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Ruling

Subject: Deductibility of holding costs for licence

Question

Are you able to claim deductions in relation to the expenses incurred in holding the commercial licence that you lease out?

Answer

Yes.

This ruling applies for the following period

For years ended 30 June 2010 to 2012

The scheme commenced on

1 July 2009

Relevant facts

You borrowed funds to acquire a commercial licence.

Income from leasing the commercial licence to professional operators has not been sufficient to cover fees and interest incurred on borrowings undertaken for the purchase of the licence.

Since the purchase the licence has been available for lease but market conditions have precluded the licence being leased on a continuous basis with extended periods when the licence could not be leased.

You have not claimed these losses in your taxation returns for these years.

You have advertised the availability of the licence lease by word of mouth, in newspapers on a number of occasions and listed the licence with some commercial licence brokers.

The same operator has leased the licence on a continual basis since the 2009/10 income year.

Recreational use is not permitted under the licence. Consequently it has never been used for any recreational/private purpose.

Relevant legislative provisions

Income Tax Assessment Act 1997, Section 8-1

Income Tax Assessment Act 1997, Subsection 35-10(2)

Reasons for decision

Summary

You are not considered to be carrying on a business with the licence. You have an arrangement where you lease out the licence to a third party or have it available for lease and there is no other use by you of the licence. The income derived from the leasing of the licence is considered to be passive income from the investment in the licence. It is non-primary production income. Because you are not considered to be carrying on a business, the non-commercial losses provisions will not apply to this activity. Therefore the losses will not be deferred.

The income will be assessable income, as non-primary production income. The deductions will be deductible to the extent that the licence is used to derive assessable income. Because the licence cannot be used for any private purpose there is no requirement to apportion the expenses; they will be fully deductible while the licence is fully available for lease.

Detailed reasoning

Are You Carrying On A Business?

Your licence activity will only be potentially subject to the non-commercial losses provisions contained within Division 35 of the Income Tax Assessment Act 1997 (ITAA 1997) if it is carried on as a business.

It is well established that the mere activity of renting out property does not constitute the carrying on of a business (11 CTBR (O.S) Case 24 and Kennedy Holdings Pty Ltd v. FC of T 92 ATC 4918).

An example of this principle is the decision of the Administrative Appeals Tribunal in AAT Case No 10679 11/96 96 ATC 199. In this case the applicant purchased a taxi vehicle, radio and meter. A taxi-licence which would enable him to conduct his taxi operations was later transferred to him. The applicant's evidence was that he had purchased the taxi to provide his unemployed father, who was an experienced taxi driver, with a job. Immediately on acquisition, he leased the above assets to his father on a payment of a fixed sum each month, his father retaining all the proceeds from operating the taxi under their agreement. After his father gave up driving the taxi, the applicant leased the taxi on similar terms to a married couple. At no time did the applicant operate the taxi. After four years of this arrangement he sold the taxi, its attachments and taxi licence to a third person.

The question before R D Fayle, Senior Member, was whether the applicant had disposed of a 'business' for the purposes of section 160ZZR of the Income Tax Assessment Act 1936. In deciding that the applicant had not disposed of a business and that therefore this section could have no application, the Senior Member made the following conclusion on the facts of the case before him. (96 ATC 199 at 203).

In the instant case there was no activity on the part of the applicant, apart from the acquisition and leasing of the taxi. Once the lease was established he played a passive role, receiving lease rent regularly but otherwise not engaged in the affairs of the taxi. If a business was being conducted then it was by the lessees in turn. The applicant outlaid capital to acquire the taxi in the expectation of a return from its leasing. In this sense he was a passive investor taking no part in the business risk of operating the taxi.

The circumstances of this decision are comparable to your own. In your case you also have acquired an asset which is then leased to another party, who uses this asset in its own business activity and for which you have no involvement. You receive a payment of a fixed sum on an annual basis for leasing out the licence. Your payment is not related to the running of the business. The payment is in the nature of rent for the use of a capital item.

The licence activity is a passive investment and is not the carrying on of a business. There is no repetition or regularity of activities with respect to the licence. You do not have any employees, contractors or agents that perform continuing activities. You advertise the availability of the licence and enter into the lease agreement.

The lack of continuing repetition and regularity of activities shows that your acquisition of the licence was an income-producing capital investment, producing income in the form of a lease payment, rather than the carrying on of a business.

Your circumstances are consistent with the decisions in 11 CTBR (O.S) Case 24, Kennedy Holdings where the income is assessable, but the activity is not a business. As your licence lease activity is not carried on as a business, it will not be subject to the provisions in Division 35 of the ITAA 1997. Consequently any 'loss' with respect to your activity will not be deferred by the provisions of Division 35.

Passive income and expenses

If an outgoing produces no assessable income, or the amount of assessable income is less than the amount of the outgoing, it may be necessary to examine all the circumstances surrounding the expenditure to determine whether the outgoing is wholly deductible. The Commissioner's views on this are set out in Taxation Ruling TR 95/33, which examines the relevance of subjective purpose, motive or intention in determining the deductibility of losses and outgoings. If expenses are deductible, under section 8-1 of the ITAA 1997, they are only deductible to the extent that they are incurred in earning assessable income.

The essential character of an expense is a question of fact to be determined by reference to all the circumstances.

You have provided information to show that the licence was acquired for the purpose of deriving assessable income and certain expenses will be incurred on an annual basis to have it available to enter into a lease arrangement. The licence is only used for the purpose of deriving assessable income. It cannot be used for private purposes. There is no reason to restrict the deductibility of expenses incurred in holding the licence.

The expenses incurred in holding the licence will be deductible in full and are not affected by the non-commercial losses provisions.