Edited version of private ruling

Authorisation Number: 1011616118630

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Ruling

Subject: Non Commercial Losses- Commissioner's discretion - Special circumstances.

Will the Commissioner exercise the discretion in paragraph 35-55(1)(a) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include any losses from your activity in your calculation of taxable income for the relevant income year?

No.

This ruling applies for the following period

1 July 2009 to 30 June 2010

The scheme commenced on

1 July 2008

Relevant facts and circumstances

You intended to carry on a business activity.

You received the necessary accreditation from the relevant organisation.

In order to carry out the activities and receive income you were required to sign a contract with a third party. However prior to commencing your activity the program was terminated.

While you were waiting for the contract to be signed you introduced some of your contacts to other parties for a fee.

You designed advertising material to advertise your activity, however, they were not printed because you did not receive any information with regards to the contract.

You were initially intending to carry on the activity in partnership. However, you have been carrying on the preliminary activities as a sole trader.

You have stated the expenses you incurred in the relevant year.

You have stated that you would have been able to earn sufficient income if you commenced the activity.

You have provided necessary information in relation to the activity.

You have requested the Commissioner to exercise the discretion in paragraph 35-55(1)(a) of the ITAA 1997 to allow you to claim the expenses in relation to your activity in the relevant income year.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 35-10(2)

Income Tax Assessment Act 1997 subsection 35-10(4)

Income Tax Assessment Act 1997 paragraph 35-55(1)(a)

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA of the ITAA 1936 to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA of the ITAA 1936 applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA of the ITAA 1936, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

Division 35 of the ITAA 1997 applies to losses from certain business activities for the 2000-01 income year and subsequent years. Under the rule in subsection 35-10(2) of the ITAA 1997, a 'loss' made by an individual (including an individual in a general law partnership) from a business activity will not be taken into account in an income year unless:

· the 'exception' in subsection 35-10(4) of the ITAA 1997 applies, or

· satisfy subsection 35-10(2E) of the ITAA 1997 for that year and one of four tests in sections 35-30, 35-35, 35-40 or 35-45 of the ITAA 1997 is met, or

· the Commissioner exercises the discretion in section 35-55 of the ITAA 1997.

You have satisfied the income requirement in subsection 35-10(2E) of the ITAA 1997.

In terms of subsection 35-5(2) of the ITAA 1997, Division 35 of the ITAA 1997 which deals with deferral of losses from non-commercial business activities, is not intended to apply to activities that do not constitute carrying on a business.

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). The following general indicators of a business, as used by the Courts, are stated in paragraph 13 of the Taxation Ruling TR 97/11:

· 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 profits

· Whether there is repetition and regularity of the activity

· Whether the activity is of the same kind and carried on in the same manner to that of the ordinary trade in that line of business

· Whether the activity is planed, organised and carried on in a business-like and systematic manner

· Whether the activity has sufficient size and scale and permanency.

In addition to the above indicators, paragraph 98 of Taxation Ruling TR 2001/14 states that a business activity should have commenced. To commence a business activity a person must have:

· made a decision to commence the business activity

· acquired the minimum level of business assets to allow that business activity to be carried on, and

· actually commenced business operations.

As explained in the above paragraphs, in order to exercise the discretion, the Commissioner should be satisfied that the activity has actually commenced operating.

The information you have provided shows that you made the decision to commence the business activity and with that intention you obtained the necessary qualifications and acquired the necessary assets to commence that activity. You expected to derive assessable income soon after the commencement. You expected that the activity would have sufficient repetition and regularity and be large enough to generate profits. The information provided also suggests that the activity would have been carried on in a businesslike manner similar to others in the industry.

After completing the preliminary activities you were required to enter into a contract with a third party to receive income. You were not in a position to commence the activity and receive payments without the contract. While you were waiting to commence the activity, the scheme was terminated and therefore, you could not actually commence the business operations.

The income you received while you were waiting for the contract is not income from the activity, therefore there is no nexus between your intended activity and the income you received. Additionally, as you did not have the necessary contract, there is no nexus between your intended activity and the income you received.

As previously discussed, the non-commercial loss provisions in Division 35 of the ITAA 1997 do not apply to activities that do not constitute carrying on a business. Accordingly, the Commissioner cannot apply the discretion to allow you to include the losses in the calculation of the taxable income for the relevant income year as we consider that your business operation had never commenced.

Summary of reasons for decision

The Commissioner will not exercise the discretion under paragraph 35-55(1)(a) of the ITAA 1997 in relation to your activity for the relevant income year as you have not carried on the business activity in that year.