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Edited version of your private ruling
Authorisation Number: 1012504248093
Ruling
Subject: Commissioner Discretion
Question
Will the Commissioner exercise the discretion in paragraph 35-55(1)(a) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include any losses from your activity in your calculation of taxable income for the financial year ended 30 June 2013?
Answer
No.
This ruling applies for the following period:
Year ended 30 June 2013
The scheme commenced on
1 July 2011
Relevant facts and circumstances
You satisfy the income requirement set out in subsection 35-10(2E) of the ITAA 1997.
You invented several products. You took these to industry to produce however offers made were below market value.
Over the last decade you have sought licensees with no success and have received no income from your activity.
Your time outside your paid employment is spent in the pursuit of the activity and you have spent considerable amounts in these pursuits. You have a website promoting the product however you cannot afford to develop further technology to support your portfolio.
Relevant legislative provisions
Income Tax Assessment Act 1997 paragraph 35-55(1)(a)
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)
Reasons for decision
Taxation Ruling TR 97/11 is about whether a taxpayer is carrying on a business.
TR 97/11 states the question of whether a person is carrying on a business is determined by the facts in each individual case. This is done by considering the following factors that have been used in court cases:
· the nature of the activities, particularly whether they have the potential of profit making;
· the repetition and regularity of the activities;
· organisation in a business-like manner, the keeping of books or records and the use of a system;
· the volume of the operations; and
· the amount of capital employed.
TR 97/11 states the indicators must be considered in combination and as a whole and whether a business is being carried on depends on the 'large or general impression gained' ( Martin v. FC of T (1953) 90 CLR 470 at 474; 5 AITR 548 at 551) from looking at all the indicators, and whether these factors provide the operations with a 'commercial flavour' ( Ferguson v. FC of T (1979) 37 FLR 310 at 325; 79 ATC 4261 at 4271; (1979) 9 ATR 873 at 884). However, the weighting to be given to each indicator may vary from case to case.
As shown in the legal cases and the views of the Commissioner listed above, the indicators with the greatest weighting are the scale or volume of operations and the repetition and regularity of the activities. The fact of profit making is not a salient indicator (although, as stated in TR 97/11, where an activity looks like it will never produce a profit, the activity will not amount to a business).
In your situation, the Commissioner considers you are not carrying on a business. You derived no income from your activity for many years and although you perform some of the activities required for the management of the product, the size and scale of your activities is not considered to be extensive enough to amount to a business for tax purposes.
Non-commercial losses
Under paragraph 35-55(1) of the ITAA 1997, the Commissioner's discretion can be exercised where the business activity satisfies four requirements. These are:
a) the business activity has started to be carried on; and
b) the business activity was or will be affected in that or those income years by special circumstances outside the control of the operators of the business activity, including drought, flood, bushfire or some other natural disaster; or
c) because of its nature it has not yet satisfied a test in Division 35; and
d) there is an objective expectation that within a period that is commercially viable for the industry concerned it will pass one of the tests or make a tax profit.
In your circumstances your activity is not considered to be carrying on a business. Therefore under subsection 35-55(1) of the ITAA 1997, the Commissioner's discretion can not be exercised.