Edited version of private advice

Authorisation Number: 1051807954417

Date of advice: 5 March 2021

Ruling

Subject: Carry forward losses - similar business

Question 1

Were you carrying on a business activity for the period 1 January 200X to 30 June 200X?

Answer

Yes, but only to the extent your activities relate to providing your skills as a precision race car driver as an independent contractor.

Question 2

Were you carrying on a business activity 'of a similar kind' for the period 1 July 20XX to 30 June 20XX?

Answer

Yes

Question 3

Are you entitled to apply the carry forward losses previously reported in respect of your motor sport activities under Division 35 of the Income Tax Assessment Act 1997 (ITAA 1997) to income earned from activities conducted in the year ended 30 June 20XX and 30 June 20XX?

Answer

Yes, but only to the extent losses are a result of deductions related to your business providing your skills as a precision race car driver as an independent contractor.

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You are a sportsperson in the field of xxxx.

You have an Australian business number and have registered a business name.

You started your sport at the age of xx. In xxxx, at the age of xx, you started competing at a professional level in your sport.

During the period 1 January xxxx to 30 June xxxx you advised you competed in your sport throughout Australia and overseas.

You also performed a skill related to your sport as an independent contractor.

During the years ending 30 June XXXX to 30 June XXXX reported limited income and significant expenses. As a result you had significant carry-forward losses.

You advised income during this period was earnt primarily from independent contract work. Sponsorship money was earnt only in the XXXX income year and prize money was minimal if received at all.

From XXXX till your return to Australia in the XXXX income year you were not considered a resident of Australia for tax purposes.

Your activities appear to have been financed by a private loan.

You have advised that historically you spent 3 to 4 days per week actively providing your services.

In addition you would spend approximately 1-2 days per week keeping contact with current clients and researching new clients by way of online searches, phone, email and personal face to face meetings.

You have advised salary and wage income received during the income years ending XXXX to XXXX was from minor casual work.

You resumed residency in Australia XXXX.

Since your return you have continued providing your skills as an independent contractor.

From XXXX you have expanded the services you provide as an independent contractor.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Subsection 995-1(1)

Income Tax Assessment Act 1997 Division 35

Income Tax Assessment Act 1997 Subsection 35-10(3)

Income Tax Assessment Act 1997 Division 36

Income Tax Assessment Act 1997 Subsection 36-15(2)

Reasons for decision

Question 1

Summary

Your activity as a sportsperson/competitor in XXXX is considered to be the vigorous pursuit of a hobby rather than a business. As such, your income from this activity (including sponsorship) in the XXXX income years should not have been assessable and your expenses were not deductible.

Your activity as an independent contractor related to your sport are considered to be a business. As such your income from this activity in the XXXX to XXXX income years was assessable and your expenses were deductible.

Detailed reasoning

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. FC of T 89 ATC 4540; (1989) 20 ATR 922).

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 following is an analysis of your sport and independent contractor activities against the business indicators:

General indicators of a business

Significant commercial purpose or character

This indicator generally covers aspects of all the other indicators. The business should be carried out on such a scale and in such a way as to show it is being operated on a commercial basis and in a commercially viable manner and that the taxpayer's involvement in the activity is capable of producing a tax profit.

You received minimal income form prize money. Sponsorship income was only received in the XXXX income year. The majority of your income was earned from working as an independent contractor.

To be a sportsperson in business, it is expected that efforts be directed towards making a profit. This is difficult with sponsorship and prize money, given the competitiveness and element of chance present in your sport. During the XXXX income years you did not appear to have a contingency plan for making a profit from your racing in the event that you didn't win prize money, we consider that your activities, during this period, lack significant purpose or character.

Further your activities were financed by a private loan that is unlikely to have been available on a commercial basis. Without this private loan you would have been unable to continue participating in your sport.

While income earned as an independent contractor was not significant these activities have the relevant commercial character.

