Edited version of private advice

Authorisation Number: 1052217558635

Date of advice: 05 February 2024

Ruling

Subject: Business deductions

Question 1

Are you entitled to apply the temporary full expensing (TFE) measures under Subdivision 40-BB of the Income Tax (Transitional Provisions) Act 1997 (ITTP 1997) to deduct in full the cost of your second-hand cars as a depreciating asset for the 2022-23 income year?

Answer

Yes.

Question 2

Are you eligible to offset your business loss against your salary and wages as a non-commercial business loss under Division 35 of the Income Tax Assessment Act 1997 (ITAA 1997) for the 2022-23 income year?

Answer

Yes.

Question 3

Are you entitled to register for an Australian Business Number (ABN) under section 8 of A New Tax System (Australian Business Number) Act 1999 (ABN Act)?

Answer

Yes

This ruling applies for the following period:

Period Ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

Your primary source of income for the relevant income year was earned as a PAYG employee in a specified role.

Your taxable income, reportable fringe benefits, reportable super contributions, and total net investment losses in the relevant income year was less than $250,000.

You hold a degree in marketing.

In a specified month you conceptualised a business venture centred around the purchasing and sharing of passenger vehicles on a peer-to-peer car-sharing platform (the platform).

This platform is a digital platform that is a conduit between vehicle owners and prospective clients seeking to rent vehicles.

You carried out market research, comprehensive cost/benefit analysis and thorough feasibility assessments which informed your decision that the business venture had the potential for profit.

You carried out your research using the following resources:

•         Earning estimations provided by the platform on their website.

•         Your own research through tracking the number of bookings on similar cars in different suburbs to estimate and optimise income.

•         Online information showing high demand suburbs and seasonal demand.

•         Online data and information with costs of maintenance, service, and repairs

You did not borrow any funds or draw on any credit to purchase the second-hand vehicles.

You have a business plan.

In a specified month you purchased a second-hand passenger vehicle and subsequently utilised this vehicle through the platform.

You completed a trial period for a specified length of time, and deemed the activity was aligned favourably with your business model.

In a specified month, you acquired another second-hand vehicle.

You became aware of Temporary Full Expensing (TFE) provisions which motivated you to acquire an additional 3 second-hand vehicles.

Vehicles can be rented for a few hours, a day, or a couple of days.

You provided the details on the amount you charge for the renting of the vehicles.

The bookings are made online directly through the platform.

Rentals payments are facilitated through the platform and rental fees are paid directly to the platform.

The platform deducts a commission and distributes the rest to the vehicle owner. You provided the percentage of commission they deduct.

Your income from the car sharing activity is deposited into your personal bank account.

You provided the individual purchase price of each second-hand vehicle.

All vehicles were exclusively used for the car rental activity and were in a specified location.

The vehicles were made immediately available for rent on the platform. You provided for each vehicle the make, registration, and the date it was made available on the platform.

You provided the average number of hours spent per day and per week on the car rental activity.

You had a specified number of bookings in the relevant income year.

You provided the percentage of time the vehicles were rented for during the relevant income year.

You updated the Compulsory Third Party (CTP) insurance registrations for all vehicles with the relevant agency to align with the business classification (5d) as per the platform requirements.

This registration covers vehicles to be rented out and has a higher premium due to the higher risk of accidents as the car is driven by multiple drivers.

You created digital and print marketing content to promote your activity through digital marketing on social media and through flyers distributed in your neighbourhood.

You kept records of tax invoices, details related to bookings, earnings, expenditures, platform fees, service, repair, cleaning, and fuel costs.

The platform provides monthly details of each booking on a spreadsheet which you download on a monthly basis to track income and booking details for each car. The report includes details such as booking start and finish time, distance driven and fuel costs.

You maintain an online calendar of when each car is due for service, tyre and battery replacements as well as safety checks.

You provided the total assessable income from the rental activity for the relevant income year.

