Edited version of private ruling

Authorisation Number: 1011647143105

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Ruling

Subject: Non-commercial losses

Issue 1

Does the Commissioner consider you are carrying on a fitness industry based business?

Yes

Issue 2

1. Are you entitled to claim the losses from your fitness industry based business against your other income in the 2009-10 income year?

Yes.

2. If your fitness industry based business activity results in a loss in the 2010-11 income year, will you be able to claim the loss against your other income?

Yes.

This ruling applies for the following periods:

Year ended 30 June 2010

Year ended 30 June 2011

The scheme commences on:

1 July 2009

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You decided to establish a business in the fitness industry.

You completed a fitness industry related course and modified your house to incorporate a home gym during the 2009-10 income year.

You resigned from your full-time job during the 2009-10 income year.

Prior to completing the course, you entered into negotiations with a gym to provide your services to their clients. During the 2010-11 income year you entered into a contract with the gym. This is part of your fitness industry activities. You are not an employee of the gym.

You also provide your services at various venues including your home gym, parks and a second commercial gym.

You obtained your first private customer during the 2010-11 income year.

You maintain a separate bank account and keep various client and financial records for this activity.

You obtain clients through the gym, advertising flyers and your personal reputation.

You did not earn any income in the 2009-10 income year but earned over $20,000 in the first five months of the 2010-11 income year.

You have incurred various expenses in establishing your personal training activity.

You made a loss in the 2009-10 income year.

Your taxable income for non-commercial loss purposes will be under $250,000 for the 2009-10 and 2010-11 income years.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 35-10

Income Tax Assessment Act 1997 Section 35-30

Income Tax Assessment Act 1997 Paragraph 35-30(b)

Income Tax Assessment Act 1997 Section 995-1.

Reasons for decision

Issue 1

Summary

It is considered that you were carrying on a fitness industry based business from when you completed your industry related qualifications.

Detailed reasoning

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

The question of whether a business is being carried on is a question of fact and degree. The courts have developed a series of indicators that are applied to determine the matter on the facts provided.

Taxation Ruling TR 97/11 provides the Commissioner's view on the factors used to determine if you are in business for tax purposes. These factors are:

· 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 profit from the activity

· whether there is regularity and repetition of the activity

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

· whether the activity is planned, organised and carried on in a businesslike manner such that it is described as making a profit

· the size, scale and permanency of the activity, and

· whether the activity is better described as a hobby, a form of recreation, or sporting activity.

No one indicator is decisive. The indicators must be considered in combination and as a whole. Whether a 'business' is carried on depends on the large or general impression.

In your case it is considered that you are carrying on a fitness industry based business as you have:

· obtained relevant formal qualifications

· modified your home to include a gym in which you conduct sessions

· entered a contract to provide services to clients of a gym but not in the capacity as an employee

· advertise your services to the general public, through the gym and flyers, through your reputation and a sign at your home, and

· you maintain a separate bank account and business related records.

When did your activity commence?

In determining when a business commences, there are three indicators which must be present before it can be said that a business has commenced. The indicators are:

· purpose, intention and decision

· acquisition of a business structure, and

· commencement of operations.

Based on the information provided, your fitness industry based activity can be said to have commenced as a business from the date you completed your industry related course. This is because you were unable to obtain provide services to clients prior to this time. Prior to this, you were undertaking preparatory activities in establishing your business.

Issue 2

Summary

You are entitled to claim your losses from your fitness industry based activity against your other income in the 2009-10 and 2010-11 income years as the Commissioner considers you have met the assessable income test.

Only those expenses incurred from the time the Commissioner considers you commenced your business activity can be included in calculating your loss for the 2009-10 income year.

The expenses incurred prior to this date are considered to be preparatory expenses preparing the capital assets for the business operations. As such the expenses are not included in calculating the loss for the 2009-10 income years.

Detailed reasoning

Division 35 of the ITAA 1997 will apply to defer non-commercial business losses from a business activity carried on by a taxpayer who is an individual, unless:

· their business activity satisfies one of the four tests listed in section 35-10 of the ITAA 1997

· the Commissioner has exercised the discretion in section 35-55 of the ITAA 1997 for the activity, or

· the individual comes within the exception contained in subsection 35-10(4) of the ITAA 1997 which may apply to a primary production or professional arts business.

Section 35-30 of the ITAA 1997 outlines the assessable income test. A business passes this test where it produces assessable income of at least $20,000 in the income year.

Paragraph 35-30(b) of the ITAA 1997 contemplates the assessable income test in situations where the activity is not carried on for the full year. In that situation a reasonable estimate of what the assessable income would have been if the activity had been carried on for the full year can be made. The estimated income needs to be at least $20,000 to pass the assessable income test.

2009-10 income year

In your case, your fitness industry business commenced when you completed your industry related qualifications. You did not earn any assessable income from this activity in this year. However, you have earned over $20,000 in the first five months of the 2010-11 income years. This shows that the assessable income test was passed in the first five months of the business's operations.

Based on the 2010-11 income year sales figures, to date, the Commissioner is satisfied that had you operated the business for the full 2009-10 income year you would have passed the assessable income test.

Therefore, you are entitled to offset your business losses against your other income in the 2009-10 income year.

When calculating your business loss, you can only include those expenses that were incurred from when you commenced the business for tax purposes. Expenses incurred prior to then are preparatory in nature and not deductible.

2010-11 income year

The 2010-11 income year is still in progress and you have not yet determined if you will make a profit or loss from your fitness industry based activities.

Your sales figures to date exceed $20,000, therefore you will meet the assessable income test in the 2010-11 income year.

If you make a loss, you will be able to take it into account in calculating your taxable income for the 2010-11 income year.