Income tax: Division 35 - non-commercial business losses

This Ruling considers the operation of Division 35 of the Income Tax Assessment Act 1997 ('ITAA 1997'), specifically: • deferral of deductions from 'non-commercial' [1] *business activities [2] under subsection 35-10(2); • deferral or prevention of pre-business capital expenditure and post-business capital expenditure deductions under section 40-880, in relation to non-commercial activities (subsections 35-10(2A) to (2D) inclusive); • the *primary production and *professional arts businesses Exception in subsection 35-10(4); • the four tests in Division 35 which are (i) the Assessable income test in section 35-30; (ii) the Profits test in section 35-35; (iii) the Real property test in section 35-40; and (iv) the Other assets test in section 35-45.

It does not consider in detail the operation of the Commissioner's discretion in section 35-55. This aspect is the subject of a separate Taxation Ruling (TR 2007/6 Income tax: non-commercial business losses: Commissioner's discretion).

For the income years up to and including the 2008-09 income year satisfaction of any one of the four tests allows a 'loss' from a *business activity to be offset against other income in the year in which it is incurred. For the 2009-10 and later income years, in addition to satisfying one of the four tests, the individual must also meet the income requirement in subsection 35-10(2E).

Unless otherwise stated, all legislative references in this Ruling are to the ITAA 1997.

This Ruling applies only to individuals (including an individual as a partner) who: (a) carry on a '*business activity'; and (b) who, for a particular year in relation to that *business activity, have allowable deductions in excess of assessable income.

Thus, this Ruling does not apply to taxpayers who are not individuals, or to activities which are not part of a *business.

This Ruling applies to assessments to which Division 35 may apply, i.e., to assessments for the income year ending on 30 June 2001 (or the equivalent substituted accounting period), and subsequent years. Note: the Addenda to this Ruling which issued on 11 July and 25 July 2007 and 27 April 2011 apply both before and after their dates of issue as required. The application of various new or amended provisions is described in relevant sentences or footnotes.

In general terms the operation of Division 35 can be represented by the following flowchart, where for an income year:

Division 35 was introduced into the ITAA 1997 via the New Business Tax System ( Integrity Measures ) Act 2000 . It applies from 1 July 2000 to each and every income year in which an individual taxpayer carries on a relevant *business activity. The main operative provision in the Division is section 35-10. The major rule in section 35-10 is that unless in each year: (a) the individual's *business activity meets one of the four tests, and for the 2009-10 and later income years, the income requirement is also satisfied. (b) the individual comes within the Exception; or (c) the individual is covered by an exercise of the Commissioner's discretion in relation to that *business activity, a loss from the *business activity will not be deductible in the income year in which it arose. The law applies as if the loss were not incurred in the income year.

Instead, the loss is deemed to be an amount deductible from the assessable income from the activity for the next year in which this activity is carried on. The deferral of deduction rules in section 35-10 are then applied to that year. However, Division 35 does not apply to activities that do not constitute carrying on a *business (subsection 35-5(2)).

The changes to the law contained in Division 35 arose as a result of the Government's adoption of Recommendation 7.5 of the Ralph Committee's report, Review of Business Taxation : A Tax System Redesigned . This recommendation focused on significant revenue leakage from individual taxpayers claiming deductions for unprofitable activities which were 'often unlikely to ever be profitable' (refer to paragraph 1.8, Explanatory Memorandum, A New Business Tax System ( Integrity Measures ) Act 2000 ).

Division 35 was amended by Tax Laws Amendment (2006 Measures No.1) Act 2006 to apply the non-commercial loss provisions to pre-business capital expenditure and post-business capital expenditure incurred on or after 1 July 2005 in relation to a *business activity, and otherwise deductible under section 40-880.

Further changes were made to Division 35 via Tax Law Amendment (2009 Budget Measures No.2) Act 2009 . For the 2009-10 and later years an income requirement was introduced to tighten the application of the non-commercial rules.

The Income Tax (Transitional Provisions) Act 1997 (IT(TP)A 1997) was also amended to provide that the non-commercial losses rules in Division 35 do not apply to a *business activity that has greater available deductions than assessable income in a given income year solely because of investment amounts deductible under Division 41 (refer to Note 2, subsection 35-10(2)). This applies to the 2009-10 and later income years.

Where an individual has a loss from a *primary production business or a *professional arts business in a year of income, and in that year the total of their assessable income from sources unrelated to that *business activity (excluding any *net capital gain) is less than $40,000, the rules in subsections 35-10(2), (2A) or (2B), will not apply in relation to that *business activity (subsection 35-10(4)).

Division 35 applies only to an individual who is carrying on a '*business activity' in an income year, either on their own, or in a general law partnership (section 35-5). Division 35 does not apply to any other entity. The Division operates by identifying a specific '*business activity' for calculating whether a non-commercial loss has been made from that activity, which would, but for Division 35, be able to be offset against other income (in the calculation of the individual's taxable income). Note, a *business may, for the purposes of Division 35, be made up of more than one *business activity (see paragraphs 36 to 39 of the Ruling section and paragraphs 83 to 85 of the Explanations section below).

Under subsection 35-10(2), if the amounts attributable to the *business activity for a year of income that otherwise could be deducted, apart from Division 35, exceed the assessable income (if any) from the *business activity, the excess (i.e., the non-commercial loss) is treated for the purposes of the ITAA 1997 as though it: (a) were not incurred in that income year; and (b) instead, were an amount attributable to the *business activity that is deductible in the next income year in which that *business activity is carried on.

In determining how Division 35 applies to the relevant *business activity it is necessary therefore to identify both the allowable deductions 'attributable' to the *business activity and the assessable income 'from' that activity. Note that the amounts to be 'attributed' to the *business activity in this regard include all the amounts for the activity that otherwise could be deducted; not just those deductible under section 8-1, for example, any deductible under Division 40.

The loss deferral rule in subsection 35-10(2) will not apply to the individual undertaking that activity for an income year if the relevant business activity: (a) satisfies at least one of the tests, and for the 2009-10 and later income years, the individual in question meets the income requirement; or (b) comes within the Exception; or (c) has a favourable exercise of the Commissioner's discretion. The individual will be able to deduct the excess deductions against other assessable income where the rule does not apply.

The income requirement in subsection 35-10(2E) is met when, in a given income year the sum of the individual's taxable income, *reportable fringe benefits, *reportable superannuation contributions and *total net investment losses is less than $250,000. When calculating whether an individual has met the income requirement, they must disregard any excess deductions that are subject to Division 35.

Subsection 35-10(2B) [2A] provides that if you are an individual, either alone or in partnership (whether or not some other entity is a member of the partnership), you cannot deduct an amount under section 40-880 for expenditure incurred on or after 1 July 2005 in relation to a *business activity: (a) you propose to carry on; or (b) another entity proposes to carry on if the other entity is not an individual, either alone or in partnership; for an income year before the one in which the business activity commences to be carried on.

