Private ruling: deductions and losses
Published: April 2012
Ruling period: Year ended 30 June 2011
Date scheme commenced: 1 July 2010

Ruling: Q1: 1. Are you entitled to a deduction for the expenses incurred in relation to your motor sport activities? | A2: 

Relevant facts and circumstances: You are a motor sportsperson. You have an Australian business number and have registered a business name. You started your motor sports activities as a child and you have been participating in this sport for over 20 years. You receive sponsorship in the form of bikes and equipment to compete at events. You advertise/promote yourself within the industry and continue to seek sponsorship in order to continue your racing. You race most weekends and practise at least once a week. You do all your own mechanical and paper work. In the 2010-11 financial year, you received no prize money but did receive over $10,000 in sponsorship, in the form of parts and equipment, and a small amount in insurance payments from this activity. You were also provided with vehicles under a loan agreement for use during the year. In the 2010-11 financial year, you incurred expenses of over $50,000 in relation to this activity. You have kept all the receipts in relation to these expenses. You are a member of a relevant association. You also work full time within the motor industry but unrelated to racing.

Relevant legislative provisions: Income Tax Assessment Act 1997 - Section 8-1. | Income Tax Assessment Act 1997 - Division 35.

Reasons for decision: Detailed Reasoning - Carrying on a business: Under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) you can claim deductions for expenses 'to the extent' they are incurred in gaining or producing your assessable income, or they are necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income. 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. 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). Taxation Rulings TR 97/11 and TR 2005/1 provide the indicators established by the courts that would need to be considered when determining whether a business is being carried on. It should be noted that TR 97/11 and TR 2005/1 specifically deal with carrying on a business of primary production and carrying on a business as a professional artist, respectively, but the indicators established can be equally applied to most other activities. The list of indicators discussed in these rulings include, but are not limited to: a) whether your activity has a significant commercial purpose or character b) whether you have more than just an intention to engage in business c) whether you have a purpose of profit as well as a prospect of profit d) whether there is repetition and regularity to your activity e) whether your activity is of the same kind and carried on in a similar manner to businesses in your industry f) whether your activity is planned, organised, and carried on in a business-like manner g) the size, scale and permanency of your activity, h) whether your activity is better described as a hobby, or recreation. The following is an analysis of your motor sport activities against the business indicators: | Detailed Reasoning - (a) Significant commercial activity: You received no prize money from your racing activities in the year ending 30 June 2011, although you did receive sponsorship in the form of goods and services, as well as the loan of equipment, to help you compete and offset some of your expenses. However, your expenses, of over $50,000, greatly outweighed the benefits you received. To be a sportsperson in business, it is expected that efforts be directed towards making a profit. This is difficult with sponsorship and prize money, given the competitiveness and element of chance present in motor racing. In the absence of a contingency plan for making a profit from your racing in the event that you don't win prize money, we consider that your activities, at their present level, lack significant purpose or character. | Detailed Reasoning - (b) An intention to engage in business: The concept of a professional racer in the wider public does not equate to carrying on a business for tax purposes. Amongst the other indicators to be considered, an intention to engage in business is required. It is important to be able to show how you expect to make a profit from your activity in order to be seen to be carrying on a business. This was demonstrated as an important factor in Case C18 71 ATC 77; Case 15 (1971) 17 CTBR (NS) 90, where an accountant's claim that his motor racing activities amounted to a business enterprise was rejected. The fact that his participation in the activity was incapable of providing any profit unless he was successful to an improbable degree was considered to be repugnant to any normal concept of business. This case was contrasted with sportspersons who receive amounts of money each week for playing regardless of wins or those who are assured minimum prize money, when Mr. Dubout, Chairman of Board of Review No. 3 stated, at 80: There are no such features present in this case. The taxpayer had to compete in races with such skill as he possessed, with such automotive aid as his car