Edited version of private advice

Authorisation Number: 1052038381474

Date of advice: 27 September 2022

Ruling

Subject: Commissioner's discretion - non-commercial losses

Question

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

Answer

No

This ruling applies for the following period:

Year of income ended 30 June 20YY

The scheme commences on:

1 July 20YY

Relevant facts and circumstances

You purchased land with the intention of building a duplex and Torrens Title subdivision. The land was the only asset purchased in relation to the property development. The land was purchased in both your name and your spouse's name, with both of you having a 50% interest in the title.

The contract for the build was signed on the DD MM YYYY with a X week build period.

You advised that the property was meant to be built by MM YYYY and listed for sale by MM YYYY so that settlement would be completed by MM YYYY.

You experienced construction delays due to the pandemic and that the build was not finalised until late MM YYYY, due to a shortage of materials and labour.

Your real estate agent advised that due to the location of the property, it should not be listed for sale until completed. The property was listed for sale in late MM YYYY. The property failed to sell and the agent advised to remove the listing from the market and relist it in MM YYYY, with an auction date to be scheduled in MM YYYY.

In the income year ended 30 June 20YY you expect to make a profit on the sale of property to be shared equally between yourself and your spouse (profit/losses to be split 50% each).

In the income year ended 30 June 20YY your income for non-commercial loss purposes is greater than $X.

ATO Form NAT 5806-11.2014 Question 7 (in Section C) includes a statement that:

'If you make the statement that you are carrying on a business, the Commissioner of Taxation may rely on it in making the private ruling. However, the Commissioner is not prevented, for the purpose of determining whether the ruling is legally binding, from making enquiries during this ruling process or at a later date to confirm this point.'

As we were not satisfied that you were 'carrying on a business', we asked you "Why was the '... purchase of land for building a duplex and Torrens title subdivision... ' a business activity? [Refer to the indicators of a business described in paragraphs 12 to 18 of TR 2007/11]"

In your response to the ATO you advised that:

•                     'Items 1 to 7 in paragraph 13 of TR 97/11 are applicable and the items listed at Paragraph 18 "indicators which suggest a business is being carried on" are also applicable, except that we did not prepare a business plan.'

•                     'There was no need for a partnership agreement.'

•                     'A partnership return was lodged each year since ownership and the costs of the land and buildings included as trading stock.'

•                     'The profit from the business will be included in the 20YY tax return.'

•                     'The partnership has an ABN and is registered for GST. Accordingly the development is a business of property development.'

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 Division35

Income Tax Assessment Act 1997 subsection35-5(2)

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

Income Tax Assessment Act 1997 paragraph 35-55(1)(a)

Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision

Question 1

Summary

The Commissioner will not exercise the discretion under subsection 35-55(1) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include losses from a business activity to offset other assessable income in the calculation of your taxable income for the year ended 30 June 20YY. The facts and circumstances you provided do not support that you are 'carrying on a business' and as such Division 35 of the ITAA 1997 is not applicable.

Detailed reasoning

For the purposes of considering the discretion in subsection 35-55(1) of the ITAA 1997 it is a requirement that Division 35 applies in the first place.

Subsection 35-5(2) of the ITAA 1997 specifies that Division 35 is not intended to apply to activities that do not amount to carrying on a business.

The Commissioner's view on whether a taxpayer is carrying on a business is set out in Taxation Ruling TR 97/11Income tax: am I carrying on a business of primary production? TR 97/11 identifies the following indicators for consideration to determine whether a taxpayer is carrying on a business:

•                     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, and

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

In determining whether a taxpayer is carrying on a business, no one indicator will be decisive. The indicators must be considered in combination and as a whole. Whether a business is being carried on depends on the large or general impressions gained from looking at all the indicators and whether these indicators provide the operations with a commercial flavour.

The following factors are not determinative in relation to whether a taxpayer is carrying on a business:

•                     they are a partner of a 'partnership' as defined in subsection 995-1(1) of the ITAA 1997 (because partners in a partnership in receipt of ordinary income or statutory income jointly are not necessarily carrying on a business);

•                     they are a partner in a partnership carrying on an 'enterprise' for ABN and GST purposes (because the term 'enterprise is defined by reference to activities (a) in the form of a business; or (b) in the form of an adventure or concern in the nature of trade - and not be reference to whether the taxpayer is carrying on a business (refer to MT 2006/1));

•                     they are a partner in a partnership that undertakes a transaction or operation with the intention of making a profit that amounts to a 'business operation or commercial transaction' for the purposes of TR 92/3 (because the profit from such an operation or transaction that is not repetitious or recurring, such that it does not amount to the 'carrying on of a business', may still constitute assessable income under section 6-5 of the ITAA 1997).

In your case, after having regard to the indicators of whether a taxpayer is carrying on a business is set out in Taxation Ruling TR 97/11 the Commissioner is not satisfied that you are carrying on a business (involving the purchase of land, building a duplex and a subdivision), as:

•                     There is an absence of any repetition or regularity of undertaking property developments of this type;

•                     The activity is not of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business - the Commissioner's approach is that an isolated husband and wife subdivision operation does not amount to 'carrying of a business'; and

•                     There is an absence of a business plan to support whether the activity is planned, organised and carried on in a businesslike manner such that is directed at making a profit.

In your case, the Commissioner is not satisfied that the correct scheme facts to be ruled upon include that you are carrying on a business in relation to the property development in question.

Accordingly, as Division 35 of the ITAA is not applicable to your circumstances the Commissioner will not exercise the discretion in subsection 35-55(1) of the ITAA 1997 to allow you to include losses from your business to offset other assessable income in the calculation of your taxable income for the 20YY income year.

Other relevant comments

•                     'a business operation or commercial transaction' for the purposes of the Myer case and TR 92/3. An operation or transaction may be entered into with a profit-making intention which characterises it as 'a business operation or commercial transaction' such that any profit from it may constitute assessable income under section 6-5 of the ITAA 1997. There is no requirement for the operation or transaction to constitute the 'carrying on a business' for this to occur. Also, the fact that an operation or transaction is 'a business operation or commercial transaction' does not mean that the operation or transaction amounts to 'carrying on a business'. This is particular where the operation or transaction does not occur as part of repetitious or recurring transactions or operations (refer to paragraph 46 of TR 92/3); and

•                     'an enterprise being carried on' for ABN and GST purposes (per MT 2006/1). The term 'enterprise' is defined by reference to activities (a) in the form of a business; or (b) in the form of an adventure or concern in the nature of trade.

Therefore, there is a lower threshold for an operation or transaction to be a 'business operation or commercial transaction' or an activity in the 'form of a business' or in the 'form of an adventure or concern in the nature of trade'.

As a result, a taxpayer may be required to have an ABN, and be registered for GST purposes, and may not be 'carrying on a business'.