However, a deduction may be allowed in the year in which the *business activity starts to be carried on (subsections 35-10(2C) and (2D)). [2B] Where the section 40-880 expenditure is attributed under subsection 35-10(2C), to a *business activity you have started to carry on, this may give rise to a 'loss' to which the loss deferral rule in subsection 35-10(2) may apply for the commencement year. That rule will not apply in the circumstances described in paragraph 6 above. However, where the section 40-880 expenditure relates to a *business activity that some other entity (other than another individual) has commenced, subsection 35-10(2D) means that this expenditure can be deducted for the income year in which that activity has started to be carried on.

If the amount of assessable income *derived by the individual from the relevant *business activity for an income year is at least $20,000, the rules in section 35-10 do not apply (paragraph 35-30(a)). Calculation of the assessable income from the activity can involve making a 'reasonable estimate' of a notional annual amount if the activity has not been carried on for the whole year (paragraph 35-30(b)).

This test involves determining whether an activity has produced a tax profit [3] in 3 out of the past 5 years. The 5-year period includes the current year. If a tax profit has resulted from the relevant *business activity in three out of the last five years, the rules in section 35-10 do not apply (subsection 35-35(1)).

If the individual uses real property, or an interest in real property, on a continuing basis in the relevant *business activity, that has a value of at least $500,000, the rules in section 35-10 do not apply (subsection 35-40(1)).

For this test, the following assets are not counted: • a *dwelling, and any adjacent land used in association with the *dwelling that is used mainly for private purposes (paragraph 35-40(4)(a)); and • fixtures owned by an individual as a tenant (paragraph 35-40(4)(b)).

To value real property or interests in real property, the individual can choose the *reduced cost base, or the market value of the property or interest in real property if that value is more than the *reduced cost base (subsection 35-40(2)). The meaning of *reduced cost base is the same as it is for capital gains tax ('CGT') purposes. This meaning is to be found in Subdivision 110-B.

*Dwelling has the same meaning in this test as it does for CGT purposes (refer to the definition in section 118-115).

Where assets that have been taken into account for the Real property test are partly used in the relevant *business activity and partly for some other purpose(s), only that part of their value that is attributable to their use in the *business activity for that year can be taken into account (section 35-50).

If the individual uses certain other assets, on a continuing basis in the relevant *business activity, that have a total value of at least $100,000, the rules in section 35-10 do not apply (subsection 35-45(1)).

The assets and their values counted for this test are those set out in the following table contained in subsection 35-45(2): Assets counted for this test and their values Item Asset Value 1 An asset whose decline in value you can deduct under Division 40 [4] The *written down value of the asset 2 An item of *trading stock Its value under subsection 70-45(1) 3 An asset that you lease from another entity The sum of the amounts of the future lease payments for the asset to which you are irrevocably committed, less an appropriate amount to reflect any interest component for those lease payments 4 Trademarks, patents, copyrights and similar rights Their *reduced cost base

The following assets are specifically excluded under subsection 35-45(4) from being counted for this test: • real property, or interests in real property, that are taken into account for the Real property test; and • *cars (as defined in section 995-1), motorcycles and similar vehicles.

Where assets that may be taken into account for the Other assets test are partly used in the relevant *business activity and partly for some other purpose(s), only that part of their value that is attributable to their use in the *business activity for that year can be taken into account (section 35-50).

The *reduced cost bases, market values or other prescribed values of a relevant asset counted for the Real property test or Other assets test is worked out: • as at the end of the income year (paragraphs 35-40(3)(a) and 35-45(3)(a)); or • if an individual stops carrying on the *business activity during the year: (i) as at the time the individual stops (subparagraphs 35-40(3)(b)(i) and 35-45(3)(b)(i)); or (ii) if the individual disposed of the asset before that time in the course of stopping carrying on the activity - as at the time the individual disposed of it (subparagraphs 35-40(3)(b)(ii) and 35-45(3)(b)(ii)).

The value of some leased assets used on a continuing basis in the relevant *business activity can be taken into account for either of the assets tests (but not for both). The general scheme is that an individual with an interest in real property comprised of fixtures owned by them as a tenant, takes the fixtures into account under the Other assets test, and not under the Real property test (paragraph 35-40(4)(b)).

An owner of real property on which a depreciating asset is fixed is potentially able to take the value of that asset into account under the Real property test and under the Other assets test. This would be where the asset qualifies as part of the real property, but is also an asset in its own right whose decline in value can be deducted under Division 40 (i.e., an asset within Item 1 of the table in subsection 35-45(2)). However, the general scheme in this case is that where such an asset is part of the real property taken into account for the purposes of the Real property test, then it is not also counted for the Other assets test (paragraph 35-45(4)(a)).

Where the relevant *business activity is carried on by an individual and one or more individuals or other entities, as partners in a general law partnership, only that part which is attributable to the total of the interests of all the individuals in the partnership may be aggregated for the Assessable income test, Real property test and Other assets test (paragraphs 35-25(a) and (c)). In addition, any assessable income that is *derived and/or assets owned by an individual partner in their own right, or that they may have from the same, or a similar, *business activity, outside of the partnership, can also be taken into account by that partner in considering these tests (paragraphs 35-25(b) and (d)). The interests of companies and trustees are ignored (paragraphs 35-25(a) and (c)).

To apply the Profits test the individual partner takes into account their share of the deductions and assessable income attributable to their interest in the partnership, along with any of their own assessable income and allowable deductions they may have from the same, or a similar, *business activity outside of the partnership (subsection 35-35(2)) see Examples 8 and 9 at paragraphs 141 to 146 below.

The Commissioner has a discretion under subsection 35-55(1) to decide that the loss deferral rule in subsection 35-10(2) does not apply to a *business activity if certain, limited circumstances affect that activity. For the 2009-10 and later income years two changes apply to subsection 35-55(1): (a) paragraph 35-55(1)(c) may apply in relation to individuals who do not satisfy the income requirement in subsection 35-10(2E); and (b) the requirement that an application for a decision of the Commissioner under section 35-55 be made in the *approved form applies. For further explanation of the operation of subsection 35-55(1) refer to Taxation Ruling TR 2007/6.

Under subsection 35-55(2) [4B] the Commissioner may, on application, decide that the rule in subsection 35-10(2B) does not apply to a *business activity for an income year if the Commissioner is satisfied that it would be unreasonable to apply that rule because special circumstances of the kind referred to in paragraph 35-55(1)(a) prevented the activity from starting. The effect of the exercise of the discretion under subsection 35-55(2) is that there is no deferral under subsection 35-10(2B), and therefore the taxpayer can claim a deduction for the expenditure under section 40-880.

