Edited version of private advice

Authorisation Number: 1051969419855

Date of advice: 6 April 2022

Ruling

Subject: Commissioner's discretion - non-commercial losses

Question

Will the Commissioner exercise the discretion in paragraphs 35-55(1)(a) or 35-55(1)(c) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include any losses from your business activity in your calculation of taxable income for the income years ended 30 June 20XX and 30 June 20YY?

Answer

No

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20YY

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You do not satisfy the <$250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997.

You purchased a boat in the 20XX financial year.

You require the relevant certification from the XX Safety Authority to operate your vessel as a commercial vessel. This certification proves that the vessel is appropriately constructed and equipped to meet the stringent marine safety requirements for its intended use.

You have not yet obtained the required certification due to various delays such as:

•                COVID-19 restrictions prevented you from moving the vessel to undertake repairs and gain time on the water needed for the certification status.

•                COVID-19 caused it to take an exceptionally long time to obtain copies of the required build certification.

•                Your inexperience caused delays in finding the right people to work with to get the vessel through the certification process.

•                Your vessel had a damaged part.

You are required to invest in structural changes to your vessel, increased safety equipment, and other changes.

Your other expenses include insurance, mooring costs and depreciation. These expenses have been incurred from the date you purchased the vessel.

You are prevented from generating income with the vessel until the required certification is obtained.

Your vessel has not generated any income in the 20XX or 20YY financial years.

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 paragraph 35-55(1)(c)

Reasons for decision

Summary

The Commissioner will not exercise the discretion in paragraph 35-55(1)(a) or paragraph 35-55(1)(c) of the ITAA 1997 because your business activity had not commenced in the 20XX and 20YY financial years.

Detailed reasoning

For the 2009-10 income year and later income 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 primary production or the professional arts exception applies; or

•                the Commissioner exercises his discretion.

However, for this division to apply, your activity should 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).

A mere intention to start carrying on the business activity will not be sufficient.

The indicators above are also set out in paragraph 69A of Taxation Ruling (TR) 2001/14 Income tax: Division 35 - non-commercial business losses. These indicators must be examined 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 manufacturing and selling of a product, the business would generally be considered to commence once you have manufactured and begun selling the product.

General indicators of a boat hire business

Taxation Ruling TR 2003/4 Income tax: boat hire arrangements, sets out how the general indicators of a business activity apply to boat hire arrangements. Paragraph 19 of the ruling states:

The boat hire activity is more likely to be a business where it is carried on in a similar manner to other businesses in the industry. Features indicating that the activity is similar in this sense, include:

•                the boat is available for charter on an arms length basis;

•                the charter operators (whether the boat owner operates the activity directly or through another party) have:

-        appropriate licences;

-        appropriate permits (e.g. for marine parks, boat surveys, etc);

-        appropriate experience;

-        appropriate insurances;

-        the owner and / or operator have appropriate indemnity cover; and

•                the use of the boat is not primarily directed at private use.

Application to your circumstances

In your case, the business activity you intend to carry on may be characterised as chartering a boat.

You have made a decision to commence a boat charter business activity, and you have acquired the primary asset (the boat) to allow the boat charter business to be carried on.

However, you have not obtained the appropriate permit (the relevant certification from XX), and thus the boat cannot be operated as a commercial vessel and in turn has not been made available for charter to the general public. This indicates that you had not yet commenced business operations in the 20XX and 20YY financial years.

The Commissioner's discretion for special circumstances or lead time under paragraph 35-55(1)(a) or 35-55(1)(c) respectively, cannot be exercised for a period when your business activity had not commenced.