Edited version of your written advice

Authorisation Number: 1012911817640

Date of advice: 13 November 2015

Ruling

Subject: Non-commercial losses

Question 1

During the 2014-15 financial year were you considered to be carrying on a business in relation to your activity (the activity)?

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 any losses in relation to the activity in your calculation of taxable income for the 2014-15 financial year?

Answer

Not applicable.

This ruling applies for the following periods

Year ended 30 June 20XX

The scheme commences on

1 November 20YY

Relevant facts and circumstances

During the relevant financial year you commenced preliminary undertakings in relation to the activity in that you:

• Applied for and was granted an ABN

• Set up a home office, including the purchase of equipment such as:

• Commercial size printer and photocopier

• Laptop

• Mobile phone

• Shredder

• Desk and chair

• Printed stationery

• Other miscellaneous equipment

You also started speaking regularly to industry experts and others engaged in this market in order to build networks and relationships within the industry.

During the relevant year, you did not receive any income from your activity or engage any clients.

You submit in your application that a medical condition prevented your business activities from occurring.

You have not yet been able to commence activities to produce income from your activity.

You have recently relocated in order to take up a full-time employed position.

You do not expect your activity to start producing any income until at least 2017.

You believe that the activity was being carried on as a business during the relevant financial year.

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(1)(a)

Income Tax Assessment Act 1997 Section 995-1

Reasons for decision

Summary

Non-commercial losses and the Commissioner's discretion

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

• the Commissioner exercises his discretion

However, for this division to apply, you must be carrying on a business.

In your case, your activities for the relevant financial year are considered preliminary to the carrying on of your intended business and are directed at conducting research and creating networks for your intended business, as well as the construction or establishment of a business structure. As such you are not considered to be carrying on a business for the relevant financial year.

Detailed reasoning

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

• the Commissioner exercises his discretion.

However, for this division to apply, your activity must be carried on as a business.

Section 995-1 of the ITAA 1997 defines 'business' as 'including any profession, trade, employment, vocation or calling, but not occupation as an employee'.

The case of Evans v. Federal Commissioner of Taxation 89 ACT 4540; (1989) 20 ATR 922 stated that whether or not an activity amounts to carrying on business for taxation purposes is a question of fact. There is no exhaustive or determinative definition which can be applied to determine this matter. The facts of each case must be examined. In Martin v. Federal Commissioner of Taxation (1953) 90 CLR 470; (1953) 10 ATD 226; (1953) 5 AITR 548, Webb J said:

The test is both subjective and objective: it is made by regarding the nature and extent of the activities under review, as well as the purpose of the individual engaging in them, and as counsel for the taxpayer put it, the determination is eventually based on the large or general impression gained.

When does a business activity commence?

The actual date of commencement of a business activity is a question of fact (Goodman Fielder Wattie Ltd v. FC of T 91 ATC 4438; (1991) 22 ATR 26) (Goodman Fielder Wattie).

For a business activity to have commenced a person must have:

• purpose, intention and decision to commence the business activity

• acquired a minimum level of business assets to allow that business activity to be carried on, and

• actually commenced business operations (Calkin v. CIR [1984] 1 NZLR 440)

We must examine the above indicators in light of the characterisation of your business activity.

In Goodman Fielder Wattie, Hill J stated at 4,447:

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, if your business activity is characterised as 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 the provision of a service, the business would generally be considered to commence once you have commenced providing this service for remuneration.

In your case it is considered that the business activity you intend to carry on is characterised as the provision of services. We can now consider the indicators set out above to determine whether this business activity has commenced.

Purpose, Intention and Decision

The intention and purpose of a taxpayer in engaging in an activity is relevant to when a business commences. However, an intention to commence a business will not determine that the business activity has actually commenced.

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 researched your proposed business activity, decided on the form of that business and had committed yourself to it.

Acquisition of a minimum level of business assets to allow that business activity to be carried on

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 and ordinary business operations must begin.

As to what the business structure will consist of, and its size, will be a question of fact and degree, and will depend on the nature of the business activity.

Your activity is the provision of services to the property market.

In your case, you have acquired the necessary capital assets in your home office to enable you to carry out your activity and although you do not yet have a client base, it is considered that you do have the necessary business structure in place for you to commence your particular business activity, albeit on a small scale to begin with.

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.

In Hadlow and FC of T [2002] AATA 1250; (2002) 2002 ATC 2294; (2002) 51 ATR 1197 the Small Taxation Claims Tribunal considered the amounts incurred by a taxpayer to research and develop a book. The question for decision was whether the activities were merely preparatory and preliminary or whether the activity had reached a stage where it was able to be characterised as a business.

In concluding that the activity was not carried on as a business in the relevant years, member Mowbray stated at paragraph 26:

Clearly Mr Hadlow has the subjective intention to carry on a business, but that is not sufficient. There must be business activity. There is a real question whether the activities to date are merely preparatory or preliminary (see Goodman Fielder Wattie at 4447), and whether the project has reached the stage where it is able to be characterised as a business. There has been much activity but

The concept of business does not equate with being busy (Goodman Fielder Wattie at 4447; 386; 339)

Mr Hadlow has researched, undertaken travel, and visited museums, libraries and farms in pursuit of a particularly interesting topic. He has expended money but has made no sales, received no advances nor signed any contracts.

It is accepted that you have gone beyond merely having an intention to engage in business, however; it is important to evaluate this activity in regards to the characterisation of your business, which is the offering of your services for sale to the general public.

The systematic and regular transactions from which you will produce revenue as part of your business operations, that is, customers actually engaging your services, has not commenced. Further you are now unsure of when your activity will start producing income.

Therefore your activities during the relevant financial year are considered preliminary to the carrying on of your intended business and were directed at preliminary activities for your intended business, and the construction or establishment of a business structure, rather than actual income producing activities.

As such you are not considered to be carrying on a business for the relevant financial year.