[Deleted] [5]

Under section 35-15 a non-commercial loss deferred to the current year under paragraph 35-10(2)(b), or a current year non-commercial loss to be deferred under paragraph 35-10(2)(b) to a later year, may be reduced where the individual has *derived *exempt income. Such losses will be reduced where any net *exempt income *derived in the current year is not fully offset against any Division 36 losses allowable for that year (see Example 15 at paragraphs 171 to 172 below).

Under section 35-20, a non-commercial loss deferred under subsection 35-10(2) will be treated differently where an individual becomes bankrupt, or is released from a debt by the operation of an Act relating to bankruptcy. A non-commercial loss incurred prior to bankruptcy that was deferred, as a result of the rule, will not be available for deduction in the current or any future year (see Example 16 at paragraph 173 below).

In this Ruling the following Key Terms are used: • '*business activity' means an activity which may be a complete *business in itself, or part of a larger *business, and may include, applying subsection 35-10(3), '... *business activities of a similar kind' (see paragraphs 36 to 39 following); • 'income requirement' [5A] An individual will meet the income requirement for an income year if the total for them of the following amounts is less than $250,000: - taxable income (ignoring any 'loss' to which subsection 35-10(2) applies) for that year - total reportable fringe benefits for that year - reportable superannuation contributions for that year - total net investment losses for that year- being financial investment losses and rental property losses. • 'individual' means a natural person; • 'non-commercial loss' means the excess of allowable deductions attributable to a '*business activity', for a particular year, over assessable income (if any) from that activity where the operation of Division 35 has not been excluded by the Exception, the four tests or the Commissioner's discretion (see subsection 35-10(2)); • '*professional arts business' has the meaning given in subsection 35-10(5), namely: '... a *business you carry on as: (a) the author of a literary, dramatic, musical or artistic work; (b) a *performing artist; or (c) a *production associate'; [6] • ' tax profit' is where the amount of assessable income from the activity for a year is greater than the sum of the deductions attributable to the *business activity for that year (apart from the operation of subsection 35-10(2)); • ' tenant's fixtures' means fixtures owned according to property law, by you as a tenant, as that expression is used in paragraph 35-40(4)(b).

Carrying on a *business activity requires that a *business be carried on, as that term is ordinarily understood. [7] Subsection 35-5(1) says the object of Division 35 'is to improve the integrity of the taxation system by preventing losses from non-commercial activities that are carried on as *businesses by individuals (alone or in partnership) being offset against other assessable income'. Division 35 is not intended to apply to activities that do not constitute a *business, e.g., a 'passive investment' [8] (subsection 35-5(2)).

A key concept to understand in applying Division 35 therefore is '*business activity' as the term is used in the Division. The asterisk signifies that the term includes the defined term *business, the meaning of which in section 995-1 is: '*business includes any profession, trade, employment, vocation or calling, but does not include occupation as an employee.'

The composite term '*business activity' is otherwise undefined in the ITAA 1997. The inclusion of the extended definition of '*business' in the composite term does not, however, alter the ordinary meaning of the composite term in any significant way. That ordinary meaning is an activity forming part or all of the taxpayer's activities 'engaged in for the purpose of profit on a continuous and repetitive basis' ( Hope v . The Council of the City of Bathurst 80 ATC 4386 at 4382; (1980) 12 ATR 231 at 236), or an activity that is one of the activities that makes up the 'course of conduct' ( FC of T v . Murry 98 ATC 4585 at 4596; (1998) 39 ATR 129 at 145) that is the taxpayer's *business.

However, while a *business may be subdivided into a number of different *business activities this cannot be carried out to the point where the composite term in Division 35, '*business activity', is deprived of practical meaning. An activity that forms part of a taxpayer's overall *business will not be a separate '*business activity' for the purposes of Division 35 unless it is capable of standing alone as an autonomous commercial undertaking of some sort (see further paragraphs 40 to 46 on identifying separate and distinct *business activities for the purposes of Division 35).

As described in paragraph 8, the relevant changes in the law are directed at activities that are 'unlikely to ever be profitable'. *Business activities have been made subject to a series of tests to determine whether they are treated as non-commercial (section 35-1) and the identification and tax treatment of non-commercial business activities is the main purpose of Division 35.

In Allied Mills Industries Pty Ltd v . FC of T 88 ATC 4852 at 4864; (1988) 19 ATR 1724 at 1737, Gummow J acknowledged that a taxpayer might carry on 'several distinct *businesses'. Gummow J stated: 'Viewed in the light of the conduct of *business of the taxpayer as a whole, one cannot sensibly say that the taxpayer went out of *business or that the taxpayer parted with a substantial part of its *business undertaking, or that its profit-making apparatus was materially crippled. It may be that activities of a taxpayer are so disparate in character and so discrete in the manner they are conducted, that one properly asks questions of the type posed by the facts of this case by reference to some but not the whole of those activities; examples of several distinct *businesses conducted by one taxpayer may be provided by the Board of Review decisions Case H100 (1956) 8 T.B.R.D. 457 (retail jeweller and real estate letting agent) and Case N38 (1962) 13 T.B.R.D. 161 (printer and seller of goods on commission). But, in my view, for the reasons I have given, the present is not such a case.'

The same may be said for Division 35 about an individual taxpayer carrying on the one *business. In certain situations their *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 and overall impression, like the question of whether they are carrying on a *business.

Given the purpose and context in which '*business activity' appears in Division 35, as noted already, such situations would also need to be ones where the separate *business activities were each capable in their own right of producing assessable income and having attributed to them amounts that would otherwise be deductible.

Further, and most importantly, to be identified as a separate *business activity for Division 35, within the statutory scheme referred to, the activity (or set of activities) will need to exhibit the following: • it produces a loss, in the sense that looked at as a separate activity there is clearly assessable income produced, or intended to be produced, from it, and otherwise allowable deductions attributable to carrying it on in excess of that income (otherwise Division 35 has no relevance); • its conduct is not motivated by factors connected with supporting in any commercial way the carrying on of the individual's other *business activities; and • it shows signs in its own right that it is unlikely to ever be profitable.

All these requirements need to be satisfied, though the greatest weight would typically be given to the last two. For example, an activity might exhibit the first, and the last, but not the second requirement, because it assists in a genuinely commercial way, the carrying on of the individual's other *business activity: see Example 1 (paragraphs 120 to 123) in the Examples part of this Ruling. Such an activity would not be identified as a separate *business activity for Division 35 purposes.