You provided the total expenses for the relevant income year. The expenses were made up of the following:

•         Carwash

•         Fuel

•         Parking Fees

•         Registration Fees

•         Maintenance and Marketing

•         The platform Fees and Commission

You provided an estimate assessable income amount for the car rental activity for the relevant income year.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 35

Income Tax Assessment Act 1997 subsection 35-10(2)

Income Tax Assessment Act 1997 subsection 35-10(2E)

Income Tax Assessment Act 1997 subsection 35-30

Income Tax Assessment Act 1997 Division 40

Income Tax Assessment Act 1997 subsection 40-25

Income Tax Assessment Act 1997 subsection 40-230

Income Tax Assessment Act 1997 subsection 328-110(1)

Income Tax Assessment Act 1997 subsection 995-1

Income Tax (Transitional Provisions) Act 1997 subdivision 40-BB

Income Tax (Transitional Provisions) Act 1997 subsection 40-150

Income Tax (Transitional Provisions) Act 1997 subsection 40-160

Income Tax (Transitional Provisions) Act 1997 subsection 40-230

A new Tax System (Australian Business Number) subsection 8

Reasons for decision

Question 1

Summary

You meet the eligibility criteria outlined in Division 40-BB of the Income Tax (Transitional Provisions) Act 1997, to claim an immediate deduction for the cost of purchasing a second-hand motor vehicle for business under temporary full expensing. Therefore, an upfront deduction for the total cost of all your second-hand motor vehicles is allowed for the relevant income year.

Detailed reasoning

For the purposes of Division 40, the TFE rules in Subdivision 40-BB of the ITTP 1997 modify the decline in value of qualifying depreciating assets held for an income year by allowing eligible entities to claim an upfront deduction for the cost of those depreciating assets.

Section 40-25 of the ITAA 1997 allows deductions for the decline in value of depreciating assets to the extent the asset's decline in value is attributable to its use, or it being installed ready for use, for a taxable purpose.

Eligible entity

Section 40-155 of the ITTP 1997 requires an entity accessing TFE to be a 'small business entity'.

Section 328-110(1) of the ITAA 1997 states:

'You are a small business entity for an income year (the current year) if:

(a)   You carry on a business in the current year; and

(b)   One or both of the following applies:

                        (i)    you carried on a business in the income year (the previous year) before the current year and

                       (ii)    your aggregated turnover for the previous year was less than $10 million.

Your aggregated turnover for the current year is likely to be less than $10 million.

Are you in business?

Subsection 995-1(1) of the ITAA 1997 defines 'business' to include '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 any guidance for determining whether the nature, extent, and manner of undertaking those activities amount to the carrying on of a business.

Taxation Ruling TR 97/11 Income Tax: am I carrying on a business of primary production? (TR 97/11) provides the Commissioner's view of the factors used to determine if a taxpayer is in business for tax purposes. In the Commissioner's view, the factors that are considered important in determining the question of business activity as outlined in TR 97/11 are as follows:

§  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 regularity and repetition of the activity.

§  whether the activity is of the same kind and carried on in a similar manner to that of ordinary trade in that line of business.

§  whether the activity is planned, organised and carried on in a businesslike manner such that it is described as 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 sporting activity.

The above factors must be considered in light of one another, with no single factor being determinative of whether the taxpayer is engaged in carrying on a business. Even where any one factor is not present, this will not necessarily mean that a business is not carried on: Evans v. Federal Commissioner of Taxation (1989) 20 ATR 922.

Considering the information provided against the indicators outlined in TR 97/11, the overall impression is that you are carrying on a business of renting second-hand cars. The factors or indicators that give the overall impression that your activities are carried on in a businesslike manner are as follows:

•         You have a business plan.

•         You conduct your car rental activities with the intent of profit.

•         You actively market your business activity through multiple channels to increase revenue and profit.

•         You purchased more vehicles after your trial to increase the size and scale of your operations.

•         You spend a significant amount of hours each week on your activities showing regularity and repetition.

•         You maintain detailed records of bookings, earnings, expenditures, platform fees, service, repair, cleaning, and fuel costs.

As you are considered to be running a business and your aggregated turnover for the income year is less than $10 million you are a small business entity as per 328-110 of the ITAA 1997. Therefore, you meet the eligible entity requirements under Subdivision 40-BB of the ITTPA 1997.

Eligible assets

To be eligible for TFE, the depreciating asset must be:

•         New or second-hand (if it is a second-hand asset, your aggregated turnover is below $50 million).

•         First held by you at or after 7.30pm AEDT on 6 October 2020.

•         First used or installed ready for use by you for a taxable purpose between 7.30pm AEDT on 6 October 2020 and 30 June 2023.

