Edited version of private advice

Authorisation Number: 1051835552861

Date of advice: 23 June 2021

Ruling

Subject: Commissioner's discretion - non-commercial losses

Question 1

During the 20xx-xx and 20xx-xx financial years, were you considered to be carrying on a business in relation to your operation?

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 from your operation which includes being an influencer, social commentator, opinion maker, fashion stylist and fashion influencer activities in your calculation of taxable income for the 20xx and 20xx financial year?

Answer

Not applicable

This ruling applies for the following periods:

Year ended 30 June 20xx

Year ending 30 June 20xx

The scheme commences on:

1 July 20xx

Relevant facts and circumstances

You are located in City XX, State A.

On 1 July 20xx you commenced your media and online publishing operation.

You founded the operation with an idea to be a social commentator, opinion maker, and fashion influencer as well as offering fashion styling services and brand ambassador partnership.

You will use different forms of social media to achieve this goal.

Your target market is millennials (Generation Y) and the Generation Next (Generation Z and Alphas).

You work as a retail shop assistant.

You have provided a report prepared by Company A dated xx/xx/20xx. The report covers the analysis of media and publishing industry start-ups.

You have stated that you have been unable to attend one-on-one shopping experiences with potential clientele due to the State Government imposed lockdowns in City XX that have occurred due to Covid-19 outbreaks in 20xx and 20xx.

Apart from your website, you promote your operation on the following platforms:

•         Facebook: Where XXX people like your page, as of the writing of this ruling.

•         Instagram: Where you have XXX followers, as of the writing of this ruling.

•         Twitter: Where you have X followers, as of the writing of this ruling.

•         Linked in: Where you have XX followers, as of the writing of this ruling.

•         YouTube: Where you have X subscribers, as of the writing of this ruling.

You incurred $X of expenses for your operation in the 20xx-xx financial year.

You had one client which resulted in $X of income revenue in the 20xx-xx financial year.

You have incurred $XX of expenses from 1 July 20xx to year to date.

You have not received any income from the operation during the period 1 July 20xx to year to date.

As of the writing of this ruling, the operation has not entered into any contracts to be a Brand Ambassador.

Relevant legislative provisions

Income Tax Assessment Act 1997subsection 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 6-5

Income Tax Assessment Act 1997 section 995-1

Reasons for decision

Summary

The Commissioner will not allow you to apply a loss from your operation and activities to your assessable income as you are not currently in business.

Detailed reasoning

For the 2009-10 and later financial years, Division 35 of the Income Tax Assessment Act 1997 (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, or

•         the Commissioner exercises his discretion.

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

In your case, you are not considered to be carrying on a business at this time as you have failed to meet a number of indicators identified in Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production (TR 97/11), which are relevant when considering if a business is being carried on. It is considered your activities for the 20xx-xx and 20xx-xx financial years relating to your operation are not presently operating in line with what is expected of a business.

Detailed reason for decision

As discussed above, for Division 35 of the ITAA 1997 to apply, your activity should be carried on as a business.

Section 6-5 of the ITAA 1997 provides that a taxpayer's assessable income includes income according to ordinary concepts. Income according to ordinary concepts includes income derived from a business.

'Business' is defined in section 995-1 of the ITAA 1997 as including 'any profession, trade, employment, vocation or calling but does not include occupation as an employee'. However, this definition simply states what activities may be included in a business. It does not provide guidance for determining whether the nature, extent and manner in undertaking those activities amount to the carrying on of a business.

Where it is not clear that a business is being carried on, consideration must be given to a number of indicators which have been distilled from case law.

TR 97/11 sets out the Commissioners' view on the indicators of whether a person is carrying on a business of primary production. The indicators in this ruling can be equally applied to non-primary production activities. It states that, whilst each case will turn on its facts, the determination of the question is the result of a process of weighing all the relevant indicators. The following indicators are relevant when considering whether a business is being carried on:

a)    whether the activity has a significant commercial purpose or character;

b)    whether there is more than just an intention to engage in business;

c)    whether there is a purpose of profit as well as a prospect of profit;

d)    whether there is repetition and regularity to the activity;

e)    whether the activity is of the same kind and carried on in a similar manner to businesses in the industry;

f)     whether the activity is planned, organised and carried on in a business-like manner;

g)    the size, scale and permanency of the activity; and

h)    whether the activity is better described as a hobby or recreation.

No one indicator is decisive, and all indicators should be considered in combination and as a whole: Evans v. FC of T 89 ATC 4540; (1989) 20 ATR 922. Whether a business is being carried on will depend on the 'large or general impression gained' (Martin v. FC of T (1953) 90 CLR 470 at 474; 5 AITR 548 at 551) from looking at all the indicators, and whether those indicators provide the operations with a 'commercial flavour' (Ferguson v. FC of T 79 ATC 4261; (1979) 9 ATR 873).

