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Edited version of your written advice
Authorisation Number: 1013091835832
Date of advice: 20 September 2016
Ruling
Subject: Business losses
Question
Are you able to offset the losses from your business activity against your compensation payments?
Answer
No.
This ruling applies for the following periods
Year ended 30 June 20XX
Year ended 30 June 20YY
Year ended 30 June 20ZZ
The scheme commences on
1 July 20WW
Relevant facts and circumstances
You suffered an injury and accepted a compensation claim under the relevant compensation act. You were offered a redundancy and separated from your employer.
Shortly before receiving the redundancy you commenced a business activity. The business activity operated until partway through the 20YY-ZZ financial year.
The business activity did not make a profit in any year and the losses were deferred under the non-commercial loss rules.
You intend to recommence the business activity in the future.
In order to receive compensation payments, you must participate in a rehabilitation plan. If you do not participate you do not receive any compensation payment.
Your weekly compensation payment is calculated as follows:
(adjustment percentage * normal weekly earnings) - amount earned in that week
The adjustment percentage changes depending on whether you are able to work and the number of hours you are employed or self-employed during the week. The greater the number of hours, the larger the adjustment percentage.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1
Reasons for decision
Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 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 of domestic nature, or relate to the earning of exempt income.
A number of significant court decisions have determined that for an expense to be an allowable deduction:
• it must have the essential character of an outgoing incurred in gaining assessable income or, in other words, or an income-producing expense (Lunney v. FC of T 1958) 100 CLR 478),
• there must be a nexus between the outgoing and the assessable income so that the outgoing is incidental and relevant to the gaining of assessable income (Ronpibon Tin NL v. FC of T (1949) 78 CLR 47), and
• it is necessary to determine the connection between the particular outgoing and the operations or activities by which the taxpayer most directly gains or produces his or her assessable income (Charles Moore Co (WA) Pty Ltd v. FC of T (1956) 95 CLR 344; FC of T v. Hatchett 71 ATC 4184).
You have incurred losses from your business activities which were deferred under the non-commercial loss rules contained in the taxation legislation. The losses could only be offset against your compensation income where the business activity expenses relate to the earning of that compensation income.
Your weekly compensation payment is calculated as a percentage of your normal weekly earnings less your actual earnings. The percentage used changes depending on whether you were employed or self-employed and the number of hours worked compared to your normal weekly hours. The more hours worked in the week, the higher the percentage.
Whilst it is acknowledged that carrying out your business activity results in a higher percentage of your normal weekly earnings being used to calculate the compensation payment, we consider the expenses were incurred for the purpose of earning assessable business income.
The fact that compensation payment calculation takes into consideration whether you are in participating in a rehabilitation program, paid employment or are self-employed in determining your weekly compensation payment does not create a nexus between the expenses relating to that employment/self-employment and the compensation the compensation payment.
As such, you are unable to offset the excess of the business activity expenses (that is, the business loss) against the compensation income.