Law Companion Ruling LCR 2021/3 Temporary full expensing (LCR 2021/3) is about provisions for temporary full expensing (TFE) of depreciating assets. LCR 2021/3 paragraph 144 to 145 explains that:

'Most depreciating assets will be eligible. Some of the exclusions applicable to larger entities also apply to small business entities (see the excluded assets in paragraph 41 of this Ruling). There are also exclusions that apply specifically to small business entities under the simplified depreciation rules:

•         assets leased or expected to be leased predominantly on a depreciating asset lease.

•         horticultural plants.

•         primary production assets where a choice has been made to deduct amounts under Subdivisions 40-F or 40-G of the ITAA 1997.

•         certain assets in a low-value pool or software development pool.

•         assets for which a notional decline in value deduction gives rise to an R&D tax offset, and

•         second-hand assets used to produce income from residential property.'

Depreciating asset lease

A 'depreciating asset lease' is defined in subsection 995-1(1) of the ITAA 1997 as:

'An agreement (including a renewal of an agreement) under which the entity that holds the depreciating asset grants a right to use the asset to another entity. However, a depreciating asset leasedoes not include a hire purchase agreement or a short-term hire agreement.'

The term 'short-term hire agreement' is defined in subsection 995-1(1) of the ITAA 1997 as follows:

'A short-term hire agreementis an agreement for the intermittent hire of an asset on an hourly, daily, weekly or monthly basis. However, an agreement for the hire of an asset is not a short-term hire agreementif, having regard to any other agreements for the hire of the same asset to the same entity or an associate of that entity, there is a substantial continuity of hiring so that the agreements together are for longer than a short-term basis.'

The Explanatory Memorandum to the New Business Tax System (Simplified Tax System) Act 2001 (the Explanatory Memorandum) introduced Division 328 of the ITAA 1997 in respect of the simplified tax system. The Explanatory Memorandum is relevant in considering the interpretation of the exclusion to a 'short-term hire agreement'. The Explanatory Memorandum states:

5.26...Short-term hirings of the same asset to the same entity, or associates of that entity, will not be regarded as a short-term hire agreement if they are reasonably continuous and total a period longer than a few months.

In this instance, the cars are rented on an hourly, daily, or weekly basis. As per your booking history provided for the relevant income year, the longest booking period by one entity was for a specific number of hours which does not represent a period longer than a few months.

Eligible asset conclusion

In your circumstances, each asset was first held by you after 7.30pm AEDT 6 October 2020 and was first installed and ready for a taxable purpose prior to 30 June 2023.

The hiring out of the second-hand cars is considered a 'short-term hire agreement' not a 'depreciating asset lease' for the purpose of calculating a depreciating asset under subsection 328-175(6) of the ITAA 1997.

Consequently, the assets meet the asset eligibility requirements under Subdivision 40-BB of the ITTPA 1997.

Taxable Use

Section 328-205 of the ITAA 1997 provides that you must for the first income year for which you are, or last were, a small business entity, make a reasonable estimate for that year of the proportion you will use, or have installed ready for use, each depreciating asset that you held just before, and at the start of, that year for a taxable purpose if:

(a)  the asset has not previously been allocated to your * general small business pool; and

(b)  you have started to use it, or have it installed ready for use, for a taxable purpose; and

(c)   you have chosen to calculate your deductions for it under this Subdivision.

Note 1: That proportion will be 100% for an asset that you expect to use, or have installed ready for use, solely for a taxable purpose.

You have advised that the second-hand vehicles are used solely for business purposes, therefore your taxable proportion will be 100%.

Car Limit

The cost of a depreciating asset has two elements. The first element of the cost is worked out under Subdivision 40-C of the ITAA 1997 as at the time you start to hold the asset and includes amounts you have taken to have paid to hold the asset, such as the acquisition price.

Section 40-230 of the ITAA 1997, where applicable, adjusts the first element of the cost of a car that is designed mainly for carrying passengers down to the car limit for the income year in which you started to hold it, if its cost exceeds that limit. The car limit for the 20yy-yy income year is $64,741.

You provided the purchase price of each vehicle, and each vehicle purchase price was below the limit amount of $64,741.

