Private ruling: Non-commercial losses
Published: July 2013
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Are the business activities you carry out as a sole trader and in partnership able to be grouped together because they are considered business activities of a similar kind under subsection 35-10(3) of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes.

Relevant facts and circumstances: You operate businesses as a sole trader and also as a partner. The turnover of the businesses is substantial and produced a profit. Some of the businesses produced losses but passed the assessable income test. The losses resulted from a change in business premises and key personnel and new competition. They are expected to trade profitably in the 20YY financial year. The partnership and sole trading activities were carried out in a similar manner but at different locations, using different assets and different financial accounts. You did not pass the income requirement of Division 35 of the ITAA 1997 in the 20XX financial year

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 35-10(1) | Income Tax Assessment Act 1997 subsection 35-10(2) | Income Tax Assessment Act 1997 subsection 35-10(2E) | Income Tax Assessment Act 1997 subsection 35-10(3)

Reasons for decision: Summary: For the 2009-10 and later financial years Division 35 of the ITAA 1997 will apply to defer a non-commercial loss from a business activity unless: · you satisfy the income requirement and you pass one of the four tests · the exceptions apply, or · the Commissioner exercises his discretion. In your situation, you do not satisfy the income requirement (that is your taxable income, reportable fringe benefits and reportable superannuation contributions but excluding your business losses, exceeds $250,000) and you do not come under any of the exceptions. Your business losses are therefore subject to the deferral rule unless the Commissioner exercises his discretion. Generally a non-commercial loss in this context is the excess of a taxpayer's allowable deductions attributable to the business activity over that taxpayer's assessable income from the business activity. 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. For the purposes of applying Division 35 of the ITAA 1997 subsection 35-10(3) of the ITAA 1997 allows you to group business activities 'of a similar kind'. Subsection 35-10(3) of the ITAA 1997 states in applying Division 35 you may group together business activities of a similar kind. In certain situations the taxpayer's business activities may be so discrete in character and in the manner they are conducted that the question arises whether they are carrying on separate and distinct business activities for Division 35 purposes. Whether this is so is clearly a question of fact. In deciding similarity of business activities it does not require exact identity. As discussed in paragraph 51 of Taxation Ruling TR 2001/14 determining whether business activities are of a similar kind to one another will involve comparing and contrasting them in relation to characteristics such as: · the location(s) where they are carried on; · the type(s) of goods and/or services provided; · the market condition(s) in which those goods and/or services are traded; · the type(s) of assets employed in each; and · any other features affecting the manner in which the activities are conducted. Some of these characteristics may be the same for the business activities being compared however some difference must always be expected. The presence or absence of similarity in respect of a single characteristic will rarely be determinative ( Goodfellow v. FC of T 77 ATC 4086 at 4094; (1977) 7 ATR 265 at 274). As overall comparison of the separate business activities will be called for weighing up the extent of the characteristics which are the same or similar against those where there are significant differences. In your case you carried out business activities as a sole trader and in partnership. Business activities were carried out in a similar fashion albeit at different locations, using different assets and keeping different accounts. It is therefore considered that these activities are of a similar kind and are able to be grouped together under subsection 35-10(3) of the ITAA 1997.