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Ruling

Subject: non commercial losses

Question

Are your two business activities considered to be business activities of 'a similar kind' in relation to Division 35 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

This ruling applies for the following periods:

Year ending 30 June 2012

The scheme commences on:

1 July 2011

Relevant facts and circumstances

A few years ago you started business activity 1.

Without notice to business owners in the industry the governing body changed the rules relating to this business activity.

As a result you were required to adjust the way you carried out this business activity.

As you had land available, you decided to diversify into business activity 2.

Early in 2011, after reviewing the governing body's projections, you concluded that profitability of business activity 1 was limited.

Without a much more time consuming commitment to business activity 1 there was little chance of profitability.

In the 2010-11 financial year you made a loss from business activity 1. This business activity ceased in the 2111-12 financial year.

After researching the profitability of business activity 2, you decided that it will provide a more reliable and regular income than business activity 1 would have.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 35-10(3)

Reasons for decision

Division 35 of the ITAA 1997 prevents losses being offset against other assessable income in the year the loss is incurred. The loss is deferred.

The deferred losses may be offset in later years against profits from the activity. The deferred losses may also be offset against other income if the income requirement and one of the other tests are satisfied, or the Commissioner exercises his discretion.

Division 35 of the ITAA 1997 applies to individuals, either alone, or in partnership where a business is carried on.

Subsection 35-10(3) of the ITAA 1997 states you may group together business activities of a similar kind in applying Division 35.

Where there are distinctly separate business activities, Division 35 of the ITAA 1997 needs to be applied to each business activity separately.

Taxation Ruling TR 2001/14 considers the operation of Division 35 of the ITAA 1997.

Paragraph 38 of TR 2001/14 states:

However, while a business may be subdivided into a number of different business activities this cannot be carried out to the point where the composite term in Division 35, 'business activity', is deprived of practical meaning. An activity that forms part of a taxpayer's overall business will not be a separate 'business activity' for the purposes of Division 35 unless it is capable of standing alone as an autonomous commercial undertaking of some sort (see further paragraphs 40 to 46 on identifying separate and distinct business activities for the purposes of Division 35).

The question of whether there are one or multiple business activities is a question of fact and overall impression. There are a number of factors which can be considered to help determine whether there are one or multiple business activities. These factors include the location of each activity, the assets used in each activity, the goods and services produced by each activity, the interdependency of the activities and any commercial links between the activities.

In your case, both business activities are conducted on the same property. The assets used in each activity would, for the most part, be different; however, there may be some equipment that could be utilised in both activities. The goods produced in each activity are vastly different and service vastly different markets. The activities are not interdependent and any commercial links would be incidental. Both activities are capable of standing alone as autonomous commercial undertakings.

Based on the facts and the overall impression gained, business activity 1 and business activity 2 are considered to be two separate business activities. Consequently Division 35 of the ITAA 1997 will be applied to each business activity separately.

Deferred losses where a business has ceased.

TR 2001/14 discusses the issue of deferred losses when a business activity ceases to be carried on. It states, at paragraph 55:

In some cases an individual taxpayer's circumstances may change leaving issues about their ability to deduct the full extent of any loss made. Any amount deferred under subsection 35-10(2) will only be deductible in a subsequent year if the business activity that gave rise to this amount, or one 'of a similar kind', is carried on in that subsequent year. If the activity, or one 'of a similar kind', is never carried on again, the entitlement to deduct the amount will be lost.

In your case, you stated that business activity 1, which gave rise to your deferred losses, ceased operating in the 2011-12 financial year.

If this business activity, or one of a similar kind, is never carried on again, you will be unable to claim the losses in the future and they will be lost.