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Ruling

Subject: multiple business activities and the non-commercial loss provisions.

Question:

Are your professional services activity and your retail sales activity considered to be two separate business activities for the purposes of Division 35 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer: Yes.

This ruling applies for the following period

Year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts

You are a qualified professional in private practice for many years.

In 2010, you registered a business name and you began your retail business activity, in conjunction with your private practice, from the same premises.

You do not see clients for your professional business in the office/bookshop, as your work is specialised with all work coming electronically or by mail.

Neither of the two businesses is full time by themselves. Your professional business requires a wide range of goods which can be accessed more easily and cheaply through your retail business.

You also sell some of your own goods, used in your professional business activity, in your retail shop.

In the 2010-11 financial year, the income from your professional activities was over $20,000, and the income from your retail business was less than $20,000. Both activities produced an overall loss.

Your income for non-commercial loss purposes in the 2010-11 financial year was less than $250,000.

Relevant legislative provisions

Income Tax Assessment Act 1997 - Division 35

Income Tax Assessment Act 1997 - section 35-10

Income Tax Assessment Act 1997 - section 35-30

Income Tax Assessment Act 1997 - section 35-35

Income Tax Assessment Act 1997 - section 35-40

Income Tax Assessment Act 1997 - section 35-45

Income Tax Assessment Act 1997 - section 35-55

Reasons for decision

Under Division 35 of the ITAA 1997, a loss made by an individual from a business activity will not be deductible in the financial year in which it arises unless certain conditions are met. Losses that cannot be taken into account in a particular year of income, because of subsection 35-10(2) of the ITAA 1997, can be applied to the extent of future profits from the business activity, or are deferred until one of the tests is passed, the discretion is exercised, or the exception applies. 

Under the rule in subsection 35-10(2) of the ITAA 1997 a loss made by an individual from a business activity will not be taken into account unless: 

o the exception in subsection 35-10(4) of the ITAA 1997 applies; or  

o you satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997 and one of the four tests is met; or  

o if you do not satisfy the income requirement or if one of the tests is not met, the Commissioner exercises the discretion in section 35-55 of the ITAA 1997.

Your business activity is not a primary production activity or a professional arts business activity. Therefore, the exception contained in subsection 35-10(4) of the ITAA 1997 does not apply.

Your income for non-commercial loss purposes is less than $250,000, therefore, you satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997. However, while your professional business activity has passed the assessable income test, your retail business activity has not. From the information available, it can be seen that your retail business activity has also not met the profits test and is unlikely to have passed either the real property test or the other assets test. 

Multiple business activities

Where there are separate business activities, Division 35 of the ITAA 1997 needs to be applied to each business activity separately.

Taxation Ruling TR 2001/14 considers the question of whether business activities would constitute separate business activities for non-commercial loss purposes.

The composite term 'business activity' is not defined in the ITAA 1997. The 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, while a business may be subdivided into a number of different business activities this cannot be carried out to the point where the composite term, 'business activity', is deprived of practical meaning. An activity that forms part of a taxpayer's overall business will not be a separate 'business activity' unless it is capable of standing alone as an autonomous commercial undertaking of some sort. (paragraphs 37 and 38)

The question of whether there are one or multiple business activities is a question of fact and overall impression. There are a number of factors which can be considered to help determine whether there are one or multiple business activities.

The following table summarises some of the factors that may be relevant to whether a business is made up of separate and distinct business activities for the purposes of Division 35 of the ITAA 1997.

In your case, both your professional and retail activities are carried out at the same premises. The assets used in each activity, such as a computer and other office equipment, would be the same. In addition, you use some of the goods from your retail activity in your professional activity and you do offer some of the goods used in your professional activity for sale as part of your retail activity. However, the goods or services produced in each activity are vastly different and service vastly different markets. The provision of specialised professional services to cliental is vastly different to providing goods in a retail market. The activities are not interdependent and, while there is some level of convenience in having both activities in the one location, any commercial links would be incidental.

Based on the facts and the overall impression, your professional and retail activities are considered to be two separate business activities and Division 35 of the ITAA 1997 will need to be applied to each business activity separately.

Therefore, if your retail business activity has not satisfied any of the four non-commercial loss tests contained in Division 35 of the ITAA 1997 in the 2010-11 financial year, your losses must be deferred to future years. If your retail business makes a profit in a following year, you can offset the deferred loss against the amount of this profit. Also, the deferred loss may be claimed in a future year where you meet the <$250,000 requirement and your retail business activity meets one of the four non-commercial loss tests.

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