The following table summarises some of the factors that may be relevant to whether a *business is made up of separate and distinct *business activities for Division 35 purposes. The term 'activities' is used in the table simply to refer to the various business operations making up the individual's *business. The table is not meant to be a checklist, or suggest that each factor should be given equal weighting in all cases. Factor 'for' there being separate and distinct *business activities 'against' there being separate and distinct *business activities Location Different types of activities carried on at different locations Different types of activities carried on but all at the same location Assets used Different types of assets used in carrying on separate activities, with no, or very little, crossover or commonality of use Some different assets used in carrying on separate activities but many assets common to all Goods/services produced (incl. market conditions) Significant differences in the type of goods/services produced from the separate activities and in the conditions affecting their sale Different types of goods/services produced but significant similarities in the manner produced and/or marketed Inter-dependency No, or very little, interdependency between the separate activities Separate activities carried on but significant level of interdependency between them in terms, for example, of working capital support, customer base, manner in which activities carried out Commercial links One set of activities is inherently unprofitable and has no, or only minimal, commercial basis on which it could support the other activities One set of activities may be inherently unprofitable but it supports the other activities, for example through increasing their sales base

The above list is not meant to be exhaustive. In some cases other factors that may be relevant to determining whether one *business activity is separate and distinct from another might include any difference in methods of funding, any difference in the degree of commercial risk associated with each of them, and any laws or regulations of any industry body that apply.

To sum up, identification of what are the individual taxpayer's relevant *business activities is to be done on a common sense basis without looking to create artificial distinctions between various parts of their overall *business. This will often mean that the relevant *business activity is the individual's whole *business.

However, where an individual taxpayer carries on several distinct *businesses it follows that they carry on several distinct *business activities for Division 35 purposes.

An individual's *business may, adopting the approach described above, be seen as made up of two or more separate and distinct *business activities. Subsection 35-10(3) nevertheless provides that those *business activities can be grouped together for all purposes in Division 35 if they are 'of a similar kind.' This would produce, for a particular income year, the same result practically as if those activities had not been identified as separate *business activities in the first place. However, where an individual does identify that their *business is in fact made up of more than one *business activity, they may choose not to group those activities under subsection 35-10(3) if it would not be to their advantage to do so.

Subsection 35-10(3) also plays another role. It will allow the comparison of separate *business activities across different income years in which they are carried on. This will be relevant to the operation of paragraph 35-10(2)(b). This paragraph requires, where a non-commercial loss has been deemed not to be deductible for an income year, identification of the '... next income year in which the activity is carried on'. As a result of subsection 35-10(3), this activity need not be the same activity as that from which the non-commercial loss was made. It can be another *business activity 'of a similar kind'. In other words, it does not have to be 'of the same kind'.

What will be a *business activity 'of a similar kind' to another *business activity is very much a question of fact and degree. The question will involve a comparison of the relevant characteristics of each, for example: • the location(s) where they are carried on; • the type(s) of goods and/or services provided; • the market(s) conditions 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 they are conducted.

Some of these characteristics may be the same for the *business activities being compared, but some differences 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). An 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. See Example 2 (paragraphs 124 to 130) for an illustration of how the factors referred to in paragraph 51 above apply to determine whether two separate activities are *business activities 'of a similar kind'.

The broader in nature any separate and distinct *business activities are the more likely it will be that they will have some same or similar characteristics, especially when looked at over a period of time. For example, a mixed farming *business consisting nevertheless of only the one *business activity may involve a particular mix of grazing certain animals and growing certain crops. Changes to this mix may mean that at some stage in the future this *business is no longer the same *business it once was. However, the relevant *business activity may still be ' of a similar kind' to the previous one, and Division 35 will apply accordingly.

That is, that the whole enterprise in the above example can continue to be treated as a single *business activity if the individual taxpayer so chooses. This means that if the enterprise is profitable overall there is no need to identify any separate loss making activities and, hence, the loss deferral rule in Division 35 will not apply at all (see paragraphs 86 to 88 of the Explanations below).

In some cases an individual taxpayer's circumstances may change leaving issues about their ability to deduct the full extent of any loss made. Any amount deferred under subsection 35-10(2) will only be deductible in a subsequent year if the *business activity that gave rise to this amount, or one 'of a similar kind', is carried on in that subsequent year. If the activity, or one 'of a similar kind', is never carried on again, the entitlement to deduct the amount will be lost (see Example 3 at paragraphs 131 and 132 below).

In determining whether Division 35 applies to the relevant *business activity it is necessary to identify both the allowable deductions 'attributable' to the *business activity and the assessable income 'from' that activity. The four tests in Division 35 are applied annually to each relevant *business activity. For the 2009-10 and later income years the income requirement must also be satisfied annually by the individual taxpayer who is carrying on the business activity, for satisfaction of any of the four tests to be relevant.

The 'amounts attributable to the *business activity' that an individual taxpayer can otherwise deduct are, for the purposes of applying the loss deferral rule in subsection 35-10(2), all those amounts otherwise deductible under any provision of the ITAA 1997, to the extent that they relate to the carrying on of the particular *business activity in the income year in question. The relevant assessable income from the *business activity is that income which is *derived directly from, and has its source or origin in the *business activity for the income year in question (see paragraphs 91 to 92C and Example 5 at paragraphs 134 to 136 of this Ruling).

Amounts attributable to the *business activity that an individual taxpayer can otherwise deduct can include pre-business capital expenditure incurred on or after 1 July 2005 otherwise deductible under section 40-880 (subsections 35-10(2C) and (2D)).

Division 35 will only apply to otherwise allowable deductions that are attributable for a particular year to the carrying on of a *business activity in that year (see subsections 35-5(2) and 35-10(1)). This means that typically they will be outgoings incurred in a particular year in the course of carrying on that *business activity in that year. There may be amounts however, for example, those deductible under paragraph 8-1(1)(b), that are deductible even though they are incurred after the business activity has ceased being carried on. [9] These otherwise allowable deductions are not subject to Division 35.

Post-business capital expenditure incurred on or after 1 July 2005 in relation to a *business activity previously carried on, may be deductible if one of the following is satisfied for the income year in which the business activity ceased to be carried out, or an earlier income year (subsection 35-10(2A)): (a) the individual meets the income requirement and their *business activity meets one of the four tests (set out in sections 35-30 to 35-45); (b) the Commissioner has exercised the discretion under section 35-55 for the business activity; or (c) the Exception in subsection (4) applies.

This Exception allows eligible individuals who carry on a *primary production business or *professional arts business to offset any loss (including any deferred amount) from their *primary production business or *professional arts business against other income in the current year. In addition, the Exception allows eligible individuals to deduct amounts under section 40-880 (business related costs) for expenditure incurred on or after 1 July 2005 in relation to a *business activity the individual used to carry on. This is regardless of the amount of the *business activity's income, assets, real property or profit, as the four tests are not relevant where the Exception applies if their assessable income (excluding any *net capital gain), from sources not related to the *business, is less than $40,000 for the income year in question (see paragraphs 89 and 90 of the Explanations and Example 4 at paragraph 133 below).

Where Division 35 does not apply and the excess deductions for the *business activity for the income year (whether in combination with other deductions, or alone) are greater than the individual's other assessable income and any *net exempt income, they will have a 'tax loss' under section 36-10. Deductibility of that tax loss in a later year will then be subject to Division 36 and not Division 35.

