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Edited version of your written advice
Authorisation Number: 1012713938644
Ruling
Subject: Non-commercial losses
Question 1
Am I in business?
Answer
No.
Question 2
Will the Commissioner exercise the discretion in paragraph 35-55(1)(c) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include any losses from your business activity in the calculation of your taxable income for the 2013-14 to the 2014-15 financial years?
Answer
No.
This ruling applies for the following periods:
Year ended 30 June 2014
Year ending 30 June 2015
The scheme commenced on
1 July 2013
Relevant facts and circumstances
You purchased a fully operational business and you traded this as a business. Your intention was to build new premises on this site, after the old premises were demolished, and also build new premises on an adjacent site. A local builder quoted for the adjacent site construction and on completion these were then sold.
You then looked at constructing new premises on the site where the operational business once stood. You engaged an experienced developer to build the premises. You input capital with others to achieve this and you also assisted in the marketing.
Relevant legislative provisions
Income Tax Assessment Act 1997 subsection 35-10(1)
Income Tax Assessment Act 1997 subsection 35-10(2)
Income Tax Assessment Act 1997 subsection 35-10(2E)
Income Tax Assessment Act 1997 paragraph 35-55(1)(c)
Income Tax Assessment Act 1997 section 995-1
Reasons for decision
Am I in business?
Subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) defines 'business' to include 'any profession, trade, employment, vocation or calling, but does not include occupation as an employee'. This definition, however, simply states what activities may be included in a business
Taxation ruling TR 1997/11 Income Tax: am I carrying on a business of primary production (TR 1997/11) provides guidance on the ordinary meaning of 'business' and the application of relevant factors in determining whether a business exists. The principles expressed in TR 1997/11 are applicable for the purpose of this ruling.
Some indicators of a business being carried out relevant to the purpose of this ruling are set out in paragraph 13 of TR 1997/11:
• 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 repetition and regularity of the activity;
• whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business;
• whether the activity is planned, organised and carried on in a business-like manner such that it is directed at making a profit;
• the size, scale and permanency of the activity.
TR 1997/11 further states, at paragraph 16 that:
The indicators must be considered in combination and as a whole. Whether a business is being carried on depends on the 'large or general impression gained' (Martin v. FC of T (1953) 90 CLR 470 at 474; 5 AITR 548 at 551) from looking at all the indicators, and whether these factors provide the operations with a 'commercial flavour' (Ferguson v. FC of T (1979) 37 FLR 310 at 325; 79 ATC 4261 at 4271; (1979) 9 ATR 873 at 884). However, the weighting to be given to each indicator may vary from case to case.
In Ferguson v Federal Commissioner of Taxation 79 ATC 4261(Ferguson), at 314, Bowen CJ and Franki J said, that there are many elements to be considered in determining whether a business is being carried on. Some of the matters referred to in Ferguson were the nature of the activities, whether they have the purpose of profit-making, repetition and regularity of activities, organisation of activities in a business-like manner, and the keeping of books, records and the use of system. It is clear from the judgment that the presence or absence of any particular factor is not necessarily decisive.
Whether a particular activity constitutes a business is a question of fact and degree and all indicators need to be considered as a whole. The following factors are taken into consideration in determining whether a property development business exists in relation to the construction of the premises.
• The intention is to have premises built for the purpose of selling.
• The entity are not experienced in property development and the previous undertaking consisted of a contracting a builder.
• The development is a one-off construction and the entity has no other property to develop.
• There is an expectation that the entity will make a profit on the eventual sale..
• The construction of the building will be outsourced to a builder who will act as project manager and have responsibilities for all the daily project management tasks.
It is concluded that the entity will not be considered to be in the business of property development by undertaking the proposed construction of the building for the following reasons:
• There is no intention to have repetition and regularity for this type of activity in the future business operations of the entity as the construction will be a one-off project.
• The entity will not be carrying out the construction in the same way as that of a property developer. The entity has little knowledge and experience in property development. They will outsource the management of the project to a builder. The only role they will carry out input capital for the construction of the premises and some marketing.
From the facts provided in the application there is no intention to engage in a business of property development and construction for the purpose of profit on a continuous and repetitive basis.
Commissioner's discretion
The Commissioner's discretion at section 35-55 of the Income Tax Assessment Act 1997 can only be exercised for individuals (alone or in partnership) who are carrying on a business. As you are not carrying on a business this section is not applicable.
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