Edited version of your written advice

Authorisation Number: 1013103027413

Date of advice: 11 October 2016

Ruling

Subject: Non-commercial losses - Vehicle leasing and hiring

Question 1

Are you considered to be carrying on a business of vehicle leasing?

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 in relation to the activity in your calculation of taxable income for the 20XX - 20ZZ financial years?

Answer

Not applicable.

This ruling applies for the following periods:

Year ended 30 June 20YY

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You purchased a vehicle in the 20XX financial year.

You are currently in the commencement phase of setting up and establishing operating activities to start leasing the vehicle to customers.

You intend to lease/short term hire this vehicle to customers.

You also intend to lease this vehicle back to the manufacturer for display purposes though you have not yet settled on fee amounts, or periods of time the vehicle will be available for this purpose.

You have not yet commenced any advertising campaigns or marketing activities apart from word of mouth.

You have not yet entered into any contractual agreements for lease or hire with any customers.

You have not entered into any contractual lease-back agreements with the vehicle manufacturer.

You expect that your primary customer will be a related entity.

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

For the 20AA-BB and later financial years, Division 35 of the ITAA 1997 will apply to defer a non-commercial loss from a business activity unless:

• you satisfy the income requirement and you pass one of the four tests

• the exceptions apply

• the Commissioner exercises his discretion.

However, for this division to apply, your activity must be carried on as a business.

Section 995-1 of the ITAA 1997 defines 'business' as 'including any profession, trade, employment, vocation or calling, but not occupation as an employee'.

The case of Evans v. Federal Commissioner of Taxation 89 ACT 4540; (1989) 20 ATR 922 stated that whether or not an activity amounts to carrying on business for taxation purposes is a question of fact. There is no exhaustive or determinative definition which can be applied to determine this matter. The facts of each case must be examined. In Martin v. Federal Commissioner of Taxation (1953) 90 CLR 470; (1953) 10 ATD 226; (1953) 5 AITR 548, Webb J said:

The test is both subjective and objective: it is made by regarding the nature and extent of the activities under review, as well as the purpose of the individual engaging in them, and as counsel for the taxpayer put it, the determination is eventually based on the large or general impression gained.

When does a business activity commence?

The actual date of commencement of a business activity is a question of fact (Goodman Fielder Wattie Ltd v. FC of T 91 ATC 4438; (1991) 22 ATR 26) (Goodman Fielder Wattie).

For a business activity to have commenced a person must have:

• purpose, intention and decision to commence the business activity

• acquired a minimum level of business assets to allow that business activity to be carried on, and

• actually commenced business operations (Calkin v. CIR [1984] 1 NZLR 440)

We must examine the above indicators in light of the characterisation of your business activity.

In Goodman Fielder Wattie, Hill J stated at 4,447:

Critical to the resolution of the present controversy, is the characterisation of the business activity itself which is said to have commenced. It was conceded properly by the applicant that if the business claimed to be carried on by it was to be characterised as one of manufacturing and selling monoclonal antibody products, then that business did not commence until around November 1982...

For example, if your business activity is characterised as a primary production activity, involving the planting and cultivating of trees, then the planting of the trees could be seen as the commencement of that business. Alternatively, if your business activity is characterised as the provision of a service, the business would generally be considered to commence once you have commenced providing this service for remuneration.

In your case it is considered that the business activity you intend to carry on is characterised as the provision of a specialised vehicle for lease or short term hire. We can now consider the indicators set out above to determine whether this business activity has commenced.

Purpose, Intention and Decision

The intention and purpose of a taxpayer in engaging in an activity is relevant to when a business commences. However, an intention to commence a business will not determine that the business activity has actually commenced.

The chain of events leading to the commencement or start-up of a business activity often begins with a mere intention to establish the business activity. This is developed by researching the proposed business and, in some instances, by experiment. This process culminates in a final decision on whether to commence business. However, not all businesses commence in such an orderly manner.

It can be argued from the information you have provided that you have researched your proposed business activity, decided on the form of that business and have committed yourself to it.

Acquisition of a minimum level of business assets to allow that business activity to be carried on

Most business activities have a structure that provides the framework of the business. It is usually a collection of capital assets. What the particular capital assets are will depend on the particular business activity.

In Calkin v. CIR [1984] 1 NZLR 440 Richardson J said at 446-447:

Clearly it is not sufficient that the taxpayer has made a commitment to engage in business: he must first establish a profit-making structure and begin ordinary business operations.

For a business activity to commence an appropriate business structure should be in place and ordinary business operations must begin.

As to what the business structure will consist of, and its size, will be a question of fact and degree, and will depend on the nature of the business activity.

Your activity is the provision of a specialised vehicle for lease or short term hire.

In your case, you have acquired the necessary capital asset, being the specialist built vehicle and although you do not yet have a client base, it is considered that you do have the necessary business structure in place for you to commence your particular business activity.

Commencement of Business Operations

As noted by Brennan J in Inglis v Federal Commissioner of Taxation (1979) 10 ATR 493; 80 ATC 4001, the level of activity is important in deciding whether a business is being carried on. Brennan J stated at ATC 4004-4005; ATR 496-497 that:

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.

In Hadlow and FC of T [2002] AATA 1250; (2002) 2002 ATC 2294; (2002) 51 ATR 1197 the Small Taxation Claims Tribunal considered the amounts incurred by a taxpayer to research and develop a book. The question for decision was whether the activities were merely preparatory and preliminary or whether the activity had reached a stage where it was able to be characterised as a business.

In concluding that the activity was not carried on as a business in the relevant years, member Mowbray stated at paragraph 26:

Clearly Mr Hadlow has the subjective intention to carry on a business, but that is not sufficient. There must be business activity. There is a real question whether the activities to date are merely preparatory or preliminary (see Goodman Fielder Wattie at 4447), and whether the project has reached the stage where it is able to be characterised as a business. There has been much activity but

 The concept of business does not equate with being busy (Goodman Fielder Wattie at 4447; 386; 339)

Mr Hadlow has researched, undertaken travel, and visited museums, libraries and farms in pursuit of a particularly interesting topic. He has expended money but has made no sales, received no advances nor signed any contracts.

It is not accepted that you have gone beyond merely having an intention to engage in business; it is important to evaluate this activity in regards to the characterisation of your business, which is the offering of your vehicle for lease or hire to the general public.

You expect your main customer will be a related entity which will lease the vehicle. This raises the question of the availability of the vehicle for leasing by the general public, as it may be argued that the demand for this specialised vehicle by unrelated third parties will be at the same times that it will be in use by your related entity.

The systematic and regular transactions from which you will produce revenue as part of your business operations, that is, customers actually engaging your services, has not commenced.

You have not yet entered into any contractual agreements for the lease or hire of your vehicle and have not yet completed developing standard contracts and lease agreements for use in your activities.

You have not yet advertised or marketed the services you intend to offer to the general public.

Therefore your activities so far are considered preliminary to the carrying on of your intended business and were directed at establishing networks for your intended business, as well as the construction or establishment of a business structure, rather than actual income producing activities.

As such you are not yet considered to be carrying on a business of leasing or hiring a vehicle. Therefore under subsection 35-55(1) of the ITAA 1997, the Commissioner's discretion cannot be exercised.

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