Assessable income is defined in section 995-1 of the ITAA 1997 to include statutory income as well as ordinary income (see generally, Division 6 of the ITAA 1997). This definition governs what income will be counted towards the Assessable income test in section 35-30, provided that such income is 'from' the relevant *business activity. Note that, where relevant, the amount taken into account will not include a Goods and Services Tax ('GST') component: see section 17-5 of the ITAA 1997.

To make a 'reasonable estimate' under paragraph 35-30(b) of assessable income that would have been *derived from the *business activity if it had been carried on throughout the income year in question (i.e., an estimate of a notional annual amount) an individual can consider all relevant factors, including, but not limited to: (a) the cyclical nature of the particular *business activity which may result in variations in the pattern of receipts; (b) any orders received and/or forward contracts entered into; (c) the amount that could have been *derived for a full income year based on a pro rata calculation of the assessable income already *derived for the part of the year. The amount *derived for the part of the year must be typical of the income *derived in a full year; (d) the type of *business activity undertaken, considering the nature and type of income receipts of similar activities typical of the industry; and (e) current size and investment in the activity.

Where a taxpayer lodges a tax return on the basis of a correctly made reasonable estimate of the assessable income the business activity would have earned for the income year for the purposes of section 35-30, there is nothing contained in the ITAA 1997 that allows a taxpayer to later revoke that reasonable estimate (see Example 3A at paragraphs 132A to 132E of this Ruling).

Initially this test will require the taxpayer to look at years before the commencement of Division 35. However, it is not a requirement that the *business activity be carried on for 5 years. If there is a profit in 3 out of 4 years that will be sufficient to satisfy the requirements of the test (see paragraph 93 of the Explanations and Example 6 at paragraph 137 below).

As section 35-35 examines the results and not the ownership of the business activity, a change of ownership in a particular year will not prevent profits from a business activity, made under a previous owner, from being taken into account for the purpose of the Profits test. Consequently, profits from a business activity, made under a previous owner can be taken into account, provided the change in the ownership or the terms and conditions of a sale of the business do not result in a loss of continuity of identity of the business activity (see Example 6A at paragraphs 137A to 137D of this Ruling).

For the purpose of applying the Real property test in section 35-40 where a person carries on a business activity as a partner, the values of assets owned or leased by another partner of the partnership that are not partnership assets but are used in carrying on the activity in that year must be ignored (paragraph 35-25(d)).

Where one party provides property for the partnership business and it can be concluded that the property is a partnership asset and that it is used in carrying on the partnership business activity, paragraph 35-25(d) does not exclude the value of the asset from being used by the partner who does not have legal title to the property in determining, for their purposes, whether the Real Property test in section 35-40 is met.

A 'partnership asset' is not defined for the purposes of the ITAA 1997. Whether an asset is a partnership asset is ultimately a question of fact and depends on the agreement of the parties and their acts and intentions (see Harvey v. Harvey (1970) 120 CLR 529; O'Brien v. Komesaroff (1982) 150 CLR 310; Kelly v. Kelly (1990) 92 ALR 74; 64 ALJR 234). For example, where one partner provides property for the partnership business without express agreement, although there had been no formal conveyance of the property, a practice of charging rent for the property would indicate that the premises remains the separate property of that partner (see Robinson v. Ashton (1875) LR 20 Eq 25) (see Example 6B at paragraphs 137E to 137H of this Ruling).

An issue arises concerning the Real property test in section 35-40. It concerns whether a holder of an interest in real property (e.g., a lessee) uses the *reduced cost base, or the market value (if greater), of that interest or, instead, of the underlying real property, in applying the Real property test. The words of section 35-40 allow an individual taxpayer to choose either of these methods in applying the Real property test to their *business activity i.e., the holder of an interest in real property can choose either the *reduced cost base or market value of: • the interest; or • the underlying property, they use in the relevant *business activity, for the purposes of applying the Real property test.

Paragraph 35-40(4)(a) specifically excludes from the assets that can be counted for the purposes of the Real property test a dwelling, and any adjacent land used in association with that dwelling, that is used mainly for private purposes. The word 'adjacent' was defined in Murray Goulburn Co-operative Co Ltd v. FCT 99 ATC 4455; (1999) 42 ATR 34 as 'lying near, close, or contiguous; adjoining; neighbouring'.

The meaning of the term *dwelling in this context is the same as for capital gains tax purposes. While the meaning of that term is set out in the CGT provisions (see section 118 115) this does not mean that section 118-120 has application when applying paragraph 35-40(4)(a). Section 118 120 provides an exemption from CGT consequences where a CGT event happens to land adjacent to a dwelling to the extent that the land is used primarily for private or domestic purposes in association with the dwelling. The maximum area of land covered by the exemption is 2 hectares. However, this exemption is only relevant for the purposes of the 'main residence' exemption under Subdivision 118 B. It does not apply to section 35-40.

As Division 35 makes no mention of a limitation on the area of adjacent land, any area of adjacent land used in association with a dwelling that is used mainly for private purposes will be excluded from the assets that can be counted for the purposes of the real property test (see Example 6C at paragraphs 137I to 137K of this Ruling).

Whether a vehicle falls within the category '*cars, motorcycles and similar vehicles' depends on the nature of the vehicle. The term 'cars' is defined in section 995-1 as a motor vehicle designed to carry a load of less than one tonne and fewer than nine passengers. It does not include motor cycles or similar vehicles.

The term 'motor vehicle' is then defined in section 995 1 to mean 'any motor-powered road vehicle (including a four-wheel drive vehicle)'.

Therefore, to determine whether a particular vehicle comes within the definition of 'cars' it must be determined whether it: • is a motor-powered road vehicle (including a four-wheel drive vehicle) • is designed to carry a load of less than one tonne • is designed to carry less than nine passengers.

The legislation does not define the meaning of the term 'motorcycle' and so takes on its ordinary meaning.

The Macquarie Dictionary [9A] defines 'motorcycle' as: n. a motor vehicle resembling a bicycle, for one or two riders, sometimes with a sidecar attached.

For a vehicle to be 'similar' to a car or motorcycle it does not have to be identical. An item is not required to exhibit all the features of the original to be considered similar (Galcif Pty Ltd v. Dudley's Corner Pty Ltd (1995) 6 BPR 14,134; Goodfellow v. FC of T 77 ATC 4086; (1977) 7 ATR 265) (see Example 7A and Example 7B at paragraphs 140A to 140R of this Ruling).

The table in subsection 35-45(2) specifies the values for different classes of assets to be used in applying the Other assets test. For example, the tax value of an asset for which an individual can deduct an amount for its decline in value is its *written down value at the date that that value is to be determined (usually, the end of an income year). If an item of machinery has been depreciated to nil, the value to be taken into account for this test will also be nil. Item 3 of subsection 35-45(2) makes it clear that where the asset is leased, the value of the interest is the future lease payments to which the individual is irrevocably committed, less an interest component, and not the value of the underlying asset.

