Private ruling: Non-commercial business losses
Published: March 2012
Ruling period: Year ended 30 June 2010 | Year ended 30 June 2011
Date scheme commenced: 1 July 2009

Ruling: Q1: Do the provisions of Division 35 of the Income Tax Assessment Act 1997 (ITAA 1997) apply to deny the deductibility of exploration expenditure when the exploration activity is not carried on as a business? | A1: 

Relevant facts and circumstances: You are not carrying on mining operations or, a business of exploration or prospecting for minerals. You propose to carry on mining operations in the future. You purchased a portion of a prospecting license, as part of a syndicate, for some property. You paid for a gravity survey on the property that showed some targets for minerals. You commenced a drilling campaign on the site. The drilling was co-funded by the government. You state that the funding received was treated as assessable income. You purchased other prospecting licences. Again you have received further co-funding from the government, which will be treated as assessable income. You have provided the following documentation: o list of expenditure incurred o overview of the project o annual technical report for the site o a gravity and survey report o details of the co-funding agreement o final report on the project You state that if the exploration proves that the sites are viable you may either develop the sites or, sell the licenses for the sites.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 35 | Income Tax Assessment Act 1997 Subsection 35-5(2) | Income Tax Assessment Act 1997 Subsection 35-10(2) | Income Tax Assessment Act 1997 Section 40-730

Reasons for decision: Summary: Under Division 35 of the Income Tax Assessment Act 1997 (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. However, subsection 35-5(2) of the ITAA 1997 provides that the division is not intended to apply to activities that do not constitute carrying on a business. If an activity is not carried on as a business, then generally speaking, you cannot claim deductions in relation to it, regardless of the operation of Division 35 of ITAA 1997. However, section 40-730 of the ITAA 1997 provides that you can deduct expenditure incurred in an income year on exploration or prospecting for minerals if; o you carried on mining operations, or o it would be reasonable to conclude you proposed to carry on such operations, or o you carried on a business, or a business that included, exploration or prospecting for minerals. In your case, you state that you were not carrying on mining operations or, carrying on a business of exploration or prospecting for minerals and, further, the expenditure was not incurred in order to receive the government co-funding. However, you state that if the exploration activity finds that the site is viable, you may either develop the site yourself or, sell the licence to the site. This shows that you propose to carry on mining operations in the future. Therefore, as it is reasonable to conclude from your statements, and information provided, that you propose to carry on mining operations in the future, section 40-730 of the ITAA 1997 will apply to allow you to deduct the expenditure incurred on exploration or prospecting for minerals against your income from other sources. Further, as you state you are not carrying on a business, Division 35 of the ITAA 1997 will not apply to prevent you from deducting the loss for the exploration activity.

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