Edited version of private ruling

Authorisation Number: 1011815961295

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Ruling

Subject: Commissioner's discretion

Question:

Can the Commissioner exercise the discretion in subsection 35-55(1) of the Income Tax Assessment Act 1997 (ITAA 1997) in relation to your business activities for 2009-10 financial year?

Answer:

No.

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts

You entered into a verbal partnership agreement with another person.

You had met the other person through business dealings.

During discussions with this other person, a business proposal was made.

In the 2009-10 financial year, you decided to enter into the business partnership arrangement with the other person. The arrangement was a fifty/fifty split.

On the same day, you registered the business with the appropriate government department and applied for an Australian Business Number (ABN) and a tax file number (TFN) for the partnership. You also opened a business bank account in the name of the partnership.

You made out a cheque to a company, owned by the other partner, for your share of the goods.

You later received a tax invoice from the company for the purchase of the goods.

The other partner tried to persuade you to pay for more goods but you refused to until the first shipment was received.

At this point you had concerns about the actions of the other partner, who had begun making threats that you would be sued if you did not proceed with the additional orders. You contacted your solicitor on the business dealings and, on their advice; you reported the matter to the police.

When the goods were not delivered, the other partner stated that more money was needed to complete the deal.

You tried, on a number of occasions, to negotiate the return of your funds. Eventually, you agreed to dissolve the partnership with the other partner stating he would refund all monies.

To date, no money has been refunded and no assessable income has ever been produced by the partnership.

Relevant legislative provisions

Income Tax Assessment Act 1997 - Division 35

Income Tax Assessment Act 1997 - Section 8-1

Reasons for decision

The non-commercial loss provisions contained in Division 35 of the ITAA 1997 only apply to an individual, either alone or in partnership, carrying on a 'business activity' and who, in relation to that business activity, has allowable deductions in excess of assessable income for a particular year (Taxation Ruling TR 2001/14).

Business activity

Whether or not a business activity is being carried on depends on the 'large or general impression gained' and like the actual commencement date of a business, is a question of fact (Martin v FC of T (1953) 90 CLR 470 at 474; 5 AITR 548 at 551, Goodman Fielder Wattie Ltd v FC of T 91 ATC 4438 at 4446; (1991) 22 ATR 26 at 35).

For a business activity to have commenced a person must have:

· made a decision to commence the business activity

· acquired the minimum level of 'business assets' to allow that business activity to be carried on; and

· actually commenced 'business operations'.

In your case, you made a decision to commence the business activity when you entered into the verbal partnership agreement. On the same day, you established the necessary business structure by registering the business name and applying for an ABN and TFN for the partnership. You also opened a business bank account in the name of the partnership and then made an initial outlay for your share of the cost of the first shipment of goods. Based on the general impression gained from these facts, your business activities commenced in the 2009-10 financial year.

Allowable deductions

Under the general deduction provision, section 8-1 of the ITAA 1997, you can claim a deduction for expenses incurred in gaining or producing your assessable income, or necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.

You cannot claim a deduction under section 8-1 of the ITAA 1997 for expenses which are of a capital, private or domestic nature or they are incurred in gaining or producing exempt income.

In your case, you made a payment to the other partner on the assumption that the funds were to be used to purchase goods. This never happened and the funds are assumed to have been embezzled by your business partner.

This payment is considered to be your capital contribution to the partnership, and a capital payment is not an allowable deduction under section 8-1 of the ITAA 1997. As the partnership had no assessable income and no allowable deductions in the 2009-10 financial year, the partnership did not incur a loss. Therefore, the non-commercial loss provisions do not apply.