Purpose and intention to engage in business and nature of the activities

The taxpayer should be able to demonstrate an intention to derive assessable income from the business activity. A taxpayer should also be able to demonstrate that appropriate activities have been carried out by that taxpayer, or on the taxpayer's behalf, to allow this to occur.

Participation in your sporting activity does not demonstrate the relevant intention.

Your activities as an independent contractor demonstrate an intention to engage in business and do not rely on chance in order to receive profit.

Intention to make a profit and prospect of profits

The taxpayer's involvement in the business activity should be motivated by wanting to make a tax profit and the taxpayer's activities should be conducted in a way that facilitates this. This will require examining whether objectively there is a real prospect of making such a profit from participating in the business, that is, from the carrying on of a business of that taxpayer.

Your high expenses in preparing for and attending competitions seriously erode the possibility of making a profit from your sporting activities. You have incurred considerably more expenditure on your sporting activities than you have received in prize money or sponsorship.

The facts of your case can be distinguished from the Federal Court case of Stone v. Federal Commissioner of Taxation [2002] FCA 1492; (2002) 51 ATR 297, in which a javelin thrower who received significant prize money, government grants, sponsorships and appearance fees was considered to be carrying on a business for tax purposes.

You have advised you sought sponsorship to offset some of your costs although you have only received income from this in the XXXX income year. However, given the high level of expenses that you incurred, it is extremely improbable that sufficient sponsorship could have been provided to allow you to make a profit from your sporting activities.

The proportion of expenses relating to the provision of your skills as an independent contractor are significantly less than those related to your sporting competition. Where these expenses are isolated it would appear there is a real prospect you would have made a profit from your activities as an independent contractor.

Repetition and regularity

The taxpayer's activities should involve repetition and regularity and have an air of permanence about them.

During the XXXX period you regularly attended competitions and you spent a significant amount of time on your activity in practising and competing.

You have not provided detail on how frequently you provided your skills as an independent contractor.

Activities of the same kind and carried on in a similar manner to those of the ordinary trade in that line of business

The taxpayer's activities or those conducted on the taxpayer's behalf should, unless circumstances dictate otherwise, be based around business methods and procedures of a type ordinarily used in ventures that would commonly be said to be businesses. The activities should be carried out using accepted practices.

Usually sportspeople in business identify a market or niche where income can be produced and tailor their work towards making a profit. Your activities do not seem to be those of a sportsperson in business in that you do not receive regular amounts of prize money for your activities nor did you have any significant benefits from sponsorship. Your costs significantly outweighed the value of any reimbursements you received.

Your activities as an independent contractor are conducted in a manner that that would commonly be said to be a business.

Organisation, systematic, business-like manner

The activities conducted by, or on behalf of the taxpayer, should be carried out in a systematic and organised manner. This will usually involve matters such as the keeping of appropriate business records by the taxpayer. If someone else carries out the activities on the taxpayer's behalf, there should be regular reports provided to the taxpayer on the results of those activities.

It is acknowledged that participation in a sport at your level may require a considerable amount of organisation and record-keeping. However, these same attributes could equally apply to someone who is vigorously pursuing a hobby. They are not exclusive attributes of a business. It is whether these attributes are combined with a business-like manner which is important. Having a registered business name is not compulsory for tax purposes and having a business name does not necessarily mean you are in business.

In your case, we do not consider that your sporting activity was carried on in a business-like manner in the XXXX period. Although your activities were planned and organised, they were not tailored towards making profits. Your activities as an independent contractor however were arguably capable of making a profit and were also planned and organised in a business-like manner.

The size and scale of the activity

The business should be large enough to make it commercially viable.

During the XXXX period the size and scale of your activities from which you were capable of generating income was small and without private support you could not have continued sustaining losses in the absence of regular monetary reward.

Hobby or recreational pursuit

There is a hobby when:

•         it is evident there is no intention to make a profit from the activity

•         losses are incurred because the activity is motivated by personal pleasure and not to make a profit

•         the transaction is isolated and there is no repetition or regularity of sales

•         there is no system to allow a profit to be produced in the conduct of the activity

•         the activity is carried out on a small scale

•         there is an intention by the taxpayer to carry on a hobby, a recreation or a sport rather than a business, and/or

•         any produce is sold to friends and relatives and not to the public at large.

