Edited version of private ruling

Authorisation Number: 1011683018165

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Ruling

Subject: deductibility of expenses

Question 1

Were you carrying on a business and, therefore, subject to the non-commercial loss provisions in the relevant income year?

Answer:

No.

Question 2

Can you claim a deduction for the rent and office consumables incurred in the period prior to your business commencing?

Answer:

Yes.

Question 3

Can you claim the registration costs of your business over a five year period?

Answer:

Yes.

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts

You have established and operate a business.

The business was registered in the relevant income year.

The lease of the premises began in the relevant income year but renovations were required before trading could commence.

The business commenced in the other income year.

You received the local council approvals required to commence trading in the other income year.

You incurred outgoings for rent, registrations and office consumables in the relevant income year.

Since commencing business, your turnover is in excess of $3,000 per week and you expect to make a profit in the other income year.

Reasons for decision

Under Division 35 of the Income Tax Assessment Act 1997 (ITAA 1997), a loss made by an individual from a business activity will not be deductible in the income year in which it arises unless certain conditions are met. If an individual is not considered to be carrying on a business in the income year, Division 35 will not apply (Taxation Ruling TR 2001/14, paragraph 10)

In your case, you registered your business name and rented premises in which to establish your business in the relevant income year. However, the required Council approvals for your business were not received until the other income year and you did not open for business until the other income year. Based on this information, it is considered that your business activities did not commence until the other income year. Therefore, you are not subject to the non-commercial loss provisions in Division 35 of the ITAA 1997 in the relevant income year in relation to the expenses you incurred. However, the expenses incurred prior to your business activities commencing may still be deductible.

Section 8-1 of the ITAA 1997 provides that a deduction is allowable for expenses incurred in gaining or producing assessable income, provided those expenses are not capital, private or domestic in nature.

The principles in relation to the deductibility of expenses incurred in gaining or producing assessable income have been established through the views taken by the Courts, Boards of Review and Administrative Appeals Tribunals.

It is not necessary that the expenditure in question should produce assessable income in the same year in which the expenditure is incurred. In Steele v. FC of T (1999) 197 CLR 459; 99 ATC 4242; (1999) 41 ATR 139, the High Court considered the deductibility of interest expenses incurred on borrowings to purchase land intended to be developed for income production. Taxation Ruling TR 2004/4, in considering the above decision, concludes that interest incurred in a period prior to the derivation of relevant assessable income will be incurred in gaining or producing the assessable income in the following circumstances:

· it is not incurred too soon, is not preliminary to the income earning activities, and is not a prelude to those activities

· it is not private or domestic

· the period of outgoings prior to the derivation of relevant assessable income is not so long, taking into account the kind of income earning activities involved, that the necessary connection between outgoings and assessable income is lost

· it is incurred with one end in view, the gaining or producing of assessable income, and

· continuing efforts are undertaken in pursuit of that end. While this does not require constant on-site development activity, the requirement is not satisfied if the venture becomes truly dormant and the holding of the asset is passive, even if there is an intention to revive the venture at some time in the future.

While TR 2004/4 refers specifically to interest payments, the same principles can be applied to other outgoings, such as rental expenses and office consumables incurred prior to a business commencing.

In your case, you incurred expenses in the relevant income year for rent and office consumables. These expenses were not incurred too soon and were not private or domestic in nature. The period between the outgoings and the derivation of assessable income in the other income year was not so long that any necessary connection was lost. The expenses were incurred with one end in view, that being the gaining or producing of assessable income from your café business, and continuing efforts were undertaken in pursuit of that end between registering your business in May and the commencement of your business in August. Therefore, the expenses incurred for rent and administration costs prior to your business activities commencing are deductible under section 8-1 of the ITAA 1997.

You also incurred the cost of registering your business in the relevant income year. The cost of registering a business name is a capital expense. Capital expenses are expenses you incur to establish, replace, enlarge or improve the business structure, as distinct from working or operating expenses. Expenses of a capital nature are not deductible under section 8-1 of the ITAA 1997. However, paragraph 40-880(2) of the ITAA 1997 allows a deduction over a five year period, in equal proportions, for capital expenditure you incur in relation to a business proposed to be carried on, starting in the year in which it is incurred. Therefore, you are entitled to claim a deduction for 20% of the cost of registering your business in the relevant income year.