Private ruling: Business Loss - cessation of trade
Published: June 2012
Ruling period: Year ended 30 June 2010
Date scheme commenced: 1 July 2008

Ruling: Q1: 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 activities in the calculation of your taxable income for the 2009-10 financial year? | A1: No

Relevant facts and circumstances: In early 2009 you commenced a business. You entered into an agreement with X Pty Ltd. You purchased more than 20 machines from X Pty Ltd. You took possession of the machines at the commencement of your business. The machines were located as follows: * machines were at location F. * machines were at location G * machines were in storage. As part of the agreement with X Pty Ltd, you paid monthly rent payments to X Pty Ltd, which were to be passed onto location F to allow your machines to be at their location. You later learned that X Pty Ltd was not passing your monthly rental payments to location F as required under the agreement. In early 2010, location F seized your * machines in lieu of rent owing. Two weeks after location F seized your machines, you decided to remove the remaining machines from location G and placed them into storage with the stored machines. X Pty Ltd has since gone into liquidation. The previous directors of X Pty Ltd formed a new company, Y Pty Ltd. You returned your * machines from X Pty Ltd to Y Pty Ltd on the promise of receiving * new machines from Y Pty Ltd. This promise has not yet been fulfilled. Your business ceased in the 2009-10 income year. Your income for non-commercial loss purposes was less than $250,000 in the 2009-10 financial year.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 35 Income Tax Assessment Act1997 subsection 35-10(1) | Income Tax Assessment Act 1997 subsection 35-10(2) | Income Tax Assessment Act 1997 section 35-30 | Income Tax Assessment Act 1997 section 35-35 | Income Tax Assessment Act 1997 section 35-40 | Income Tax Assessment Act 1997 section 35-45 | Income Tax Assessment Act 1997 section 35-55

Reasons for decision: Summary: If an activity is not carried on as a business, and cannot reasonably be expected to produce assessable income, for example, it is carried on as a hobby, then you cannot claim general deductions in relation to it, regardless of the operation of Division 35 of the ITAA 1997. Whether a business is being carried on depends on the large or general impression gained ( Martin v. Federal Commissioner of Taxation (1953) 90 CLR 470; (1953) 10 ATD 226; (1953) 5 AITR 548) from looking at all the indicators of carrying on a business, and no one indicator will be decisive ( Evans v. Federal Commissioner of Taxation 89 ATC 4540; (1989) 20 ATR 922). These indicators are described in Taxation Ruling TR 97/11. In your case, you have indicated in your application that your activity is carried on as a business. This ruling has, therefore, been determined on the basis of accepting your statement that you were carrying on a business during the 2009-10 financial year. | Detailed Reasoning - Non-commercial loss provisions: Under Division 35 of the ITAA 1997, a loss made by an individual from a business activity will not be deductible in the financial year in which it arises unless certain conditions are met. Losses that cannot be taken into account in a particular year of income, because of subsection 35-10(2) of the ITAA 1997, can be applied to the extent of future profits from the business activity, or are deferred until one of the tests is passed, the discretion is exercised, or the exception applies. Under the rule in subsection 35-10(2) of the ITAA 1997 a loss made by an individual from a business activity will not be taken into account unless: · the exception in subsection 35-10(4) of the ITAA 1997 applies; or · you satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997 and one of the four tests is met; or · if you do not satisfy the income requirement or if one of the tests is not met, the Commissioner exercises the discretion in section 35-55 of the ITAA 1997. Your business activity is not a primary production activity or a professional arts business activity. Therefore, the exception does not apply. Your income for non-commercial loss purposes was less than $250,000 in the 2009-10 financial year, therefore you satisfy the income requirement. However, your business activity did not satisfy any of the four non-commercial loss tests. In broad terms, the tests require: · at least $20,000 of assessable income in that year from the business activity (section 35-30 of the ITAA 1997); · the business activity results in a tax profit in 3 of the past 5 income years (including the current year) (section 35-35 of the ITAA 1997); · at least $500,000 of real property, or an interest in real property, (excluding any private dwelling) used on a continuing basis in carrying on the business activity in that year (section 35-40 of the ITAA 1997); or · at least $100,000 of certain other assets (with some exclusions) used on a continuing basis in carrying on the business activity in that year (section 35-45 of the ITAA 1997). Your business activities did not satisfy any of the four non-commercial loss tests in the 2009-10 financial year and, is not expected to as your business activity has now ceased. | Detailed Reasoning - The Commissioner's discretion - special circumstances: Under paragraph 35-55(1)(a) of the ITAA 1997, 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 business activity. Taxation Ruling TR 2007/6 sets out the interpretation of the exercise of the Commissioners discretion under paragraph 35-55(1)(a) of the ITAA 1997. The following has been extracted from paragraphs 47 to 53 of this Ruling. Although not limited to natural disasters, paragraph 35-55(1)(a) refers to special circumstances outside the control of the business activity, including drought, flood, bushfire or some other natural disaster. Cyclones, hailstorms and tsunamis are examples of other natural disasters that would come within the scope of the paragraph. These events are taken to be special circumstances outside the control of the operators of the business activity. The special circumstances must have affected the business activity. However, the use of the word 'including' indicates that the type of circumstances to which the special circumstances limb of the discretion can potentially apply is broader than those which are natural disasters. For example, circumstances such as oil spills, chemical spray drifts, explosions, disturbances to energy supplies, government restrictions and illnesses affecting key personnel might, depending on the facts, constitute special circumstances of the type in question. In your case, you purchased * machines from X Pty Ltd and entered into an agreement with them regarding rent payments to enable you to locate * of your machines at location F. X Pty Ltd did not comply with their part of the agreement as they did not pass your rent payments to location F, and in turn your * machines were seized by location F in lieu of rent owing. It is accepted that this situation was outside your control and could be considered 'special circumstances' for the purposes of paragraph 35-55(1)(a) of the ITAA 1997. However, before the Commissioner can exercise the discretion you must be able to show that it was the special circumstances that prevented your activities from meeting one of the tests. Even when taking into account the affects of the 'special circumstances' on income received, the activity would still not have been capable of earning assessable income of greater than $20,000. The Commissioner is not satisfied that your activities would have met one of the four tests if it had not been affected by special circumstances. Therefore, the Commissioner is unable to exercise the discretion available in accordance with subsection 35-55(1) and paragraph 35-55(1)(a) of the ITAA 1997 in relation to your vending machine business activities for the 2009-10 financial year.

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