Applying the relevant cases and indicators to your circumstances

Significant commercial purpose

The 'significant commercial purpose or character' indicator is closely linked to the other indicators and is a generalisation drawn from the interaction of the other indicators. It is particularly linked to the size and scale of activity, the repetition and regularity of activity and the profit indicators. A way of establishing that there is a significant commercial purpose or character is to compare the activities with those of a taxpayer who is carrying on a similar activity that is a business. Any knowledge, previous experience or skill of the taxpayer in the activity, and any advice taken by the taxpayer in the conduct of the activity should also be considered.

Your operation is to establish yourself as a published author, opinion maker, social commentator, fashion influencer and brand ambassador via various social media and other platforms.

Your operation has a business plan that contains financial predictions that extends to the year 20xx. Your forecast is that you will make losses in the first X years, however a small profit of circa $xxx is expected in year X.

You have promoted your operation on several electronic platforms such as Facebook, Instagram and YouTube. Having commenced your online operation in 20xx, however, as at the publication of this ruling, you have xxxx followers on Instagram, x followers on Twitter, xx followers on LinkedIn and x subscribers on YouTube. The numbers of follower's and/or viewers of your interactions within the social media and digital platforms are not significant commercial in numbers.

Intention of the taxpayer

Based on the business model report that you provided, you forecast that you will make $xxx profit in year 3 (20xx), $xxx in year 4 (20xx) and $xxx after year 5 (20xx). This shows that you are entering the operation with a view to making a profit.

Prospect of Profit

This is a critical factor. An intention for profit does not of itself establish a reasonable prospect of making a profit. This factor requires an examination of whether objectively there is a real prospect of making a profit from the relevant activity.

Although you forecast making a profit in the coming year, we are unable to see any evidence of income stream or potential income stream at this stage. Your operation has only shown an income of $xxx since its commencement.

As there has been no significant income generated to date, nor potential income being generated in the future, we are unable to see any prospect of profit at this time.

Repetition and regularity

The taxpayer's activities should involve repetition and regularity and have an air of permanence about them. Frequent and regular transactions are the usual feature of business operations. In Hope v. The Council of the City of Bathurst (1980) 144 CLR 1; 80 ATC 4386; (1981) 12 ATR 231, transactions were entered into on a continuous and repetitive basis which was one factor that supported that the activity in question was a business.

When reviewing your YouTube channel, between the dates of September 20xx through May 20xx, you have released at least six video's each month. In August 20xx, you released three videos. Prior to this date, the last posting of a video was November 20xx. As stated earlier, at as xx June 20xx, the number of views on your YouTube videos has been minimal, most of them having either no views, one or two views.

Organisation in a business-like manner, the keeping of books, records and the use of a system

The activities conducted by, or on behalf of the taxpayer, should be carried out in a systematic and organised manner. This will usually involve matters such as the keeping of appropriate business records by the taxpayer. If the activities are carried out on the taxpayer's behalf by someone else, there should be regular reports provided to the taxpayer on the results of those activities.

Commercial businesses generally operate in an orderly fashion, including organised sales bookings, reliable client base, consistent income stream, continuous commercial activity, control of business expenses and a plan for future growth.

You have provided us with an independent report from Company A that denotes "draft total income vs total expenditure" forecasts up to the 20xx financial year. You are expecting losses during the first two financial years, and then expect to grow the operation quite significantly to have an expected profit per year of approx. $xxxx by 20xx. You have advised us that you are unable to grow your operation currently due to the Covid-19 Victorian State Government lockdowns. You have undertaken one paid transaction where you received $xxx in the 20xx financial year. You have not received any income in 20xx-xx financial year.

You have engaged an accountant to assist with recording the operation records. You appear to be keeping records however as your expense transactions are many, and your only sale was in the 20xx financial year, we do not feel this is of a large enough scale to denote a business-like manner.

The size and scale of the activity

The larger the scale of the activity, the more likely it is that the taxpayer would be carrying on a business. However, this is not conclusive as a person may carry on a business in a small way. As the size or scale of the activity is not determinable, it is important that this indicator is not considered in isolation, but rather in conjunction with the other indicators.

An activity conducted on a small scale may constitute the carrying on of a business if the taxpayer has the purpose of making a profit, there is repetition and regularity in the taxpayers activities, the taxpayer informs itself of market conditions and the taxpayer organises its activities in a business like way through the keeping of books of account.

The scale of the activity here is not fatal to a finding of a business. Rather, as has been discussed, not having a significant commercial purpose or character, lack of income stream, repetition and regularity and prospects of profits denote the activity is not yet operating on a scale conducive to obtaining a commercially viable profit in the near future.

In conclusion

Although you have commenced your operation with the intention of generating enough sales to supply you with an income, the Commissioner feels that at this time your operation is not presently operating in line with what is expected of a business of this type.

On balance, when applying the indicators to your circumstances it is considered you have not demonstrated your activity amounts to the conduct of a business.