Edited version of your written advice

Authorisation Number: 1013079577911

Date of advice: 26 August 2016

Ruling

Subject: Non-commercial losses

Question 1

Are you considered to be carrying on a business in the relevant income years?

Answer

No.

Question 2

Will the Commissioner exercise the discretion in subsection 35-55(1) of the Income Tax Assessment Act 1997 (ITAA 1997) for the relevant income years?

Answer

Non-commercial loss provisions do not apply.

Question 3

Are you entitled to a deduction for the interest you incur on you loan after the property have been sold?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 2014

Year ended 30 June 2015

Year ended 30 June 2016

The scheme commences on:

1 July 2013

Relevant facts and circumstances

You owned a property that a business was being conducted on.

You sold the property and ceased operating the business.

You continued to incur interest expenses following the sale.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 subsection 35-55(1)

Reasons for decision

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.

Business

Consideration needs to be given as to whether your activities constitute a business. The term business is defined in subsection 995-1(1) of the ITAA 1997 to include any profession, trade, employment, vocation or calling, but does not include occupation as an employee.

Taxation Ruling TR 97/11 discusses the indicators to be considered when determining whether a business is being carried on. These indicators are:

• whether the activity has a significant commercial purpose of character

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

• whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity

• there is a repetition and regularity of the activity

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

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

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

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

No one indicator is decisive. The indicators must be considered in combination and as a whole.

Application to your circumstances

In your case you owned a property which was sold and the business activities ceased. Therefore, this activity does not fulfil the indicators required to be considered to be carrying on a business.

As you are no longer carrying on a business, the non-commercial loss provisions do not apply.

Paragraph 58 if TR 2001/14 states that Division 35 will only apply where a business is being carried on in a particular year and there may be amounts that are deductible even though the business activities have ceased. These otherwise allowable deductions are not subject to Division 35.

Section 8-1 of the Income Tax Assessment Act 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income or a provision of the taxation legislation excludes it.

Taxation Ruling TR 2004/4 provides the Commissioner's view on the deductibility of interest where the income-producing asset has been disposed of and the taxpayer is still liable on the balance of the loan.

In general, the interest expense will continue to be deductible where:

• the taxpayer borrowed money to acquire an income-producing asset

• the income-producing asset has been disposed of

• the proceeds from the disposal have been applied against the loan and not used for personal or non-income producing purposes

• the taxpayer does not have the legal power to repay the loan (FC of T v. Brown 99 ATC 4600, (1999) 43 ATR 1) or does not have the financial resources to repay the loan fully (FC of T v. Jones 2002 ATC 4135, (2002) 49 ATR 188), and

• is unable to avoid incurring ongoing interest liabilities.

In this situation, a nexus will continue to exist between the interest outgoings and the relevant income earning activities at least until the end of the period during which the interest cannot be avoided.

However, where it can be inferred that a taxpayer has:

• kept the loan on foot for reasons unassociated with the former income earning activities, or

• made a conscious decision to extend the loan in such a way that there is an ongoing commercial advantage to be derived from the extension which is unrelated to the attempts to earn assessable income in connection with which the debt was originally incurred,

the nexus between the outgoings and relevant income-earning activities will be broken.

We have determined that you are entitled to claim deductions for the interest expenses related to your loan.

Your obligation to pay the interest expenses arose from your former business activities. The connection with the income earning activities has not been broken because the property has been sold.

You have not kept the loan on foot for reasons unassociated with your former income earning activities. Nor have you made a conscious decision to extend your loan to gain an ongoing commercial advantage.