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Ruling

Subject: Loss incurred on the sale of goods

Question

Are you able to claim a trading loss resulting from the sale of goods held overseas?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June 2011

The scheme commenced on:

1 July 2010

Relevant facts and circumstances

You were informed by a broker that there was money to be made from trading in goods.

Initially you purchased a quantity of goods which were sold two years later realising a profit which was included in your income tax return.

Further goods were purchased and held for a number of years. The goods on hand, whilst owned by you, were at all times warehoused at locations overseas.

All goods were purchased from the broker with payment being made by cheque.

You have no control over the storage of the goods and do not issue invoices or other documentation when the goods are sold on your behalf. All documentation regarding the sale of goods was prepared by your broker.

In the 2010-11 income year you sold the remaining goods through another broker based overseas. The Australian dollar equivalent of the sale less charges was paid into your bank account. The sale generated a loss on the transaction.

The price obtained for the goods was determined by the broker offering a price and you accepting that price.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Reasons for decision

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that you can deduct from your assessable income any loss or outgoing that is incurred in gaining or producing your assessable income or is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income. However you cannot deduct a loss or outgoing that is of a capital, private or domestic nature.

For a loss to be incurred in gaining or producing the assessable income 'it is both sufficient and necessary that the occasion of the loss ... be found in whatever is productive of the assessable income or, if none be produced, would be expected to produce assessable income' (Ronpibon Tin N.L. and Tongkah Compound N.L. v. FC of T (1949) 78 CLR 47 at 57; Fletcher & Ors v. FC of T 91 ATC 4950 at 4957; (1991) 22 ATR 613 at 622).

Carrying on a business

The Commissioner's views about carrying on a business are found in Taxation Ruling TR 97/11. The ruling outlines a number of indicators that are relevant in determining whether a business is being carried on.

These indicators include:

· 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 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 sporting activity.

When considering whether a person is carrying on a business, all of the above indicators must be weighed up. Whether a business is carried on depends on the general impression gained and whether it has a commercial flavour or character.

The general impression gained of your trading activities is that they do not amount to the carrying on of a business. Your activities were limited to the purchase of a certain quantity of goods. This indicates that the activity did not have a significant commercial purpose and lacked regularity and repetition. The lack of sales over long periods also indicates that the activity was not planned, organised or carried out in a businesslike manner.

Isolated transactions

Taxation Ruling TR 92/3 advises that, in the Commissioner's view, an isolated transaction is one which refers to:

· those transactions outside the ordinary course of business of a taxpayer carrying on a business; and

· those transactions entered into by a non-business taxpayer.

We consider that a profit from an isolated transaction is generally income when both of the following elements are present (FC of T v. The Myer Emporium Ltd (1987) 163 CLR 199 at 213; 87 ATC 4363 at 4369; 18 ATR 693 at 699-700):

· the intention or purpose of the taxpayer in entering into the transaction was to make a profit or gain; and

· the transaction was entered into, and the profit was made in carrying out a business operation or commercial transaction.

Our views on the above elements are set out in detail in Taxation Ruling TR 92/3 and apply equally in considering whether a loss on an isolated transaction is deductible (see Taxation Ruling TR 92/4). The following matters are considered relevant in determining whether an isolated transaction amounts to a business operation or commercial transaction.

· the nature of the entity undertaking the operation or transaction;

· the nature and scale of other activities undertaken by the taxpayer;

· the amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained;

· the nature, scale and complexity of the operation or transaction;

· the manner in which the operation or transaction was entered into or carried out;

· the nature of any connection between the relevant taxpayer and any other party to the operation or transaction;

· if the transaction involves the acquisition and disposal of property, the nature of that property; and

· the timing of the transaction or the various steps in the transaction.

You have invested a considerable sum of money into the activity with the intention of deriving a profit and in fact returned a profit in your assessment in a prior year. The goods acquired were readily disposable and you had the means available to take advantage of any upward movement in the price obtainable. All transactions were at arms length and the manner in which you entered into the activity is indicative of a commercial transaction.

Your purchase and subsequent sale of goods is therefore considered to fall within the criteria set out in TR 92/3 for a commercial transaction to be present and accordingly the loss incurred on the transaction will be allowable under section 8-1 of the ITAA 1997.