Edited version of private ruling

Authorisation Number: 1011804285917

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Ruling

Subject: Non-commercial losses

Question

Does the Commissioner consider you are carrying on a business from the date you advertised your services for paid remuneration?

Answer

Yes.

Question

Can deductible expenses incurred after you began advertising your services for paid remuneration, be included in calculating business losses to be offset against your other income in the 2010 financial year?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 2010

The scheme commences on:

1 November 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.

Prior to starting your business, you and your business partner held numerous qualifications.

You and your business partner were professional sportspersons. During this employment you identified a need for particular services in schools.

You decided to create a business which would offer these services to clients.

You and your business partner resigned from your paid employment during the recent calendar year to concentrate on building the business. Prior to ceasing employment you were working on the business after hours and on weekends.

The business received an Australian Business Number in a particular year, and at the same time you put together a business plan. The business plan also included a partnership agreement.

Initially the short-term objective of the business was to secure a niche for your activity within national and other sporting leagues. Further, you aimed to secure a niche within grass roots sports organisations and high schools.

During your time as a professional sportsperson you formed many networks and contacts within the industry, therefore you began advertising your services for paid remuneration in the particular year with an e-marketing (email marketing) campaign. You also displayed posters advertising your services.

The first client activity of your business was a pro-bono sports coaching clinic with your ex-employer. You ceased paid employment with the employer in the recent year.

You and your business partner expanded your activity knowledge by completing training courses:

You did further pro-bono activities after you completing the relevant training course.

Your business offers numerous programs for several groups of clients and organisations.

You first received business income in July of the recent year. You received business income in excess of $20,000 in the first half of the subsequent financial year.

You meet with clients and conduct other business at your home offices. You also conduct onsite client visits and utilise local community facilities for workshops.

You market your business using the following methods:

· email marketing

· the creation of a business website

· you attend a monthly networking/advertising event

· a membership to a business group

· business cards, and

· survey monkey - conducting market research through social media sites

You are members of numerous sporting associations and organisations.

You purchased a business insurance policy in the recent year.

You have incurred various expenses relating to the setting up and running of the business.

You have opened a business bank account.

Your taxable income for non-commercial loss purposes will be under $250,000 for the recent financial year.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 35-10,

Income Tax Assessment Act 1997 Subsection 35-10(4),

Income Tax Assessment Act 1997 Section 35-30,

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

Income Tax Assessment Act 1997 Section 35-55 and

Income Tax Assessment Act 1997 Section 995-1.

Question 1

Summary

It is considered that you were carrying on a business from when you began advertising your services for paid remuneration.

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 business-like 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 business of life coaching as you have:

· the necessary skills and tertiary education qualifications relevant to deliver sport coaching courses

· embarked on an advertising campaign advertising your services for paid remuneration

· established a home office where you meet with clients, 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 life coaching business can be said to have commenced from the date you began advertising your services for paid remuneration. This is because you were not known to be able to provide the services prior to this time. Prior to that date, you were undertaking preparatory activities in establishing your business.

Question 2

Summary

You are entitled to claim your losses from your business activity against your other income in the recent financial year as the Commissioner considers that you have met the assessable income test.

Only those expenses incurred from the time that the Commissioner considers you commenced your business activity can be included in calculating your loss for the recent financial 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 recent financial year.

Detailed reasoning

For taxpayers whose income for non-commercial loss purposes is less than $250,000 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.

In your case your business commenced late in the particular year when you began advertising your services for paid remuneration. You did not earn any assessable income from this activity in the recent financial year. However, you have earned greater than $20,000 in the first six months of the subsequent financial year.

Based on the subsequent financial year sales figures to date, the Commissioner is satisfied that had you operated the business for the full recent financial year you would have passed the assessable income test.

Therefore, you are entitled to offset your business losses against your other income in the recent financial year.

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