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Ruling

Subject: non-commercial losses

Question:

Is the Commissioner able to exercise the discretion in Division 35 of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to claim losses in relation to activities not carried on as business in the 2009-10 financial year?

Answer: No.

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts

You commenced a business activity, leased a business premises from which to operate and commence business.

A subsequent tax audit determined that you were not in business during the earlier years and, as a result, your business deductions were disallowed.

You lodged an objection to the audit decision and your objection was disallowed in full.

You sought a review of the objection decision and an agreement was ultimately reached that you were in business in these earlier years.

During this review, your 'business' has been on hold/mothballed.

During the 2009-10 financial year, your services were not advertised and were not available. All equipment was kept in storage during this period.

You incurred some on-going expenses in relation to the activities during the 2009-10 financial year.

Your income for non-commercial loss purposes in the 2009-10 financial year was above $250,000.

Relevant legislative provisions

Income Tax Assessment Act 1997 - Division 35.

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

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 income year in which it arises unless certain conditions are met. If an individual is not considered to be carrying on a business in the income year, Division 35 will not apply (Taxation Ruling TR 2001/14, paragraph 10)

If an activity is not carried on as a business, and cannot reasonably be expected to produce assessable income, then you cannot claim general deductions in relation to it, regardless of the operation of Division 35 of the ITAA 1997. 

Whether a business is being carried on depends on the large or general impression gained (Martin v. Federal Commissioner of Taxation (1953) 90 CLR 470; (1953) 10 ATD 226; (1953) 5 AITR 548) from looking at all the indicators of carrying on a business, and no one indicator will be decisive (Evans v. Federal Commissioner of Taxation 89 ATC 4540; (1989) 20 ATR 922).

However, the courts have developed a series of indicators that you can apply to your circumstances to determine whether you are carrying on a business. Taxation Rulings TR 97/11 and TR 2005/1 provide the indicators established by the courts that would need to be considered when determining whether a business is being carried on. It should be noted that TR 97/11 and TR 2005/1 specifically deal with carrying on a business of primary production and carrying on a business as a professional artist, respectively, but the indicators established can be equally applied to most other activities. 

The list of indicators discussed in these rulings include, but are not limited to:  

§ whether the activity has a significant commercial purpose or character

§ whether the taxpayer has more than just an intention to engage in business

§ whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity

§ whether there is regularity and repetition of the activity

§ whether the activity is of the same kind, and carried on in a similar manner, to that of ordinary trade in that line of business

§ whether the activity is planned, organised and carried on in a businesslike manner such that it is described as making a profit

§ the size, scale and permanency of the activity, and

§ whether the activity is better described as a hobby, a form of recreation or sporting activity.  

In addition to the above, In Inglis v. FC of T 80 ATC 4001; (1979) 10 ATR 493 Brennan J made it clear that there must actually be activity when he said:

The carrying on of a business is not a matter merely of intention. It is a matter of activity. Yet the degree of activity which is requisite to the carrying on of a business varies according to the circumstances in which the supposed business is being conducted…

Brennan J went on to say:

At the end of the day, the extent of activity determines whether the business is being carried on. That is a question of fact and degree.

You have stated that your 'business' has been on hold/mothballed since June 2008. During the 2009-10 financial year, your products were not advertised for hire and were not available for hire. They were kept in storage during this period. Therefore it is considered that you have not carried on your business activities during the 2009-10 financial year and accordingly Division 35, and more specifically, subsection 35-55(1) of the ITAA 1997 do not apply.

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