Private ruling: Non commercial losses and the Commissioner's discretion
Published: July 2012
Ruling period: Year ended 30 June 2011
Date scheme commenced: November 2010

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 activity in your calculation of taxable income for the 2009-10 income year? | A1: No.


Relevant legislative provisions: Income Tax Assessment Act 1997 paragraph 35-55(1)(a)

Reasons for decision: Summary: In order for Division 35 of the ITAA 1997 to apply, a taxpayer must have commenced business. In determining when a business commences, there are three indicators that must be present before it can be said that a business has commenced. These are: • purpose, intention and decision; • acquisition of a business structure; and • commencement of business operations We must examine the above indicators in light of the characterisation of your business activity. In Goodman Fielder Wattie Ltd v. Federal Commissioner of Taxation 29 FCR 376; (1991) 22 ATR 26; 91 ATC 4438, where claims for business deductions prior to November 1982 were at question, Hill J stated: Critical to the resolution of the present controversy, is the characterisation of the business activity itself which is said to have commenced. It was conceded properly by the applicant that if the business claimed to be carried on by it was to be characterised as one of manufacturing and selling monoclonal antibody products, then that business did not commence until around November 1982... For example, for a primary production activity involving the planting and cultivating of trees, then the planting of the trees could be seen as the commencement of that business. Alternatively, if your business activity is characterised as a trading activity, involving conducting services in return for a fee, the business would generally be considered to have commenced once you begin conducting the services for a fee. The information you provided clearly indicates that your intended business activity was best characterised as a trading activity. Your intention was to receive a fee from chartering your asset. The indicators set out above are used to determine whether your business activity had commenced during the 2010-11 income year. | Detailed Reasoning - Purpose, intention and decision:: The chain of events leading to the commencement or start-up of a business activity often begins with a mere intention to establish the business activity. This is developed by researching the proposed business and, in some instances, by experiment. This process culminates in a final decision on whether to commence business. However, not all businesses commence in such an orderly manner. It is clear from the information you have provided that you had shown some commitment to a business by purchasing the asset. | Detailed Reasoning - Acquisition of a business structure:: Most business activities have a structure that provides the framework of the business. It is usually a collection of capital assets. What the particular capital assets are will depend on the particular business activity. In Calkin v. CIR [1984] 1 NZLR 440 Richardson J said at 446-447: Clearly it is not sufficient that the taxpayer has made a commitment to engage in business: he must first establish a profit-making structure and begin ordinary business operations. For a business activity to commence, an appropriate business structure should be in place. As to what this structure will consist of, and its size, this will be a question of fact and degree, and depend on the nature of the business activity. Your business activity was to charter your asset. | Detailed Reasoning - Commencement of Business Operations:: As noted by Brennan J in Inglis v. Federal Commissioner of Taxation (1979) 10 ATR 493; 80 ATC 4001, the level of activity is important in deciding whether a business is being carried on. Brennan J stated at ATC 4004-4005; ATR 496-497 that: The carrying on of a business is not a matter merely of intention. It is a matter of activity. Yet the degree of activity which is requisite to the carrying on of a business varies according to the circumstances in which the supposed business is being conducted. It is accepted that, during the 2010-11 income year, you had gone beyond merely having an intention to engage in business and there had been some activity. For example, you have purchased the asset and you tried to obtain the necessary certificate. However, it is important in evaluating these activities to have a proper regard to the characterisation of your proposed business. The business you proposed to commence in the 2010-11 income year was offering your asset for charter. Therefore, until you had commenced activity with the asset, you will not have commenced business. We consider that, during the 2010-11 financial year, your activities were preliminary to the carrying on of your intended business and you were still in the course of establishing a business. As the provisions of Division 35 of the ITAA 1997 are subject to a business being conducted the discretion at paragraph 35-55(1)(a) will not be exercised.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | You purchased an asset in November 2010.: In your business plan, you allowed three months to obtain the necessary certificate. However, due to unforseen delays, it took almost nine months to obtain the certificate. This meant that you could not operate during this time. | You do not satisfy subsection 35-10(2E) of the ITAA 1997 as your adjusted taxable income was more than $250,000 in the 2009-10 financial year.