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Ruling

Subject: Non-commercial losses

Question 1:

1. Is your partnership business activity of providing legal services and your sole trader business activity considered to be of a similar kind for non-commercial loss purposes?

Answer:

Yes.

Question 2:

2. Does the loss deferral rule in Division 35 of the Income Tax Assessment Act 1997 (ITAA 1997) apply to your business activity of providing legal services in the 2010-11 financial year?

Answer:

No.

This ruling applies for the following period

Year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts and circumstances

For several years, you had conducted your business activity, under a partnership structure with another party. The partnership has been highly profitable.

In 2011, the partnership was dissolved and you commenced practicing as a sole trader.

As a sole trader, you are providing the same services to the same clients as you did while in partnership.

Your partnership distribution for the 2010-11 financial year exceeded the loss from your sole trader business resulting in an overall profit from both activities.

You made a profit in the 2011-12 financial year from your sole trader activities.

Assumptions

None.

Relevant legislative provisions

Income Tax Assessment Act 1997 - Division 35

Income Tax Assessment Act 1997 - Section 35-10

Reasons for decision

Subsection 35-10(3) of the ITAA 1997 allows business activities to be grouped where they are activities 'of a similar kind' for non-commercial loss purposes. A similar activity may be one that has evolved from the first business activity, or it may simply be another business activity carried on in the same year, that fits the description of being 'similar'.

Business activities which are of a similar kind are those which inherently have the same nature or character. The activities must be similar; they do not need to be identical.

What will be a business activity 'of a similar kind' to another business activity is very much a question of fact and degree. The question will involve a comparison of the relevant characteristics of each, for example:

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

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

· the market(s) conditions 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 they are conducted.

In your case, you are providing the same services to the same clients using the same assets and the same professional registrations. The only change has been the location and business structure through which you operate. Therefore, your partnership business activity and your sole trader business activity are of a similar kind for non-commercial loss purposes and can be grouped to determine any profit or loss in an income year.

In your case, the 2010-11 financial year when you group your partnership distribution and your sole trader loss together you make an overall profit.

This means that the business activity is profitable overall and there is no need to identify any separate loss making activities and, hence, the loss deferral rule in Division 35 will not apply at all.