Edited version of private advice

Authorisation Number: 1051989879313

Date of advice: 8 June 2022

Ruling

Subject: Commissioner's discretion - non-commercial losses

Question

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 business activity in your calculation of taxable income for the 20XX income year?

Answer

No.

This ruling applies for the following period:

The year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Your income for non-commercial loss purposes is less than $250,000.

Your activity commenced part way through the income year (the relevant income year).

Your activity is providing ride-sharing services.

You had a business plan in place. You conducted research about ride-share driving and consulted with other ride-share drivers before commencing your own activity.

You drove for your ride-share activity in about 25 out of the 38 weeks left of the relevant income year after you commenced your activity.

In the weeks that you did drive, you drove an average of X hours (not much longer than 10 hours) per week. You drove regular hours on the same days each week. These hours were after work and on weekends.

The areas you drove in were in a COVID-19 lockdowns for approximately 4 weeks.

You stated that your business activity was affected by these COVID-19 lockdowns, and that your business activity was also affected outside these lockdown periods because people were choosing to stay home to reduce the risk of exposure to COVID-19, instead of travelling.

You stated that you sometimes drove for the whole evening and received no ride requests or only one ride request.

During the relevant income year, you had other employment.

To conduct your ride-share activity, you used a vehicle which you owned for personal use prior to commencing your ride-share activity. You then changed the use of the vehicle to be for personal use and ride-share use.

You purchased three assets for your vehicle, each with a value of under $100.

You provided a calculation showing that your assessable income from the ride-share activity could have been met the assessable income test if it were not for COVID-19. Your calculation was based on the average hourly rate (around $40) for a driver according to a third-party website.

You also provided an estimate of the average hourly rate from the ride-share platform's website, which is lower than the third-party website figure.

You provided the details of your actual quarterly income and expenses for your ride-share activity from the commencement of your activity until the end of the relevant income year.

You provided additional information showing your income for one particular month. This spreadsheet shows that all the income from the relevant quarter was earned on one day in that quarter.

You are not certain whether you will continue your ride-share driving activity. You are not sure when the activity will meet one of the four tests.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 35-5

Income Tax Assessment Act 1997 section 35-10

Income Tax Assessment Act 1997 section 35-55

Reasons for decision

Summary

No, the Commissioner will not exercise the discretion in paragraph 35-55(1)(a) of the ITAA 1997 because your activities did not amount to carrying on a business, and even if you were in business, the Commissioner is not satisfied that your activity would have passed one of the four tests if it weren't for COVID-19.

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 professional arts exceptions apply

•         the Commissioner exercises his discretion.

Your activity was not in primary production or professional arts, so the exceptions will not apply.

Your income for non-commercial loss purposes is less than $250,000, therefore you satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997. However, your activity has not satisfied any of the four non-commercial loss tests.

Therefore, you will be required to defer your non-commercial losses, unless the Commissioner exercises the discretion for special circumstances in paragraph 35-55(1)(a) of the ITAA 1997.

The Commissioner's discretion for special circumstances

Where the income requirement is satisfied, the Commissioner's discretion can be exercised where:

•         the business activity is affected by special circumstances, such that it is unable to satisfy any of the tests; and

•         the special circumstances affecting the business activity are outside the control of the operators of the business activity.

For the Commissioner's discretion to be considered, your activities must be business activities.

The question of whether a business is being carried on is a question of fact and degree. The courts have developed a series of indicators to determine the matter. These indicators are summarised in Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production (TR 97/11). These indicators are applicable to business activity generally.

Paragraph 13 lists the following indicators as being relevant when determining whether or not a business is being carried on:

•         whether the activity has a significant commercial purpose or 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

•         whether there is 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

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

Paragraph 16 of TR 97/11 states that the indicators must be considered in combination and as a whole. Whether a business is being carried on depends on the large or general impression gained from looking at all the indicators. Paragraph 17 highlights that where an overall profit motive appears absent and the activity does not look like it will ever produce a profit, it is unlikely that the activity will amount to a business.

If a business is being carried on, the Commissioner may then consider whether or not the discretion for special circumstances should be exercised.

Taxation Ruling TR 2007/6 Income tax: non-commercial business losses: Commissioner's discretion provides guidance on how the Commissioner's discretion for special circumstances in subsection 35-55(1)(a) of the ITAA 1997, may be exercised.

Paragraph 13 of TR 2007/6 states that special circumstances are those circumstances which are sufficiently different to distinguish them from the circumstances that occur in the normal course of conducting a business activity. Paragraph 14 of TR 2007/6 explains that they must be outside the control of the operator of the business activity. Special circumstances include, but are not limited to, drought, flood, bushfire or some other natural disaster.

To exercise the discretion, the Commissioner must be satisfied that the special circumstances materially affected the business activity, and the special circumstances were the cause of the business activity's failure to satisfy any of the four tests in Division 35. Paragraph 50 of TR 2007/6 explains that in the situation where a business activity would have failed to satisfy a test, even if the special circumstances had not occurred, it is unlikely that the Commissioner would exercise the discretion.

COVID-19

You began a ride-share activity in October 20XX. During the relevant income year, COVID-19 affected your activity.