The use of assets required for them to be taken into account under one of the two assets tests must be something more than 'transient or insubstantial use' (see FC of T v . Stewart 84 ATC 4146; (1984) 15 ATR 387). This is evident also from the requirement in both sections 35-40 and 35-45 that the use of the assets in question must be on a 'continuing basis'. 'Continuing' is not defined for Division 35 purposes and therefore takes its ordinary meaning. Whether an asset is used on a continuing basis in the *business activity will depend on the circumstances of each case.

However, 'continuing' does not cover the following, or similar, circumstances: (a) the asset is used on a short-term basis for a specific task or for a one-off activity; or (b) the asset is acquired under an agreement for taking a unit of property on hire where the agreement is of a kind ordinarily entered into by persons taking property on hire intermittently as the occasion requires on an hourly, daily, weekly, monthly or other short-term basis. [10] The reference to using an asset on a short-term basis for a specific task does not mean that, for example, an item of machinery, such as a harvester, used in an ongoing *business, but only at harvest time, would be regarded as not being used on a continuing basis. On the other hand, a large item of earthmoving equipment hired on a one-off basis for the construction of a dam would not meet the requirement of being used on a continuing basis.

Determination of the existence, or otherwise, of a partnership at general law will be determined under case law. Taxation Ruling TR 94/8 outlines the factors to be considered in deciding whether persons are carrying on a *business as partners.

If the arrangement between the parties is not as partners at general law, the interest of the individuals must be taken into account separately and assessed independently against all of the tests.

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The meaning of the composite phrase, '*business activity', as it appears in Division 35, is explained in paragraphs 36 to 39 of this Ruling. A major point to note is that an individual's *business will not comprise separate and distinct *business activities for the purposes of Division 35 where all the activities are interlinked, and support each other in a genuine commercial way.

During consultation on this Ruling the view was expressed that the term '*business activity' effectively had the same meaning as *business as defined in section 995-1. In other words, there was no warrant for separating out various parts of an individual's *business into separate *business activities. Some support for this view can be found in the objects clause to Division 35, section 35-5, specifically in subsection (1). There reference is made to Division 35 being intended to deal with '... losses from non-commercial activities that are carried on as *businesses'.

Such a view ignores the question of why the specific term, *business activity, is otherwise used regularly in the same manner throughout Division 35, especially in the key operative provision, section 35-10. If Parliament had intended the term *business activity to mean *business, it would have been easy enough to use the term *business rather than *business activity. However, on the basis of the view taken in this Ruling on the meaning of *business activity, in many cases it will be an individual's whole *business anyway that will be identified as the relevant *business activity for Division 35. Even under this alternative view there would be a need to perform separate calculations for the purpose of section 35-10 where the same individual taxpayer carries on separate and distinct *businesses.

Subsection 35-10(3) allows *business activities to be grouped for Division 35 purposes where they are activities 'of a similar kind'. A similar activity may be one that has evolved from the first *business activity, or it may simply be another *business activity carried on in the same year, that fits the description of being 'similar'. *Business activities which are of a similar kind are those which inherently have the same nature or character. The activities must be similar; they do not need to be identical ( Goodfellow ). The term 'similar' involves 'a near identity, a close correspondence, a resemblance in many, but not all respects' ( Galcif Pty Ltd v . Dudley's Corner Pty Ltd & Ors (1995) 6 BPR 14,134).

Identification of the relevant *business activity for Division 35 purposes will always need to occur having regard to the possible operation of subsection 35-10(3). In other words, there will be no practical effect achieved in splitting an individual's *business up into two or more separate *business activities if under subsection 35-10(3) they can be combined back together because they are 'of a similar kind'. These combined activities will then form the one *business activity for all Division 35 purposes.

However, where an individual does identify that their *business is in fact made up of more than one *business activity, they may choose not to group those activities under subsection 35-10(3) if it would not be to their advantage to do so.

Subsection 35-10(4) contains an Exception for *primary production businesses or *professional arts businesses that are carried on by certain individuals, where they have less than $40,000 of assessable income (excluding any *net capital gain), from sources not related to their *primary production business or *professional arts business. [12]

The term *Professional arts business is given a wide meaning in subsection 35-10(5) through use of the same concepts as found in Division 405 concerning the averaging of incomes of authors, *performing artists and *production associates. Paragraph 35-10(5)(a) includes as a *professional arts business a *business that an individual carries on as the author of a literary, dramatic, musical or artistic work. As noted under paragraph 35-10(5)(a), the term 'author' is a technical term from copyright law. Apart from the author of a photograph, which is generally the person who took it, the Copyright Act 1968 does not define what an author is. [13] Copyright law indicates that the author of a literary, dramatic, musical or artistic work will be the person who has 'originated it or brought it into existence and has not copied it from another'. [14]

When determining if the Exception applies it is necessary to ascertain whether the individual's assessable income from sources that do not relate to the *primary production business activity or *professional arts business activity is less than $40,000. Consequently this also means that if the individual derives assessable income from other sources that do relate to that business activity, it will not be taken into account in determining if the $40,000 threshold is met.

Whether the source of assessable income relates to a business activity is a matter of overall impression. It requires an association or connection between the two but the required extent of that association or connection will depend on the purpose and context of the provision in question (see Tooheys Ltd v. Commissioner of Stamp Duties (NSW ) (1961) 105 CLR 602, Secretary, Department of Foreign Affairs and Trade v. Boswell (1992) 36 FCR 367).

The purpose and context of subsection 35-10(4) do not suggest that any indirect or less than substantial connection between the two will be sufficient. Rather, they point to the relationship between the business activity and the source of the other income needing to be more than a remote one.

In the case of Spriggs v. Federal Commissioner of Taxation, Riddell v. Federal Commissioner of Taxation (2009) 239 CLR 1; 2009 ATC 20-109; (2009) 72 ATR 148 (Spriggs), the High Court found that each taxpayer, who was a professional sportsman, carried on a business of commercially exploiting his sporting prowess and reputation for profit and that employment with a club was part of that business.

The High Court said that whether, in relation to any sporting artistic or professional activity, an individual is carrying on a business that includes employment activities as opposed to pursuing activities of unrelated income derivation depends on a 'wide survey and an exact scrutiny' of the individual's activities. It indicated that the contractual framework under which an individual carries out their income earning activities, and the synergy or connection between the various activities, would be relevant in deciding this (see Example 4A at paragraphs 133A to 133F of this Ruling).

For income years up to and including the 2008-09 income year, where none of the four tests is satisfied, the Exception does not apply, and the Commissioner has not exercised the discretion in section 35-55, the rule in subsection 35-10(2) applies. [14A] Subsection 35-10(2) contains the loss deferral mechanism of Division 35. Under this provision, for a particular income year where 'the amounts attributable to the *business activity for that income year' exceed 'the assessable income from the *business activity for that year', then the excess is treated as though it 'were not incurred in that income year'.

