Edited version of private advice

Authorisation Number: 1012681621643

Ruling

Subject: Non-commercial losses and the Commissioner's discretion

Question 1

Were you carrying on a business of operating automatic teller machines (ATMs) in the 2013-14 financial year?

Answer

No.

Question 2

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 losses from your ATM operating activity in your calculation of taxable income for the 2013-14 financial year?

Answer

Not applicable

This ruling applies for the following periods:

Year ended 30 June 2014

The scheme commences on:

1 September 2009

Relevant facts and circumstances

You purchased a number of Automatic Teller Machines (ATMs) from an Australian ATM company (the deployer).

You signed an agreement with the deployer to manage the placement and day to day operation of the machines. The agreement allowed that you would be paid a minimum commission per month.

You chose to pay the deployer to take over the responsibility relating to the ongoing performance of the ATM.

According to the contract between you and the deployer, the deployer is, among other things, responsible for:

• the installation of the ATMs

• the payment of all charges, fees and expenses in operating the ATMs

• providing maintenance of the ATMs

• removing and relocating ATMs at its discretion after notifying you

• paying you either a minimum monthly amount or a certain amount per transaction whichever is greater.

According to the contract you have agreed, among other things, to:

• use the deployer's services exclusively, and

• comply with all legislative requirements.

ATMs were placed into voluntary administration during the 2011-12 income year. As a result you only received a small amount of income from your investment.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 995-1

Income Tax Assessment Act 1997 Division 35

Income Tax Assessment Act 1997 Paragraph 35-55(1)(a)

Reasons for decision

Carrying on a business

The question of whether a business is being carried on is a question of fact and degree to be determined on a case by case basis. The courts have developed a series of indicators to determine the matter, which are summarised in Taxation Ruling TR 97/11. Although TR 97/11 specifically refers to primary production, the same principles apply to all businesses. Some indicators of carrying on a business which the courts have considered to be relevant include:

• whether the activity has a significant commercial purposes or character

• whether the taxpayer has more than just an intention to engage in business

• whether there is regularity and repetition of the activity

• whether the activity is of the same kind, and carried on in a similar manner, to that of ordinary trade in that line of business

• whether the activity is planned, organised and carried on in a businesslike manner such that it is described as making a profit

• the size, scale and permanency of the activity, and

• whether the activity is better described as a hobby, a form of recreation or sporting activity.

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' from looking at all the indicators and whether these factors provide the operations with a 'commercial flavour.

However, the weighting to be given to each indicator may vary from case to case, and no one indicator will be decisive (Evans v. FC of T 89 ATC 4540; (1989) 20 ATR 922).

To be carrying on a business, a taxpayer must be involved in the activities that make up that business. This would be evidenced by an element of control over, and/or an ongoing participation in, the business. The involvement should be direct or immediate, rather than passive. The payment of expenses relating to the ownership of property would not, without more, be sufficient. In the absence of such an involvement, an owner of property would not be regarded as being engaged in the business. The mere receipt by the property owner of a payment from users for the use of the item of property would be in the nature of income from property rather than from the carrying on of a business.

The fact that the sale of ATMs may be promoted as a business opportunity does not necessarily preclude you from being an investor, notwithstanding the existence of a business plan.

The activity does not have to be profit-generating in the first year of operation or in the short term to be characterised as a business. Bowen CJ and Franki J in Ferguson at ATC 4262; ATR 876 stated that '…an immediate purpose of profit-making in a particular income year does not appear to be essential…'. Thus, where short term losses are expected it may be that a business is nevertheless carried on: see Tweddle v. FC of T (1942) 7 ATD 186; (1942) 2 AITR 360. As a result, the fact that a loss results in a particular income year does not necessarily add weight to the conclusion that the taxpayer was not carrying on a business.

In determining whether a taxpayer is carrying on a business, the number of assets the taxpayer has will be a relevant factor, but not determinative. The volume of the operations and the amount of capital employed by the taxpayer was considered in TR 97/11. However, even ATM owners with a large number of machines may not be carrying on a business if they display a lack of active participation in the activity.

A taxpayer should undertake at least minimum activities necessary to maintain a commercial quantity and quality of product for sale. Although business owners do not necessarily have to manage the day-to-day operations themselves, it is expected that they would have control over the assets and business performance.

Additionally, in reviewing the terms of a contract, both the express terms of the contract and the substance or reality of the contractual relations (in other words, the actual behaviour of the parties) are relevant. The approach under Australian common law is to find the true substance of the relationship, often referred to as the 'substance over form' approach.

It is acknowledged that where there is a management agreement in place, the day to day activities of operating a business can be attributed to the taxpayer. However, the indicators of a bona fide management agreement can include:

• the owner of the item of property shares in the risks and rewards of the business activity

• the contract for the provision of the property to the user highlights that the manager/operator is acting as the agent of the property owner in the arrangement

• the property owner derives income and incurs expenses relating to the use of the asset by third parties, and

• the property owner maintains a sufficient level of control of the property/asset.

Indicators against a bona fide management agreement can include:

• the property owner has little control over the property/asset

• rights of exclusive use of the item of property

• a right to all income with the owner being entitled to a fixed amount per month, and

• the manager/operator does not act demonstrably in best interests of the property owner but just in their own interests.

Application to your circumstances

You bought a number of ATMs and signed a contract to give the daily operation and management of the ATMs to the deployer.

This deployment means that you were not actively involved in the income producing activity. You were to have limited control of the asset, its placement, maintenance and repairs. You were to receive payments on a per transaction basis from machines. You were guaranteed a minimum monthly return on each of your ATM regardless of the number of transactions which reduced/limited your ability or incentive to be involved in the daily operation or to improve the performance.

You would have had no ability to increase your profits through cost cutting or to instigate strategies to increase revenue, which would be normal practice for an entity in business. This indicates that the elements that are usually indicative of a business are absent in the present case.

The ordinary trade in a business of operating an ATM involves maintenance, electricity connection, data connection, insurance, compliance with legislation regarding EFTPOS terminals, software upgrades, on screen advertising, collection of proceeds and engaging with the premises owners. An example would be where an ATM owner owns several ATMs, moves them around to various venues/events to maximise potential income and is actively involved in the day to day activities of the operation.

We do not consider that you carried on or were to carry on your activity in a similar manner to that of ordinary trade in that line of business. The deployment company was to plan, organise and carry out the management of your ATM in a businesslike manner. This allows the contracted payments to be made to you on a monthly basis but you have not demonstrated that you had any involvement in that planning or were to have any involvement in the management of the ATM.

As the agreement with the deployer does not display the indicators of a bona fide management agreement, the repetition and regularity of the activities would be that of the deployment company and not something that could be attributed to you.

Conclusion

After considering all of the relevant indicators discussed in TR 97/11 and the circumstances of this case, it is considered that you were not carrying on a business of operating an ATM in the 2013-14 financial year. Based on the factors above, the overall impression gained from your activity is that you were an investor rather than a business owner.

As you are not carrying on a business, Division 35 of the ITAA 1997 does not apply. Therefore the Commissioner cannot address the non-commercial loss provisions.