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Ruling

Subject: Non-commercial losses

Question

Are the pharmacy activities you carry out as a sole trader and in partnership able to be grouped together because they are considered business activities of a similar kind under section 35-10(3) of the Income Tax Assessment Act 1997 (ITAA 1997)?

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

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.

You are a qualified professional.

You conduct a retail professional activity as a sole trader.

You conducted a number of similar retail professional activities in partnership.

The partnership and sole trading activities were carried out in a similar manner but at different locations, using different assets and different financial accounts.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 35-10(1)

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

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

Income Tax Assessment Act 1997 paragraph 35-55(3)

Reasons for decision

For the 2009-10 and later financial years, Division 35 of the ITAA 1997 will apply to defer a non-commercial loss from a business activity unless:

· you satisfy the income requirement and you pass one of the four tests

· the exceptions apply, or

· the Commissioner exercises his discretion.

In your situation, you do not satisfy the income requirement (that is your taxable income, reportable fringe benefits and reportable superannuation contributions but excluding your business losses, exceeds $250,000) and you do not come under any of the exceptions. Your business losses are therefore subject to the deferral rule unless the Commissioner exercises his discretion.

Generally, a non-commercial loss in this context is, the excess of a taxpayer's allowable deductions attributable to the business activity over that taxpayer's assessable income from the business activity.

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.

For the purposes of applying Division 35 of the ITAA 1997, subsection 35-10(3) of the ITAA 1997 allows you to group business activities 'of a similar kind'.

Subsection 35-10(3) of the ITAA 1997 states in applying this Division (Division 35) you may group together business activities of a similar kind. In certain situations the taxpayers business activities may be so discrete in character and in the manner they are conducted that the question arises whether they are carrying on separate and distinct business activities for Division 35 purposes. Whether this is so, is clearly a question of fact.

In deciding similarity of business activities it does not require exact identity. As discussed in paragraph 51 of Taxation Ruling TR 2001/14, determining whether business activities are of a similar kind to one another will involve comparing and contrasting them in relation to characteristics such as:

· The location(s) where they are carried on;

· The type(s) of goods and/or services provided;

· The market condition(s) in which those goods and/or services are traded;

· The type(s) of assets employed in each; and

· Any other features affecting the manner in which the activities are conducted.

Some of these characteristics may be the same for the business activities being compared, however, some difference must always be expected. The presence or absence of similarity in respect of a single characteristic will rarely be determinative (Goodfellow v. FC of T 77 ATC 4086 at 4094; (1977) 7 ATR 265 at 274). As overall comparison of the separate business activities will be called for, weighing up the extent of the characteristics which are the same or similar against those where there are significant differences.

In application to your case you carried out a retail professional activity as a sole trader and retail professional activity in partnership. Both activities were carried out in a similar fashion albeit at different locations, using different assets and keeping different accounts. It is therefore considered that these two activities are of a similar kind and are able to be grouped together under section 35-10(3) of the ITAA 1997.