Edited version of your private ruling

Authorisation Number: 1012528624653

Ruling

Subject: Non commercial losses

Question 1

Will the Commissioner exercise the discretion in paragraph 35-55(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include any losses from your business activity in your calculation of taxable income for the 2012-13 to 2014-15 income years?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 2013

Year ending 30 June 2014

Year ending 30 June 2015

The scheme commences on:

1 July 2012

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 have provided a business plan relating to an on-line supply activity with a product list focusing on materials for research and development.

The products are mostly new materials which need to be imported, exported and manufactured.

To be fully compliant and in order to be able to import, export and manufacture the products, assessments need to be conducted at the Federal level. The time frame is dependent on the permit or certification required per material.

It can take between 12 to 36 months for application and review times before some materials and processes can be commercially exploited in Australia.

There are barriers to entry into your industry including the time associated with gaining the necessary permits, and the regulation and monitoring activities.

You are currently trying to get permits at the federal level to import, export and manufacture your products.

You have registered your business name. You have registered domain dames and set up a business PayPal account. You have a company credit card.

You have identified X individual and distinguishable products for the foundation product range.

Advertising campaigns have been planned.

Relevant legislative provisions

Income Tax Assessment Act 1997 paragraph 35-55(1)(b).

Reasons for decision

Summary

Division 35 of the ITAA 1997 will not apply to your activities in the in the 2012-13 to 2014-15 financial years as the activities undertaken are considered to be preliminary to the business you propose to carry on and the Commissioner's discretion is not available.

The reason your proposed business activity is not expected to pass one of the tests or produce a tax profit until the 2015-16 financial year is due to the time taken to earn the necessary permits and build up a client base and is not due to the nature of the import and retail/wholesale business. Therefore, the Commissioner is unable to exercise the discretion available in paragraph 35-55(1)(b) of the ITAA 1997 in relation to your activities for 2012-13 to 2014-15 financial years.

Detailed reasoning

In order for Division 35 of the ITAA 1997 to apply, a taxpayer must have commenced business. In determining when a business commences, there are three indicators that must be present before it can be said that a business has commenced. These are:

· •purpose, intention and decision;

· •acquisition of a business structure; and

· •commencement of business operations

We must examine the above indicators in light of the characterisation of your business activity. In Goodman Fielder Wattie Ltd v. Federal Commissioner of Taxation 29 FCR 376; (1991) 22 ATR 26; 91 ATC 4438, where claims for business deductions prior to November 1982 were at question, Hill J stated:

Critical to the resolution of the present controversy, is the characterisation of the business activity itself which is said to have commenced. It was conceded properly by the applicant that if the business claimed to be carried on by it was to be characterised as one of manufacturing and selling monoclonal antibody products, then that business did not commence until around November 1982...

For example, for a primary production activity involving the planting and cultivating of trees, then the planting of the trees could be seen as the commencement of that business. Alternatively, if your business activity is characterised as a trading activity, involving conducting services in return for a fee, the business would generally be considered to have commenced once you begin conducting the services for a fee.

The information you provided clearly indicates that your intended business activity is best characterised as a trading activity. Your intention is to import, export and manufacture products.

The indicators set out above are used to determine whether your business activity had commenced during the 2012-13 income year.

Purpose, intention and decision:

The chain of events leading to the commencement or start-up of a business activity often begins with a mere intention to establish the business activity.  This is developed by researching the proposed business and, in some instances, by experiment.  This process culminates in a final decision on whether to commence business.  However, not all businesses commence in such an orderly manner.

It is clear from the information you have provided that you have shown some commitment to a business by applying for some of the necessary permits you will require. You have registered your business name, domain dames and set up a business PayPal account. You have a company credit card.

Acquisition of a business structure:

Most business activities have a structure that provides the framework of the business.  It is usually a collection of capital assets.  What the particular capital assets are will depend on the particular business activity.

In Calkin v. CIR [1984] 1 NZLR 440 Richardson J said at 446-447:

Clearly it is not sufficient that the taxpayer has made a commitment to engage in business: he must first establish a profit-making structure and begin ordinary business operations.

For a business activity to commence, an appropriate business structure should be in place.  As to what this structure will consist of, and its size, this will be a question of fact and degree, and depend on the nature of the business activity. 

Your business activity is to be the importing, exporting and manufacture products.  You intend to run the business as a sole trader.

Commencement of Business Operations:

As noted by Brennan J in Inglis v. Federal Commissioner of Taxation (1979) 10 ATR 493; 80 ATC 4001, the level of activity is important in deciding whether a business is being carried on.  Brennan J stated at ATC 4004-4005; ATR 496-497 that:

The carrying on of a business is not a matter merely of intention.  It is a matter of activity.  Yet the degree of activity which is requisite to the carrying on of a business varies according to the circumstances in which the supposed business is being conducted.

It is accepted that, during the 2012-13 income year, you had gone beyond merely having an intention to engage in business and there had been some activity. For example, you have started the process of applying for the necessary federal permits necessary to run your business. You have registered your business name and domain names. You have planned your advertising campaigns.

However, it is important in evaluating these activities to have a proper regard to the characterisation of your proposed business. The business you proposed to commence in the 2012-13 income year was the sale of products. Therefore, until you had commenced importing, exporting and manufacturing the products, you will not have commenced business.

We consider that, during the 2012-13 financial year, your activities were preliminary to the carrying on of your intended business and you were still in the course of establishing a business. As the provisions of Division 35 of the ITAA 1997 are subject to a business being conducted the discretion at paragraph 35-55(1)(b) will not be exercised.

Further issues for you to consider

Where you cannot offset your business loss against any of your other assessable income in a financial year, your loss is simply deferred to future years. If your business makes a profit in a following year, you can offset the deferred loss against the amount of this profit.

If the nature of your activities changes in terms of size, scale and commercial character, you can apply for a private ruling in the future to determine whether your activities constitute carrying on a business.