Edited version of your private ruling

Authorisation Number: 1012064744383

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Ruling

Subject: Carrying on a business

Question 1

Are you carrying on a business of making personal ear protection?

Answer

Yes

Question 2

Will the Commissioner exercise the discretion in section 35-55 of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include any losses from your ear plug making activities in your calculation of taxable income for the 2007-08 to 2010-11 financial years.

Answer

No

This ruling applies for the following periods:

Year ended 30 June 2009

Year ended 30 June 2010

Year ended 30 June 2011

Year ending 30 June 2012

The scheme commenced on:

1 July 2008

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.

The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:

· the application for private ruling and

· additional information you provided

You carry on an activity of making a product.

The product is made only for an individual.

You established the activity in the middle of 2009.

The start up cost for the activity was approximately a certain amount.

You have a business card with information and web address of the company that provides your materials.

You advertise by putting your business cards in shops and at swimming pool centres.

You have a stall at the local markets and at other events where you live.

You record your sales and product purchases using a spread sheet. You do yearly profit and loss statements.

You operate a separate bank account which has its own debit credit card. The account has a particular name.

You currently have full-time work as well as a part time job. This allows you only one day a week to attend to your activities.

You provided details of the income and expenditure for the 2008-09 to 2010-11 financial years:

Your income for non-commercial loss purposes is over $40,000 but below the $250,000 threshold.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 35

Income Tax Assessment Act 1997 subsection 35-10(2)

Income Tax Assessment Act 1997 subsection 35-10(2E)

Income Tax Assessment Act 1997 subsection 35-10(4)

Income Tax Assessment Act 1997 subsection 35-30

Income Tax Assessment Act 1997 subsection 35-35

Income Tax Assessment Act 1997 subsection 35-40

Income Tax Assessment Act 1997 subsection 35-45

Income Tax Assessment Act 1997 subsection 35-55(1)(a)

Income Tax Assessment Act 1997 subsection 35-55(1)(b)

Income Tax Assessment Act 1997 section 995-1

Reasons for decision

Business is defined in section 995-1 of the ITAA 1997 as 'any profession, trade, employment, vocation or calling, but does not include occupation as an employee'.

Whether a business is being carried on depends on the large or general impression gained (Martin v. Federal Commissioner of Taxation (1953) 90 CLR 470; (1953) 10 ATD 226; (1953) 5 AITR 548) from looking at all the indicators of carrying on a business, and no one indicator will be decisive (Evans v. Federal Commissioner of Taxation 89 ATC 4540; (1989) 20 ATR 922). Taxation Ruling TR 97/11 provides the Commissioners view of the factors used to determine if you are in business for tax purposes.

The question of whether a taxpayer is engaged in a business is essentially based on the facts of each taxpayer's own situation. This matter has been addressed in a number of court cases. The court cases determined that the following factors need to be considered:

(a) the nature of the activities and whether they have the purpose of profit-making (A business is ordinarily carried on for the purpose of making profits. The product produced needs to be aimed at the appropriate market. Businesses generally advertise their products by a number of different means in order to build their business and attract customers from the appropriate market.)

(b) the complexity and magnitude of the undertaking (How is the business set up, the amount of capital, equipment, research and expertise knowledge employed)

(c) the repetition and regularity of the activities (Repetition is a significant characteristic of business activities. Repetition refers to the frequency of transactions, or the number of similar transactions.)

(d) organisation in a business-like manner, the keeping of books, records and the use of a system (Generally, a business has some form of planning to set profit targets and budgets. A business generally has an appropriate office and business area as well as a record keeping system.)

(e) an intention to engage in trade regularly, routinely or systematically (Generally, businesses aim to maximise turnover through frequent and regular transactions over a lengthy period.)

(f) the volume of the taxpayer's operation and the amount of capital employed by him (The higher the volume of the activity, the more likely it is that the activity is a business. The amount of capital employed in the activity is not a determinative factor. However, the larger the amount of capital invested, the more likely the activity is a business).

There is no single factor that is determinative of the question of whether a taxpayer is carrying on a business. Each factor is taken into account and weighed one against the other.

In applying your circumstances to the above factors, we have determined that you are carrying on a business of making a product.

We based our decision on the following:

· The product is aimed at the appropriate market, for example, motorcycle shops and swimming pools

· Due to the nature of the product being made to fit each individual person, you are restricted in where you advertise and sell your product.

· Your advertising is done by dropping business cards in shops and word of mouth. You also have a display at the local markets and other events in the town where you live.

· You have a business plan for your activity.