could provide, and against such hazards as chance might cast his way. In those circumstances we do not consider that the prize money is properly to be described as income and consequently, not assessable income. | Detailed Reasoning - (c) Purpose of profit and prospect of profit: Your high expenses in preparing for and attending competitions seriously erode the possibility of making a profit from your racing activities. You have incurred considerably more expenditure on your racing activities than you have received in sponsorship. The facts of your case can be distinguished from the Federal Court case of Stone v. Federal Commissioner of Taxation [2002] FCA 1492; (2002) 51 ATR 297, in which a javelin thrower who received significant prize money, government grants, sponsorships and appearance fees was considered to be carrying on a business for tax purposes. There is some evidence that you have taken active steps to seek further sponsorship to offset some of your costs. However, given the high level of expenses that you incur, it is extremely improbable that sufficient sponsorship will be provided to allow you to make a profit from your racing activities. | Detailed Reasoning - (d) Repetition and Regularity: You regularly attend various racing events and you spend a significant amount of time on your activity in practising and competing, without the surety that you will make a profit. You have been participating in the activity since you were a child and it is for this reason that the question of a dual purpose is raised, that is, whether you would do it anyway for other reasons (eg. hobby or recreational/sporting activity). | Detailed Reasoning - (e) Activities carried on in a similar manner to other in business in your industry: Usually sportspeople in business identify a market or niche where income can be produced and tailor their work towards making a profit. Your activities do not seem to be those of a sportsperson in business in that you do not receive regular amounts of prize money for your activities nor do you have any significant benefits from sponsorship, other than to defray some of your expenses. Your costs still outweigh the value of these donations and any prize money you might receive. | Detailed Reasoning - (f) Whether activity is planned, organised, and carried on in a business-like manner: It is acknowledged that participation in a sport at your level may require a considerable amount of organisation and record-keeping. However, these same attributes could equally apply to someone who is vigorously pursuing a hobby. They are not exclusive attributes of a business. It is whether these attributes are combined with a business-like manner which is important. Having a registered business name is not compulsory for tax purposes and having a business name does not necessarily mean you are in business. In your case, we do not consider that your activity is carried on in a business-like manner. Although your activities are planned and organised they are not tailored towards making profits. | Detailed Reasoning - (g) Size, scale and permanency of the activity: The size and scale of your activities are small and it is unclear if you can go on sustaining losses in the absence of regular monetary rewards. | Detailed Reasoning - (h) Whether the activity would be better described as a hobby, or recreation.: The expenses associated with travelling to the events and participating in them has to date greatly outweighed any prize money or sponsorship benefits received. Participation in activities generating pastime or hobby receipts is a social or personal pursuit of a non-commercial nature. Pastime receipts are not intended to, nor do they usually, cover expenses. We consider that, for tax purposes, your activity as it stands would be better described as a hobby or a sporting pursuit. | Detailed Reasoning - CONCLUSION: A majority of the above factors point to your activity as a sportsperson/competitor in motor sports being the vigorous pursuit of a hobby rather than constituting a business. This is because it does not have a commercial character, there are no regular income-generating transactions being carried on and you cannot demonstrate a reasonable belief of profit from the activities in the future. As such, your income from this activity (including sponsorship) will not be assessable and your expenses are not deductible under section 8-1 of the ITAA 1997. | Detailed Reasoning - Division 35 of the ITAA 1997: Under Division 35 of the ITAA 1997, a loss made by an individual from a business activity will not be deductible in the income year in which it arises unless certain conditions are met. If an individual is not considered to be carrying on a business in the income year, Division 35 will not apply (Taxation Ruling TR 2001/14, paragraph 10). As discussed above, as you are not considered to have been carrying on a motor sport business in the 2010-11 financial year, Division 35 of the ITAA 1997 does not apply.

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. | 2. Do the non-commercial loss provisions in Division 35 of the Income Tax Assessment Act 1997 (ITAA 1997) apply to your motor sport activities?