The Commissioner accepts that COVID-19 is a special circumstance that is sufficiently different to the normal circumstances that occur in the conduct of a ride-share business, and that COVID-19 was outside your control.

However, there are two other requirements that must be met before the Commissioners discretion for special circumstances can be exercised:

1.      The Commissioner must be satisfied that there was business activity.

2.      The Commissioner must be satisfied that you have shown that it was COVID-19 that prevented your business activities from meeting one of the tests.

1. Were your activities 'business activities'?

After weighing up the indicators in TR 97/11, the Commissioner does not consider your activities during the relevant income year constitute carrying on a business. Outlined below is our consideration of the most relevant indicators in this case.

Whether you had more than just an intention to engage in business

Although you had an intention to engage in business, evidenced by the fact that you had a business plan and you consulted with other ride-share drivers before commencing your activity, we must consider how you actually conducted your activity once you commenced. More weight will be given to the other indicators outlined below.

Whether you had a purpose of profit as well as a prospect of profit from the activity

You have provided an estimate of the income a ride-share driver could earn if they drove the same number of hours as you for one year. We do not consider the third-party website a necessarily creditable source for taxation purposes. However, even if we use the third-party website figure around $40 per hour, this equates to a figure slightly in excess of $20,000 for a year of driving. If we then also apportion your actual expenses to get an estimate of expenses for one year, the total expenses will become $XX. Comparing the estimated income to the total expenses of $XX, the result is a loss, not a profit. The loss may be even greater, if we used an estimate of income from the ride-share platform in the calculation instead. This shows that there was a lack of prospect of profit from your activity.

Whether there is repetition and regularity, and size, scale and permanency of the activity

You have stated that in the weeks you did your ride-share activity, you had regular hours. This may show certain regularity. However, the information you provided also shows that you did not do your ride-share activity consistently. There were about 13 weeks that you did not drive in the 38-week period, in which only 4 weeks were in lockdowns. In addition, you are not certain whether you will continue your ride-share activity. These factors show a lack of repetition and regularity and a lack of permanency.

Furthermore, the fact that you only earnt income on one day in the first three months that you conducted your activity, may also be considered an indicator of less repetition and a smaller scale.

To conduct your ride-share activity, you used a vehicle which you owned for personal use prior to using it for your ride-share activities, and you acquired minimal additional assets for conducting the activity. These assets could be used for personal use and were not strictly used for your ride-share activity. This also shows a smaller size and scale of operation.

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

You did your ride-share activity for not much longer than 10 hours a week, and this was only outside the hours of your other employment, and these hours were not necessarily at peak times. You also only actually drove your ride-share during 25 of the 38 available weeks from the commencement of your activity. Of the 13 weeks you did not drive, the areas where you would usually drive were not in COVID-19 lockdowns for the entire period, but you have not explained why you did not drive during the 9 weeks not in lockdown. We consider that these factors show that your activity was not carried on in a similar way to other ride share drivers, or taxi drivers who are considered to be 'in business'.

We also consider that other ride-share businesses, although also affected by COVID-19, may have earnt income on more than just one day in three months of operation.

Whether the activity has a significant commercial purpose or character

The combination of the lack of prospect of profit, regularity and scale of your activity indicate that your activity did not have a significant commercial purpose or character.

The overall impression gained is that your activities did not amount to carrying on a business in the relevant income year.

2. Would you have passed the assessable income test or other tests if it weren't for COVID-19?

Even if you were carrying on a business, the Commissioner is not satisfied that your business activity would have passed one of the four tests if it were not for COVID-19.

As outlined above, you have provided information which gives an indication of what an average ride-share driver could earn if they worked the same number of hours as you per week for one year. This estimate shows assessable income of over $20,000, thus meeting the assessable income test.

However, the Commissioner does not consider that in your particular circumstances, and the way that you conducted your business activity, you would have met the $20,000 assessable income test. This is because:

•         Your actual assessable income for the relevant income year was only $XX (under $1000).

•         During the first quarter of your activity, the only income you earned was all earned on one day. This is not consistent with your claim that you drove for not much longer than 10 hours per week.

•         In the period between the commencement of your activity and the end of the relevant income year, the areas that you drove your ride-share in were only in lockdowns for approximately 4 weeks.

•         Out of the other 34 weeks in that period, when the areas you drove in were not in lockdowns, you only actually drove your ride-share for 25 of those weeks.

The combination of these factors shows that you were not conducting your ride-share activity in a way that would have passed the assessable income test even if it were not for COVID-19.

Based on the facts provided, there is no reasonable expectation that you would have met any of the other 3 tests.

Therefore, the Commissioner cannot exercise the discretion for special circumstances. Although COVID-19 and the consequent reduction in income would be considered special circumstances, the Commissioner is not satisfied that your business activity would have satisfied any tests even if this had not occurred.

Conclusion

The Commissioner will not exercise the discretion under paragraph 35-55(1)(a) for the relevant income year, because your activities did not amount to business activity, and even if you were carrying on a business, it would not have met the assessable income test, or any of the other 3 tests, even if the special circumstances did not affect the activity.

This means that any losses you made during the relevant income year cannot be offset against your other income and must instead be deferred.