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Ruling

Subject: Non-commercial losses

Questions:

1. Is your training activity considered to be a separate business activity from your professional artist activity for the purposes of Division 35 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer:

Yes.

2. Are you entitled to a deduction for costs incurred to repair the premises where you carry out your training business activities under section 25-10 of the 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 commenced your artist activity almost twenty years ago in accordance with a business plan.

Your activities were conducted in a large shed which is owned by you and two others and yours is the only activity conducted from the shed. You pay no rent but you are responsible for the upkeep of the shed.

In the initial years you did undertake a series of training activities in the shed in conjunction with an adult education service. During these lessons it was realised that the workshop facilities were insufficient to meet student's needs and could not be used for training.

You continued your artist activities until the 2010-11 financial year when you decided to complete the necessary repairs on the building and equipment to allow for an increased emphasis on training.

You are also employed as a professional and realised that there was an 'untapped' client base and extended your training to include your professional clients.

Your artist activities have only produced approximately $X over the past few years while your training activities have produced over $Y in the 2010-11 financial year.

Over the years the shed has deteriorated, especially in recent years of heavy rain and floods.

In the 2010-11 financial year, significant repairs were needed to restore the building to it original condition.

The costs incurred to repair the roof and walls are over $Z.

Relevant legislative provisions

Income Tax Assessment Act 1997 - Section 25-10

Income Tax Assessment Act 1997 - Division 35

Reasons for decision

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. Murray 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 artist activities and your training activities are carried out at the same premises. The assets used in each activity, such as the machinery and tools, would be the same. In addition, you use some of the same skills to both produce artistic pieces and train others to do the same. However, the goods or services produced in each activity are different and service different markets. Your artist activities produce pieces for retail sale while your training activities provide others with skills to produce their own pieces as a form of therapy. The activities are not interdependent and, while there is some level of convenience in being able to utilise the one location for both activities, any commercial links would be incidental.

Based on the facts and the overall impression, your artistic activities and your training 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.

Repairs

Section 25-10 of the Income Tax Assessment Act 1997 (ITAA 97) allows a deduction for the cost of repairs to premises used for income producing purposes. However, subsection 25-10(3) of the ITAA 1997 does not allow a deduction for repairs where the expenditure is of a capital nature.

Taxation Ruling TR 97/23 discusses the circumstances in which expenditure incurred for repairs may or may not be an allowable deduction under section 25-10 of the ITAA 1997.

The word 'repair' is not defined within the taxation legislation.  Accordingly, it takes its ordinary meaning. Works can fairly be described as 'repairs' if they are done to make good damage or deterioration that has occurred by ordinary wear and tear, by accidental or deliberate damage or by the operation of natural causes (whether expected or unexpected) during the passage of time (paragraph 15 of TR 97/23).

While some works may be fairly described as repairs, the expenditure will be considered capital in nature in some situations, and therefore not deductible under section 25-10 of the ITAA 97. Expenditure incurred for repairs to property used for income producing purposes is of a capital nature where:

· the works result in a greater efficiency of function in the property, therefore representing an improvement rather than a repair; or

· the extent of the work carried out represents a renewal or reconstruction of the entirety, or

· the work is an initial repair.

An improvement

An 'improvement' involves bringing a thing or structure into a more valuable or desirable form, state or condition than a mere repair would do. Some factors that point to work done to property being an improvement include whether the work will extend the property's income producing ability, significantly enhance its saleability or market value or extend the property's expected life.

In your case, there is nothing to suggest that the repairs undertaken would be considered to be an improvement as it simply restored the sheds normal functions.

An entirety

TR 97/23 states that a thing or structure is more likely to be an entirety if it is an integral part, but only a part, of entire premises and is capable of providing a useful function without regard to any other part of the premises. The Ruling states that something that is part of a building, for example, a roof or wall, is just that and no more. The building itself is the entirety.

In your case, repairing the roof and walls would not be considered an entirety.

Initial repair

If work is carried out to remedy defects, damage or deterioration that existed at the date of acquisition it is considered an initial repair and any expenditure incurred is considered capital in nature. The cost of effecting an initial repair is still not deductible even if some income happens to be earned after acquisition but before the repair expenditure is incurred.

In your case, the property has been owned for almost 20 years and would not be considered to be an initial repair.

Therefore, the costs incurred to repair the roof and walls are not capital expenses and are deductible as repairs under section 25-10 of the ITAA 1997.

These expenses will need to be apportioned between the activities.

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