· You maintain records showing your income and expenditure including the cost of materials. You also have profit and loss statements for each year in which you have conducted the activity.

· You only spend four days a month undertaking your activities which will be increased as your business grows.

· You intend in making the business profitable.

Considering all the indicators in combination and as a whole, the making of the product activities constitutes a business.

As it has been determined that your activities are carrying on a business, you will need to consider the non-commercial loss provisions in claiming the losses and outgoings associated with your business activities.

Non-commercial losses

Under Division 35 of the ITAA 1997, a loss made by an individual from a business activity will not be deductible in the financial year in which it arises unless certain conditions are met. 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.

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 unless: 

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

· you satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997 (applicable for 2009-10 and later financial years) and one of the four tests is met; or  

· if you do not satisfy the income requirement or if one of the tests is not met, the Commissioner exercises the discretion in section 35-55 of the ITAA 1997.

As your business is not a primary production business or a professional arts business the exception contained in subsection 35-10(4) of the ITAA 1997 does not apply.

Your income for non-commercial loss purposes is less than $250,000, therefore you satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997. However, your business activities for the 2008-09 to 2010-11 financial years did not satisfy any of the four non-commercial loss tests contained in sections 35-30 (assessable income test), 35-35 (profits test), 35-40 (real property test) and 35-45 (other assets test) of the ITAA 1997. It is not expected that your business activities will satisfy any of these tests in the 2011-12 financial year.

The Commissioner's discretion - special circumstances

Under paragraph 35-55(1)(a) of the ITAA 1997, the Commissioner's discretion can be exercised where: 

· the business activity is affected by special circumstances such that it is unable to satisfy any of the tests; and

· the special circumstances affecting the business activity are outside the control of the business activity.

Taxation Ruling TR 2007/6 sets out the interpretation of the exercise of the Commissioners discretion under paragraph 35-55(1)(a) of the ITAA 1997. The following has been extracted from paragraphs 47 to 53 of this Ruling. 

Although not limited to natural disasters, paragraph 35-55(1)(a) of the ITAA 1997 refers to special circumstances outside the control of the business activity, including drought, flood, bushfire or some other natural disaster. Cyclones, hailstorms and tsunamis are examples of other natural disasters that would come within the scope of the paragraph. These events are taken to be special circumstances outside the control of the operators of the business activity. The special circumstances must have affected the business activity.

You have not indicated in your application that your business activity was affected by special circumstances which prevented you from satisfying any of the tests.

The Commissioner's discretion - lead time 

Under paragraph 35-55(1)(b) of the ITAA 1997, the Commissioner's discretion can be exercised where: 

· the business activity has started to be carried on but because of its nature it has not satisfied, or will not satisfy, one of the tests set out in sections 35-30, 35-35, 35-40 or 35-45 of the ITAA 1997; and  

· there is an objective expectation that within a period that is commercially viable for the industry concerned the activity will meet one of the tests listed above or produce assessable income for an income year greater than the deductions attributable to it for that year.  

Taxation Ruling TR 2007/6 sets out guidelines on how the Commissioner's discretion under paragraph 35-55(1)(b) of the ITAA 1997 may be exercised. The following has been extracted from paragraphs 70 to 104 of this ruling. 

The discretion is provided to ensure that certain individuals who carry on genuine commercial businesses are not disadvantaged due to particular circumstances which prevent them from satisfying one of the tests. 

This arm of the safeguard discretion will ensure that the loss deferral rule in section 35-10 of the ITAA 1997 does not adversely impact on taxpayers who have commenced to carry on activities which by their nature require a number of years to produce assessable income. The paragraph is intended to cover a business activity that has a lead time between the commencement of the activity and the production of any assessable income. Such activities have an inherent characteristic that cannot be overcome by conducting the business activity in a different way but only by changing the nature of the business. 

For example, the discretion will not be available where the failure to make a profit is for reasons other than the nature of the business such as, a consequence of starting out on a small scale, the hours worked or the need to build a client base.

In your case, the nature of your business did not prevent it from producing assessable income in the first year it commenced.

The inability of your business activity to satisfy one of the four non-commercial loss tests is due to the small scale in which it is carried on and the amount of time spent on the activity. It was not due to lead time, as set out in paragraph 35-55(1)(b) of the ITAA 1997.

Therefore, the Commissioner will not exercise the discretion in section 35-55 of the ITAA 1997 to allow you to offset the losses made from the making of the product against your other assessable income for purposes of calculating your taxable income for the 2008-09 to 2012-13 financial years.