Edited version of private ruling

Authorisation Number: 1011766649897

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Ruling

Subject: Non commercial losses

Question

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 losses from your business activities in your calculation of taxable income for the 2008-09 and 2009-10 financial years?

Answer: No

This ruling applies for the following period

Year ended 30 June 2009

Year ended 30 June 2010

The scheme commenced on

23 June 2008

Relevant facts and circumstances

You were employed full-time. In 2007 you were diagnosed with an illness.

In 2007 you were placed on workers compensation and resigned from your employment.

After you were placed on workers compensation you started a business so as to provide income to live on and support your family.

You carried out two separate activities.

You have submitted your business was affected by your illness and the need to visit doctors, psychiatrists and try various medications.

You incurred losses in the 2008-09 and 2009-10 financial years.

You employment income from other sources increased in the 2009-10 financial year.

Your assessable income from other sources is in excess of $40,000.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 35-10.
Income Tax Assessment Act 1997 Section 35-30.
Income Tax Assessment Act 1997 Section 35-35.
Income Tax Assessment Act 1997 Section 35-40.
Income Tax Assessment Act 1997 Section 35-45.
Income Tax Assessment Act 1997 Subsection 35-55(1).
Income Tax Assessment Act 1997 Paragraph 35-55(1)(a).

Reasons for decision

Summary

The Commissioner will not exercise the discretion under paragraph 35-55(1)(a) of the ITAA 1997 in relation to your business activities on the basis that you have provided insufficient evidence that you would have met the assessable income test but for you illness for each of your business activities.

Division 35 of the ITAA 1997

Overview

Division 35 of the ITAA 1997 applies to losses from certain business activities for the 2000-01 financial year and subsequent years. Under the rule in subsection 35-10(2) of the ITAA 1997, a 'loss' made by an individual from a business activity will not be taken into account in an income year unless one of the three conditions of 35-10(1) applies, that is

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

· one of four tests in sections 35-30, 35-35, 35-40 or 35-45 of the ITAA 1997 is met or

· if one of the tests is not satisfied, the Commissioner exercises the discretion in section 35-55 of the ITAA 1997.

Generally, a 'loss' in this context is, for the income year in question, the excess of a taxpayer's allowable deductions attributable to the business activity over that taxpayer's assessable income from the business activity.

Losses that cannot be taken into account in a particular year of income, because of subsection 35-10(2) of the ITAA 1997, can be applied to the extent of future profits from the business activity, or are deferred until one of the tests is passed, the discretion is exercised, or the exception applies.

For the purposes of applying Division 35 of the ITAA 1997, subsection 35-10(3) of the ITAA 1997 allows you to group business activities 'of a similar kind'.

Exception

Under subsection 35-10(4) of the ITAA 1997, there is an Exception to the general rule in subsection 35-10(2) of the ITAA 1997 where the loss is from a primary production business activity or a professional arts business activity and the individual taxpayer has other assessable income for the income year from sources not related to that activity, of less than $40,000 (excluding any net capital gain).

As your assessable income from other sources for the income years in question is in excess of $40,000, the exception in subsection 35-10(4) of the ITAA 1997, has no relevance for the purpose of this ruling.

Tests

In broad terms, the tests require:

(a) at least $20,000 of assessable income in that year from the business activity (section 35-30 of the ITAA 1997)

(b) the business activity results in a taxation profit in three of the past five income years (including the current year) (section 35-35 of the ITAA 1997)

(c) at least $500,000 of real property, or an interest in real property, (excluding any private dwelling) is used on a continuing basis in carrying on the business activity in that year (section 35-40 of the ITAA 1997), or

(d) at least $100,000 of certain other assets (excluding cars, motor cycles and similar vehicles) are used on a continuing basis in carrying on the business activity in that year (section 35-45 of the ITAA 1997).

Business activity

Taxation Ruling TR 2001/14 contains the Commissioners view regarding the operation of Division 35 of the ITAA 1997.

Division 35 of the ITAA 1997 applies to each business activity that an individual carries on during the income year.

An activity that forms part of your overall business is not a separate business activity for the purposes of Division 35 of the ITAA 1997, unless it can stand alone as an autonomous commercial undertaking.

Whether a separate business activity is being conducted is a question of fact and overall impression.

Some of the factors that assist in determining the issue include:

· whether the different types of activities are conducted at the same location

· whether different types of assets are used for the activities, with little or no crossover

· whether the goods or services are significantly different in type, manner of production and marketing

· whether there is little interdependency between the activities, and

· whether one activity is inherently unprofitable and has little prospect of supporting the other activities.

The process of identifying business activities is done on a common sense basis without creating artificial distinctions between the various parts of the overall business.

Subsection 35-10(3) of the ITAA 1997 allows activities that are of a similar kind to be grouped together even though they may constitute separate and distinct business activities.

Whether a business activity is of a similar kind to another business activity is a question of fact and degree. It involves a comparison of the characteristics of each such as:

· the locations they are carried on

· the types of goods and services provided

· the market conditions in which the goods and services are traded

· the types of assets used in each, and

· any other features affect the conduct of the activity.

Application to your circumstances

We have determined that you conduct two separate and distinct business activities. You produce income as a performing artist and for the provision of catering services.

The activities are not similar business activities under Division 35 of the ITAA 1997. The overall impression is that the business activities are distinct in the services you provide.

As such Division 35 of the ITAA 1997 must be applied to each business activity separately.

The application of paragraph 35-55(1)(a) of the ITAA 1997 (Commissioners Discretion) to this arrangement.

Paragraph 35-55(1)(a) of the ITAA 1997 sets out the first arm of the Commissioner's discretion. The Commissioner may decide that the rule in section 35-10 does not apply to a business activity for one or more income years if the Commissioner is satisfied that it would be unreasonable to apply that rule because the business activity was or will be affected in that or those income years by special circumstances outside the control of the operators of the business activity.

Paragraph 35-55(1)(a) of the ITAA 1997 refers to 'special circumstances' outside of the control of the operators of the business activity. No exhaustive definition is given of 'special circumstances' but the paragraph does include drought, bushfire and other natural disasters.

In Taxation Ruling TR 2007/6, the Commissioner expands on his view of what would constitute special circumstances in the context of paragraph 35-55(1)(a) of the ITAA 1997, to include other events (for example, illness of the operator or employee(s)) which have significantly affected the ability of the operator to carry on the business activity.

In your application, you confirmed that you were unable to pass any of the four tests in Division 35 of the ITAA 1997 for both activities. You cite you illness as the special circumstances which prevented you from meeting the assessable income test.

It is our view that you have not shown in the 2008-09 and 2009-10 financial years that you would have met the assessable income test but for your illness. The Commissioner is not in a position to apply the discretion on that basis and the following reasons apply:

· Your illness supersedes the start of the business activities.

· For the 2008-09 financial year you would need to have more than doubled the income you earned to meet the assessable income test. Similar figures were reported for the 2009-10 income year.

· The lack of historical verification of the meeting of the assessable income test in the past from the business activities because your activities were not undertaken in previous income years.

· The difficulties faced by the Commissioner in attributing the impact of the illness to your activity due to the relatively early stages of the business activities. The loss may have been the result of factors unrelated. For example, your employment income from other sources increased in the 2009-10 financial year, which suggests you had less time to devote to promoting or undertaking your business ventures.