 to 88 to assist in determining this question.

Are you carrying on separate business activities?

Division 35 of the ITAA 1997 applies to activities that are carried on as a business and while the meaning of the term business is defined in section 995-1 of the ITAA 1997, the meaning of the composite term 'business activity' is not. The inclusion of the extended definition of business in the composite term does not, however, alter the ordinary meaning of the composite term in any significant way. That ordinary meaning is an activity forming part or all of the taxpayer's activities 'engaged in for the purpose of profit on a continuous and repetitive basis' (Hope v. The Council of the City of Bathurst 80 ATC 4386 at 4382; (1980) 12 ATR 231 at 236), or an activity that is one of the activities that makes up the 'course of conduct' (FC of T v. Murry 98 ATC 4585 at 4596; (1998) 39 ATR 129 at 145) that is the taxpayer's business.

However, a business can consist of one or more business activities. In Allied Mills Industries Pty Ltd v. FC of T 88 ATC 4852 at 4864; (1988) 19 ATR 1724 at 1737, Gummow J acknowledged that a taxpayer might carry on 'several distinct businesses'. Gummow J stated:

Viewed in the light of the conduct of *business of the taxpayer as a whole, one cannot sensibly say that the taxpayer went out of *business or that the taxpayer parted with a substantial part of its *business undertaking, or that its profit-making apparatus was materially crippled.

It may be that activities of a taxpayer are so disparate in character and so discrete in the manner they are conducted, that one properly asks questions of the type posed by the facts of this case by reference to some but not the whole of those activities; examples of several distinct *businesses conducted by one taxpayer may be provided by the Board of Review decisions Case H100 (1956) 8 T.B.R.D. 457 (retail jeweller and real estate letting agent) and Case N38 (1962) 13 T.B.R.D. 161 (printer and seller of goods on commission)…

Paragraph 43 of TR 2001/14 states that to be identified as a separate business activity for Division 35 of the ITAA 1997, the activity (or set of activities) will need to exhibit the following:

· it produces a loss, in the sense that looked at as a separate activity there is clearly assessable income produced, or intended to be produced, from it, and otherwise allowable deductions attributable to carrying it on in excess of that income

· its conduct is not motivated by factors connected with supporting in any commercial way the carrying on of the individual's other business activities and

· it shows signs in its own right that it is unlikely to ever be profitable.

All of these requirements need to be satisfied, though the greatest weight would typically be given to the last two.

The table in paragraph 45 of TR 2001/14 summarises some of the factors that may be relevant to whether a business is made up of separate and distinct business activities for non-commercial loss purposes. The factors summarised are location, assets used, goods/services produced (including market conditions), interdependency and commercial links. The list is not meant to be exhaustive.

We have considered the following factors in order to determine whether there are separate business activities in this case:

· Use of different assets - the same equipment is used in both activities.

· Different commercial risks - the markets for the produce from both activities are the same and therefore the same market conditions apply.

· Differences in the type of goods produced - there are no differences in the type of goods produced.

· Interdependency between the two activities - as both activities are located in the same locality and the same employees are engaged on both businesses, there appears to be some interdependency between the two activities.

· Location - the activities are carried out from different locations however they are in the same locality.

· Financial separation of the activities - one is conducted as a sole trader and the other in partnership where you are the majority partner, and you are reliant on the cash flow from the partnership activity to fund the sole trader activity for at least the next two years.

· The two enterprises have been grouped for GST purposes.

The above factors indicate that the sole trader activity would not be regarded as a separate and distinct business activity from the partnership activity for the purposes of Division 35 of the ITAA 1997.

Will the Commissioner exercise the discretion in paragraph 35-55(1)(c) of the ITAA 1997?

As we have determined above that the activities are not separate and distinct business activities, that is, they are the one business activity, and you have advised that you will be in receipt of net income from this one business activity for the income year, the non-commercial provisions in Division 35 of the ITAA 1997, and this discretion, will have no application to you for the income year.

It is therefore not necessary to answer this question.

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