Private ruling: Non-commercial losses and the Commissioner’s discretion
Date of advice: 13 June 2017
Published: October 2017
Ruling period: Year ending 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Q1: Had you started your business activity for the period you are seeking the Commissioner’s discretion? | A1: No | Q2: Will the Commissioner exercise the discretion in section 35-55(1)(a) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include any losses from your cattle breeding activity (the activity) primary production business activity in your calculation of taxable income for the 2015-16 financial year? | A2: Not applicable.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. During the 2014-15 financial year you took possession of a property, for the purpose of operating the activity. You opened a trading account with a financial institution to be used in the activity. The property had been neglected and was in no condition to run cattle. Therefore you began making improvements to the property. During the 2014-15 a grass fire burnt 75% of the grassland and much of the fencing. The work to complete the fencing to make the property cattle proof was finished in the 2015-16 financial year. During the 2015-16 financial year you established a credit facility for purchasing cattle. The property experienced a dry winter and spring, with low rainfall. Consequently there was no spring grass growth. By the end of the 2015-16 financial years most of the property dams had gone dry, and you were forced to have them excavated to increase their capacity. During the 2015-16 financial year fodder costs were extremely high and cattle prices were at a 10 year high. Therefore you decided not to enter the market until the start of the 2016-17 financial year when you purchased a small number of cows. You have subsequently added more cows to the herd in the 2016-17 financial year.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 35 | Income Tax Assessment Act 1997 Section 995-1

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 ● the Commissioner exercises his discretion. However, for this division to apply, you must be carrying on a business. In your case, your activities to date are considered preliminary to the carrying on of your intended business and are directed at constructing or establishing a business structure. As such you are not considered to be carrying on a business for the 2015-16 financial year. | Detailed Reasoning - Detailed reasoning: 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 ● the Commissioner exercises his discretion. However, for this division to apply, your activity should be carried on as a business. Section 995-1 of the ITAA 1997 defines 'business' as 'including any profession, trade, employment, vocation or calling, but not occupation as an employee'. The case of Evans v. Federal Commissioner of Taxation 89 ACT 4540; (1989) 20 ATR 922 stated that whether or not an activity amounts to carrying on business for taxation purposes is a question of fact. There is no exhaustive or determinative definition which can be applied to determine this matter. The facts of each case must be examined. In Martin v. Federal Commissioner of Taxation (1953) 90 CLR 470; (1953) 10 ATD 226; (1953) 5 AITR 548, Webb J said: The test is both subjective and objective: it is made by regarding the nature and extent of the activities under review, as well as the purpose of the individual engaging in them, and as counsel for the taxpayer put it, the determination is eventually based on the large or general impression gained. When does a business activity commence? The actual date of commencement of a business activity is a question of fact ( Goodman Fielder Wattie Ltd v. FC of T 91 ATC 4438; (1991) 22 ATR 26) ( Goodman Fielder Wattie ). For a business activity to have commenced a person must have: ● purpose, intention and decision to commence the business activity ● acquired a minimum level of business assets to allow that business activity to be carried on, and ● actually commenced business operations ( Calkin v. CIR [1984] 1 NZLR 440). We must examine the above indicators in light of the characterisation of your business activity. In Goodman Fielder Wattie , Hill J stated at 4,447: 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, if your business activity is characterised as 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. In your case it is considered that the business activity you intend to carry on is characterised as the raising and sale of cattle. We can now consider the indicators set out above to determine whether this business activity has commenced. Purpose, Intention and Decision The intention and purpose of a taxpayer in engaging in an activity is relevant to when a business commences. However, an intention to commence a business will not determine that the business activity has actually commenced. 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 have researched your proposed business activity, decided on the form of that business and have committed yourself to it. Acquisition of a minimum level of business assets to allow that business activity to be carried on 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 and begin ordinary business operations. As to what the business structure will consist of, and its size, will be a question of fact and degree, and will depend on the nature of the business activity. Your activity is the raising and selling of cattle. For the year you are seeking the Commissioner’s discretion you had yet to purchase any cattle as you were waiting for the right time to enter the market considering your particular circumstances. As such it is considered that you did not yet have the necessary business structure in place for you to commence your business structure. 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. In Hadlow and FC of T [2002] AATA 1250; (2002) 2002 ATC 2294; (2002) 51 ATR 1197 the Small Taxation Claims Tribunal considered the amounts incurred by a taxpayer to research and develop a book. The question for decision was whether the activities were merely preparatory and preliminary or whether the activity had reached a stage where it was able to be characterised as a business. In concluding that the activity was not carried on as a business in the relevant years, member Mowbray stated at paragraph 26: Clearly Mr Hadlow has the subjective intention to carry on a business, but that is not sufficient. There must be business activity. There is a real question whether the activities to date are merely preparatory or preliminary (see Goodman Fielder Wattie at 4447), and whether the project has reached the stage where it is able to be characterised as a business. There has been much activity but The concept of business does not equate with being busy ( Goodman Fielder Wattie at 4447; 386; 339) Mr Hadlow has researched, undertaken travel, and visited museums, libraries and farms in pursuit of a particularly interesting topic. He has expended money but has made no sales, received no advances nor signed any contracts. It is accepted that you have gone beyond merely having an intention to engage in business and there has been some activity. For example, you have made the property suitable for running cattle by fixing the fencing and deepening the dams. However, it is important to evaluate these activities in regards to the characterisation of your business, which is the raising and selling of cattle. The systematic and regular transactions from which you will produce revenue as part of your business operations, that is the active raising and selling of cattle, had not commenced. At the time you are seeking the discretion you did not have any cattle, yet alone enough to make a commercial operation. Therefore your activities in the 2015-16 financial year are considered preliminary to the carrying on of your intended business and are directed at constructing or establishing a business structure. As such you are not considered to be carrying on a business for the 2015-16 financial year and the Commissioner is unable to exercise his discretion.