The excess is treated as an amount attributable to that activity that the individual could deduct for the next income year in which the activity or a similar activity is carried on. The amounts attributable to the *business activity are those that the individual could, apart from Division 35, deduct under the Act for that income year. They do not include a 'tax loss' (as that term is used in Division 36) that might be deductible in that year, but has arisen in respect of carrying on operations in a previous year.

Watson v. Deputy Commissioner of Taxation [2010] FCAFC 17; (2010) 182 FCR 104; 2010 ATC 20-167; (2010) 75 ATR 224 ( Watson ) concerned whether income protection policy payments were assessable income from the business activity, being the taxpayer's financial planning business. The Full Federal Court held at paragraph 29 that the word 'from' is intended to have its dictionary meaning. It indicates the starting point, source or origin of the assessable income. It was held at paragraph 31 that '[i]f the starting point or source of the assessable income must be the business activity ..., [then] the extent and nature of that business activity must be identified ... [to] determine whether or not particular income is 'from' it'.

At paragraph 30 the Court held that the assessable income referred to in subsection 35-10(2) must be 'from' the business activity in the same year in which it is assessable income of the taxpayer.

In Watson the question was whether the source or origin of the policy income was the business activity. At paragraph 32 the Court concluded that the policy income was not 'from' the business activity in question because it was derived from the taxpayer's incapacity to conduct business activity, not from the activity the taxpayer actually undertook.

Farm Management Deposits [15] (FMDs) are designed to allow primary producer taxpayers to carry over income from years of good cash flow and to draw down on that income in years when the cash flow is needed. [16] It is also a requirement of FMDs that the taxpayer be carrying on a primary production business in Australia or the deposit must be repaid to the taxpayer. [17]

In relation to the assessable income that arises as a result of the withdrawal of a FMD, [18] the Commissioner accepts that where the FMD deposit was funded by the primary production business activity and the withdrawal occurs while that same business activity is conducted, the extent and nature of the business activity is such that the relationship between that assessable income and the conduct of the business means that the assessable income will be from the business activity for the purposes of Division 35 (see Example 5A at paragraphs 136A to 136D of this Ruling).

The Profits test in section 35-55 requires that the *business activity has produced 'profits' in 3 out of the past 5 income years (where this five year period includes the current income year), for the activity to satisfy this test. The term 'profit' refers to the excess of the tax law assessable income from the activity for the income year in question, over the tax law deductions attributable to carrying on the activity in that year (but does not include any deduction deemed attributable to the activity under subsection 35-10(2) in relation to a non-commercial loss deferred from a previous year).

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The first requirement concerning when a *business activity starts to be carried on is one that usually arises in relation to the deductibility of expenses incurred in the establishment of a *business activity. The actual date of commencement of a *business is a question of fact (see Goodman Fielder Wattie Ltd v . FC of T 91 ATC 4438 at 4446; (1991) 22 ATR 26 at 35).

For a *business activity to have commenced a person must have: • made a decision to commence the *business activity; • acquired the minimum level of 'business assets' to allow that *business activity to be carried on; and • actually commenced 'business operations'.

We believe that when a *business activity commences is like the question of whether a *business is being carried on at all and depends on the 'large or general impression gained' ( Martin v . FC of T (1953) 90 CLR 470 at 474; 5 AITR 548 at 551).

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. Not all *businesses commence in such an orderly fashion of course.

The intention and purpose of the taxpayer in engaging in the activity is relevant to when a *business commences. However, a mere intention to commence a *business activity is not enough: Goodman Fielder Wattie . The taxpayer must have more than an intention to commence *business. There must be activity. In Esso Australia Resources Ltd v . FC of T 97 ATC 4371 at 4382; (1997) 36 ATR 65 at 77-78 Sundberg J stated: 'While the taxpayer may have had the intention ultimately to engage in production, that is not sufficient in itself to constitute a business activity.' Sundberg J went on to say that 'commitment' was missing on the facts of the case. See also Brennan J in Inglis v . FC of T 80 ATC 4001 at 4004-4005; (1979) 10 ATR 493 at 496-497.

Whitfords Beach Pty Ltd v . FC of T 83 ATC 4277; (1983) 14 ATR 247 is one of the few cases that has examined the issue of the commencement of a *business activity and the factors to consider when determining the commencement of a *business activity. These factors were a consideration of the taxpayer's purpose and the taxpayer's activities. Bowen CJ, Morling and Fitzgerald JJ said, at ATC 4282; ATR 253: 'Of course it does not follow that all the activities engaged in by the taxpayer were necessarily in the course of that business or that some of them were not merely preparatory to it. In order to determine when the taxpayer's relevant business commenced and when its land or the various parts of it were committed to or ventured in that business, it is necessary to have regard both to the taxpayer's purposes and to its activities .' (emphasis added)

Most *business activities have a structure that provides the framework of the *business, or their 'profit yielding subject'. 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 .' (emphasis added)

For a *business activity to commence, an appropriate business structure should also 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. A suitable structure might even be established by the execution of certain documents, where independent contractors with the necessary capital assets are engaged. Even though the taxpayer may have no physical assets themselves, their rights as against the independent contractor secure use of such assets, and those rights can properly be said to be capital assets in the taxpayer's hands. However, each case will need to be determined on its own facts and having regard to industry norms.

As noted in Inglis , the level of activity is important. The extent of activity will also determine whether a *business activity has commenced and is in its start-up phase. Activity will support the taxpayer's claims to have commenced a *business activity. Brennan J in Inglis made it clear that there must be activity when he said at ATC 4004; ATR 496: '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. Little activity may suffice for carrying on a business that does not call for much activity, as in Thomas and in Ferguson .' (emphasis added) Brennan J went on to say at ATC 4005; ATR 497: ' At the end of the day , the extent of activity determines whether the business is being carried on . That is a question of fact and degree .' (emphasis added) The level of activity that is required will clearly vary from case to case. Based on the decision in Calkin two different types of activity are relevant: • acquisition of the minimum level of 'business assets'; and • the commencement of 'business operations'. Both are necessary to be able to conclude that a *business has commenced.

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The application of section 35-10 may be modified if in the current year the individual *derived *exempt income. This modification was inserted to ensure that losses deferred under Division 35 are treated similarly to how losses are treated under Division 36.

A current year non-commercial loss to be deferred under paragraph 35-10(2)(b) may be reduced if the individual *derived *exempt income. The non-commercial loss (apart from any deduction deemed to arise under subsection 35-10(2)) must be reduced by any amount of net *exempt income *derived in the current year that has not already been used to reduce any Division 36 tax losses, before being able to be deferred under paragraph 35-10(2)(b). If the total current year non-commercial loss is fully reduced by the individual's *exempt income, no amount will be deferred.