During the XXXX period expenses associated with travelling to competitions (in Australia and overseas) and participating in them has to date greatly outweighed any prize money or sponsorship benefits received. Participation in activities generating pastime or hobby receipts is a social or personal pursuit of a non-commercial nature. Pastime receipts are not intended to, nor do they usually, cover expenses.

We consider that, for tax purposes, your sporting activity as it stands would be better described as a hobby or a sporting pursuit.

The activity was not commercially viable and was not carried out in a business-like manner.

The activity did not make a profit and did not have significant commercial character.

Your activities as an independent contractor however have a commercial purpose, you have more than an intention to engage in business, there is a prospect of a profit from your activities, there is repetition and regularity, your activities are planned, organised and carried on in a similar manner to other businesses, therefore it is considered that you were operating a business as an independent contractor in the XXXX income years.

Question 2

Summary

You are considered to be carrying on an activity 'of a similar kind' as an independent contractor providing your skills as XXXX in the XXXX income years.

Detailed Reasoning

Subsection 35-10(3) of the Income Tax Assessment Act 1997 (ITAA 1997) allows business activities to be grouped together where they are activities 'of a similar kind' for non-commercial loss purposes. A similar activity may be one that has evolved from the first business activity, or it may simply be another business activity carried on in the same year, that fits the description of being 'similar'.

Business activities which are of a similar kind are those which inherently have the same nature or character. The activities must be similar; they do not need to be identical.

Taxation Ruling TR 2001/14states that a business activity 'of a similar kind' to another business activity is very much a question of fact and degree and will involve a comparison of the relevant characteristics of each, for example:

•         the location(s) where they are carried on;

•         the type(s) of goods and/or services provided;

•         the market(s) conditions in which those goods and/or services are traded;

•         the type(s) of assets employed in each; and

•         any other features affecting the manner in which they are conducted.

In your case, you have expanded your independent contractor business operations in the XXXX income years to include provision of your skills as XXXX. The services you provide are the same, providing your skill as a XXXX. Based on these facts your independent contractor activities in the XXXX period and XXXX period are 'of a similar kind' for non-commercial loss purposes.

Question 3

Summary

You are entitled to apply the carry forward losses previously reported in respect of your sporting activities under Division 35 of the ITAA 1997 to income earned from activities conducted in the year ended XXXX but only to the extent losses are a result of deductions related to your business as an independent contractor.

Detailed Reasoning

Prior year losses

Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income, or necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income, except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income.

For expenditure to be deductible there must be a nexus between the expenditure and the assessable income so that it is incidental and relevant to the gaining of assessable income or carrying on a business. The expenditure must also have the essential character of an outgoing incurred in gaining assessable income or, in other words, of an income producing nature.

You reported expenses in the XXXX income years that were attributable to both your sporting activities and independent contractor activities.

In your case you were not considered a professional sportsperson. Even though you have competed at national and international level you were not paid or endorsed to compete at those levels therefore you were not considered to be carrying on a business of XXXX.

Therefore, expenses incurred in order for you to train, compete or recover are not deductible as they are personal in nature.

As you are considered to be in the business of providing your skills as an independent contractor you would have been entitled to claim a deduction for expenses incurred in relation to your business. Where expenses incurred are attributable to both activities these expenses should be apportioned accordingly.

Application of carry-forward loss provisions

Division 36 of the ITAA 1997 sets out the method for calculating and deducting tax losses of earlier income years.

Subsection 36-15(2) of the ITAA 1997 provides that where a taxpayer does not have net exempt income, an earlier year tax loss is deductible against the excess of total assessable income over total deductions in a later income year.

Where carry forward losses were incurred in respect of your activity as an independent contractor you are entitled to deduct these against the excess of total assessable income over deductions in the XXXX income years.

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