As each vehicle is below the car cost limit of $64,741, you are entitled to claim a deduction for the full cost of all the second-hand vehicles.

Conclusion

You meet the eligible entity and eligible asset requirements under Division 40-BB of the ITTPA 1997 to deduct in full the cost of all the second-hand motor vehicles as a depreciating asset for the relevant income year.

Question 2

Summary

You are eligible to apply your business loss against your salary and wages for the relevant income year as you meet the income requirement under section 35-10(2E) of ITAA 1997 and satisfy the assessable income test under section 35-30 of the ITAA 1997.

Detailed Reasoning

Where a person has a business loss, Division 35 of the ITAA 1997 needs to be considered.

Division 35 of the ITAA 1997 prevents losses from a non-commercial business activity carried out by an individual taxpayer (alone or in partnership) from being offset against other assessable income in the year in which the loss is incurred, unless:

•         the individual meets the income requirement, and the business activity satisfies one of the stipulated tests (paragraph 35-10(1)(a))

•         an exception in subsection 35-10(4) applies; or

•         the Commissioner exercises the discretion in subsection 35-55(1) for the business activity for one or more income years.

Income Requirement

Subsection 35-10(2E) outlines that you satisfy the income requirements for an income year if the sum of the following is less than $250,000:

(a)  your taxable income for that year, disregarding your assessable FHSS released amount for that year;

(b)  your reportable fringe benefits total for that year;

(c)   your reportable superannuation contributions for that year;

(d)  your total net investment losses for that year

If you meet the income requirement, you must satisfy one of the 4 tests. If you pass, you can offset the loss in the year in question.

Four Tests

The 4 tests are:

•         assessable income test (section 35-30 of the ITAA 1997),

•         profits test (section 35-35 of the ITAA 1997),

•         real property test (section 35-40 of the ITAA 1997),

•         other assets test (section 35-45 of the ITAA 1997).

Section 35-30 of the ITAA 1997 specifies the assessable income test is met for an income year if:

(a)  the amount of assessable income from the business activity for the year; or

(b)  you started to carry on the business activity or stopped carrying it on, during the year - a reasonable estimate of what would have been the amount of that assessable income if you had carried on that activity throughout the year, is at least $20,000.

Application to your circumstances

In your circumstances, you met the income requirement outlined in subsection 35-10(2E), as your taxable income, reportable fringe benefits and reportable superannuation contributions but excluding your business losses did not exceed $250,000.

Your assessable business income for the relevant income year exceeded $20,000. Therefore, you met the requirement of paragraph 35-30(a) that the assessable income of your business for the relevant income year is at least $20,000.

Conclusion

As you met the income requirement and passed one of the four tests, your business loss is not subject to the deferral rule under Division 35 of the ITAA 1997 and are consequently eligible to offset your business loss against your other assessable income for the relevant income year.

Question 3

Summary

As you are carrying on an enterprise, you are entitled to register for an ABN under section 8 of the ABN Act.

Detailed reasoning

Section 8 of the ABN Act states that you are entitled to an ABN if you are:

•         Carrying on or starting an enterprise in Australia

•         Making supplies connected with Australia's indirect tax zone

•         A corporations Act company

Miscellaneous Taxation Ruling MT 2006/1:The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number (MT 2006/1) paragraph 150 states:

"Subsection 9-20(1) of the GST Act provides that an enterprise is an activity, or a series of activities, done:

(a)  in the form of a business; or

(b)  in the form of an adventure or concern in the nature of trade; or

(c)   on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property; or

(d)  by the trustee of a fund that is covered by, or by an authority or institution that is covered by, Subdivision 30-B of the ITAA 1997 and to which deductible gifts can be made; or

(e)  by a trustee of a *complying superannuation fund or, if there is no trustee of the fund, by a person who manages the fund,

(f)    by a charity; or

(g)  by the Commonwealth, a State or a Territory, or by a body corporate, or corporation sole, established for a public purpose by or under a law of the Commonwealth, a State or a Territory; or

(h)  by a trustee of a fund covered by item 2 of the table in section 30-15 of the ITAA 1997 or of a fund that would be covered by that item if it had an ABN."

Conclusion

As you are deemed to be carrying on a business, you meet the criteria for carrying on an enterprise in Australia. Consequently, you are entitled to apply for an ABN under section 8 of the ABN Act.