Edited version of private ruling

Authorisation Number: 1011652385533

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Ruling

Subject: non-commercial losses and the Commissioner's discretion

Issue 1

Were you carrying on a business for tax purposes of providing animal related services in the year ended 30 June 2010?

Issue 2

Can you include any losses from your animal related services activity in calculating your taxable income for the year ended 30 June 2010?

No.

This ruling applies for the following period

1 July 2009 to 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts and circumstances

You established an animal related services activity during the 2009-10 income year.

The activity is part of a franchise.

You have incurred setting up costs and franchise fees.

You are building up your client base.

You maintain a diary and invoices.

You have advertised your services through letter drops and in the Yellow Pages.

You have registered your business name.

You have provided a profit and loss statement for the 2009-10 income year which showed you earned less than $20,000 of assessable income. You expect to make a profit in the 2010-11 income year.

You state the special circumstances which prevented you from meeting a test was that you had just started your business.

Your income for non-commercial loss purposes was less than $250,000 for the 2009-10 income year.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 35-10

Income Tax Assessment Act 1997 Section 35-55

Income Tax Assessment Act 1997 Section 995-1

Reasons for decision

Issue 1

Summary

It is considered that you were carrying on a business for tax purposes of providing animal related services during the year ended 30 June 2010.

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 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 of 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 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 out 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 a 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.

Application to your circumstances

Based on the information you have provided, the Commissioner has determined you were carrying on a business, for tax purposes in the 2009-10 income year, of providing animal related services as:

· your business was being conducted as part of a franchise

· your activity had regularity and repetition with visiting clients

· you advertised through letter drops and the Yellow Pages

· your main clientele was the general public as opposed to friends and family

· a market exists for this type of activity, and

· your activity cannot be better described as a hobby, form of recreation or a sporting activity.

Issue 2

Summary

The Commissioner cannot exercise his discretion under section 35-55 of the ITAA 1997 in relation to your animal related services activity for the 2009-10 income year as special circumstances did not apply. Also, your activity is not of a type (such as, a forestry plantation) which by its very nature, requires a lead time before any income is produced.

As no test was satisfied and the Commissioner's discretion has not been exercised, the loss generated from the activity should be deferred until the activity meets one of the tests set out in Division 35 of the ITAA 1997 of there is a profit from the activity.

Detailed reasoning

Division 35 of the ITAA 1997 will apply to defer a non-commercial business loss 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 the activity, or

· the individual comes within the exception to Division 35 which may apply to a primary production or professional arts business.

The discretion in section 35-55 of the ITAA 1997 may be exercised for the income year in question where the business activity is affected by special circumstances outside of the control of the operators of the business activity. Such circumstances are specifically defined to include, but are not limited to, drought, flood, bushfire or some other natural disaster.

The discretion in section 35-55 of the ITAA 1997 may also be exercised for a business activity that has started to be carried on, where, for the income year in question, because of its nature, it has not satisfied, or will not satisfy, any of the tests and there is an objective expectation, based on evidence from independent sources (if available) that, within a period that is commercially viable for the industry concerned, the activity will satisfy one of the tests or produce a tax profit.

This second discretion is intended to cover a business activity that has a lead time between the commencement of the activity and the production of any assessable income. The example given in the taxation legislation is an activity involving the planting of hardwood trees for harvest, where many years would pass before the activity could reasonably be expected to produce income.

Taxation Ruling TR 2007/6 is about the Commissioner's discretion. It states the discretion is not intended to apply where a business activity makes a loss because of factors which can apply to any business and which do not affect the ability of the activity to satisfy one of the four tests. Rather, the discretion is intended to be available for a commercial business activity that has failed, or objectively is expected to fail for a period of time, to satisfy any of the tests for certain reasons outside the control of the operator. Paragraph 139 of Taxation Ruling TR 2007/6 provides the following example:

Andrew started a clock repair business in the 2001 income year. Andrew was new to the region and the industry and had yet to establish his clientele. Andrew had intended to operate his business full time but as his funding was very limited he chose to continue with his part time employment to support himself and only worked on his business activity in his spare time. Andrew's premises are in the back of a small arcade and he only opens for business on weekends while the other shops in the arcade are open every day of the week. The arcade is not in an area that attracts business on weekends. Andrew cannot afford advertising and has so few clients that he is unable to cover his expenses and has made losses each year. Andrew's business has yet to satisfy one of the four tests. Other businesses of this type are able to satisfy a test in the first year of operation.

The inability of Andrew's business activity to satisfy any of the four tests is due to his personal business choices as to hours of business, location and advertising, not any inherent characteristics that affect clock repair businesses. Accordingly the requirement of subparagraph 35-55(1)(b)(i) is not met and the Commissioner would not exercise the discretion.

In your case, you commenced your animal related services activity during the 2009-10 income year. You do not expect to pass the assessable income test until the 2010-11 income year. Your failure to meet the assessable income test was not due to special circumstances, outside of your control, such as a natural disaster. Also, your business is not of a type (such as a forestry plantation) which by its very nature, requires a lead time before any income is produced.

Additionally, the exception does not apply to you as your animal related services are not considered to fall within the definition of a primary production or professional arts business.

Based on the information provided by you, your situation is not of the kind for which section 35-55 of the ITAA 1997 was enacted.

To conclude, the tax legislation does not permit the Commissioner to exercise his discretion in your case.