Edited version of private advice

Authorisation Number: 1052128017709

Date of advice: 22 June 2023

Ruling

Subject: Commissioner's discretion - non-commercial loss

Question

Will the Commissioner exercise his discretion under subsection 33-55(1)(a) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include losses from your trading activity in your taxable income for the 2021-22 financial year?

Answer

No.

Summary

The Commissioner will not exercise the discretion under subsection 35-55(1) of the ITAA 1997 to allow you to include losses from an activity to offset against other assessable income in the calculation of your taxable income for the 2021-22 financial year. 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.

This ruling applies for the following period:

Year ended 30 June 2022

The scheme commenced on:

1 July 2022

Relevant facts and circumstances

You planned your trading activity on an informal basis and relied on your own expertise rather than advice from relevant authorities or technical literature. You estimated costs and profits by surveying stock on the market at the time, prices and condition, and estimated the average cost of repairs. You used your savings as an initial investment to purchase and resell items in the previous financial year. While your activity was on a smaller scale than most used trading businesses you hoped it would grow.

You did not seek expert advice or advice from the relevant authorities on market conditions or how to go about starting up a new venture in this industry in your state. You were unaware of the requirement for a licence to trade these items as part of a business activity in your state, and the training and qualifications necessary to obtain one.

You purchased items at online auctions over a short period in the relevant financial year, and then had these repaired and resold several weeks later. You bought the items at wholesale auction, repaired them yourself or paid for repairs for them, presented them for sale, and sold them after advertising through Facebook Marketplace to members of the public. You repaired and sold the items from your own home.

Purchasing the items online you were unable to inspect them and found that the condition of the items you purchased was not accurately described. The cost of the purchase and the repairs was more than you were able to sell them for, and you made a loss on the sale.

You had previously purchased and resold items in this manner in the previous financial year. You have not bought or sold any further items to date as you have had concerns about opportunities to inspect the quality of the items for sale and the profitability of reselling them.

You kept records related to your trading activity so you could reconcile your income and expenditure and comply with your taxation obligations and declare your income from this activity.

You manage your business on a cash rather than an accrual basis and will invest in accounting software when the business grows. You usually maintain digital records on your laptop. You save and keep paper invoices or receipts to assist in this process.

You bought and sold a small number of items for a loss in the relevant financial year but undertook no further trading in that for the following financial year. You made a loss on this activity in the previous financial year.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 section 995-1

Reasons for decision

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 97/11 Income 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.

We have considered the following factors in relation to your activity:

•         Your trading activity had some commercial purpose. You had an informal business plan and estimated you could make a profit based on your previous experience in this activity. You had not sought expert advice from the relevant authorities, were unaware that a license was required to legally trade these items as a business activity in your state and were unaware of the qualifications and training needed to gain that license.

•         You demonstrated more than an intention to trade by purchasing a small number of these items to trade at auction over three weeks in the relevant financial year, then repairing and reselling them several weeks later. You have not actively engaged in this activity since that time.

•         You had purpose and prospect of profit in undertaking this activity. You estimated costs and profits by surveying items on the market at the time, their price and condition, and estimated the average cost of repairs. You used your savings as an initial investment to purchase and resell items in the previous financial year.

•         There has been no regularity, repetition, or permanence to this scheme as you have not actively engaged in this activity since your initial purchase and resale of items at the start of relevant financial year.

•         Your trading activity is on a smaller scale and of a more domestic nature than ordinary trade in this line of business. You repaired and sold items to members of the public from your home and advertised them for sale on Facebook.

•         There is some level of informal planning of your activity. You accounted for your trading on a cash rather than an accrual basis. You usually maintain digital records on your laptop and save and keep paper invoices or receipts to assist in this process.

•         There is not enough information to determine if this activity was a hobby.

In this case the Commissioner is not satisfied that you were carrying on a business in relation to this trading in the relevant financial year.

Accordingly, as Division 35 of the ITAA is not applicable in this case the Commissioner will not exercise the discretion in subsection 35-55(1) of the ITAA 1997 to allow you to include losses from this activity to offset other assessable income in the calculation of your taxable income for the 2021-22 financial year.