Section 35-20 modifies the operation of the non-commercial loss deferral rule contained in subsection 35-10(2) in certain circumstances relating to bankruptcy. The non-commercial loss deferral rule is modified in accordance with subsection 35-20(3) where: • an individual becomes bankrupt or is released from bankruptcy in the current income year (subsection 35-20(1)); or • in that year their bankruptcy is annulled under section 74 of the Bankruptcy Act 1966 by a release from debt under a composition or scheme of arrangement accepted by their creditors (subsection 35-20(2)).

The effect of subsection 35-20(3) is that a non-commercial loss incurred by the individual prior to any one of the above events, and deferred under the loss deferral rule, will not be deemed to be attributable to the *business activity. The deferred loss will not be available to be deducted in that year or any subsequent year.

An individual taxpayer can apply to the Commissioner for a Private Ruling on whether the discretion in section 35-55 would be exercised in relation to their *business activity. Such an application should be in the required format. A taxpayer can apply for a Private Ruling in relation to an arrangement which has not yet commenced, so long as it is being 'seriously contemplated' (paragraph 14ZAN(h), Taxation Administration Act 1953 ). Details of such an arrangement and the reasons why the Commissioner should exercise his discretion under subsection 35-55(1) may therefore extend over a number of years into the future. Further information on applying for a Private Ruling, particularly one involving subsection 35-55(1), can be found on the Australian Taxation Office website (http://www.ato.gov.au).

Bill has operated a flower shop *business for several years, in which he sells a range of products other than flowers, such as fine china and various novelty items. Until recently there was nothing about his *business to suggest any part of it was separate or discrete from the rest.

In the last six months he has also operated a delivery service for his flowers, to expand his client base and compete with other sellers. Although a separate fee is charged for this service, looked at on its own, it is not profitable.

However, there is a clear commercial purpose behind offering the delivery service, and it has now become an integral part of Bill's overall *business.

The delivery activity would not be regarded as a separate and distinct *business activity for the purposes of Division 35, even though it is being carried on at a loss.

Six years ago Des purchased 5 hectares of land on the outskirts of a capital city, for $455,000, where he has since been living. He planted 1 hectare with grapevines, which have now come into full production. For the current income year his sales of grapes total $2,700. Initially his stock of plant and equipment was small. However, recently he has cut back his time worked as an employee in the city to only 2 days a week, and he has been devoting more and more time to providing various contract services, such as spraying, mowing, weeding, digging trenches etc., for other people in the district.

For some of this work he can use his original equipment, but he has also bought new equipment, so that for the current income year the *written down value of his depreciating assets will have increased to approximately $85,000. Despite earning income of $19,100 from this contract work, he has made an overall loss in relation to the two activities (grape growing and contract work) of $11,000, in part due to the interest he is paying on the loans taken out to purchase the land and the new equipment.

Although insufficient details are given in this example on which to determine this point, a complete examination of his grape growing activity may show that it lacks sufficient of the recognised features of a *business (e.g., those outlined in Taxation Ruling TR 97/11) for it to qualify as a *business activity. Such an examination may also show that on its current size and scale, it cannot reasonably be expected to ever exist as any sort of autonomous commercial undertaking and therefore losses attributable to it are not allowable.

Assuming however, that the grape growing is a *business activity, the question then arises, because of the separate and discrete way in which it is largely carried on, whether or not Des is carrying on just the one *business activity of grape growing and providing contract services, or two separate and distinct *business activities. Applying the factors and reasoning described in paragraphs 40 to 46 of this Ruling leads to the conclusion that the grape growing or vineyard activity is a separate *business activity from that of providing the contract services. This is not a case where the earning of income from doing such things as the spraying etc., is merely ancillary or incidental to the carrying on of a *primary production business.

On the basis that the two activities in this case are separate and distinct *business activities for the purposes of Division 35, the further question then arises, as to whether or not they are 'of a similar kind'. If they are, then Des can group them together under subsection 35-10(3), and this combined *business activity will then satisfy the Assessable income test. Otherwise, when looked at as two separate *business activities, neither will satisfy any one of the four tests. Would the activities undertaken by Des be *business activities 'of a similar kind'? Applying the factors described in paragraph 51 to the facts in Des' case produces the following comparison: Factor grape growing Contract services Location On Des' small vineyard On properties of neighbours Goods or services provided Sale of grapes Provision of contract services such as, spraying, mowing, etc. Market conditions Governed by domestic and world market conditions for grapes Dependent on demand of other farmers for services provided using the equipment; whether services of any other contractors available locally Assets employed Des' land, and vineyard equipment used for grape growing Various items of machinery Other characteristics Nature of income *derived - from sales of produce from land-affected by risk of crop failures etc. Nature of income *derived -from the provision of services

An overall comparison therefore shows some similarities between the two activities, e.g., use of common assets (the vineyard equipment) in both, and both activities involve, to some degree, the working of land used for growing grapes in a vineyard. However, there are significant differences between the activities as well - the different locations and market conditions, different other assets used, the significantly different way in which income is *derived in each activity, and the different elements of 'risk' that apply to each. If the two activities do constitute two separate and distinct *business activities, they would not be regarded as being 'of a similar kind' for the purposes of Division 35.

Therefore, under Division 35 Des will have to attribute those otherwise allowable deductions, such as depreciation on the vineyard equipment, between the two *business activities to determine the profit or loss from each *business activity. As separate activities, neither satisfy any of the four tests. The loss deferral rule will therefore apply separately to losses from both activities (assuming that the Exception does not apply, and that there is no exercise of the Commissioner's discretion).

Marie owns land on which she previously carried on a *business activity. Due to losses incurred in a prior income year, there is an amount of $11,000 that she could potentially deduct against assessable income earned from the *business activity, or a similar one, in a later income year under paragraph 35-10(2)(b). In the current year, however, she is not carrying on any *business activity, and it is unlikely that she will ever do so again. One fifth of the land is rented out in this year at a commercial rate to someone else.

Two consequences from these events should be noted: (a) Marie will lose her entitlement to a potential deduction unless she carries on the same *business activity (or one 'of a similar kind') to which the amount of $11,000 relates in a later income year; and (b) Marie's rental income is unlikely, on well established authority, to be income from the carrying on of a *business activity. Therefore, Division 35 will not apply to any loss made from the rental activity and she will not be required to defer it. However, as only part of the land is now being used for the purpose of producing assessable income, Marie will need to apportion expenses that relate to the land as a whole, e.g., interest, insurance, rates and taxes, etc. These outgoings will only be deductible to the extent to which they are incurred under section 8-1 in producing the rental income.

Laura resigned from her job and commenced a green grocer business activity in the new local shopping centre in June 2012. Laura made a loss from this activity in the 2011-12 income year. The assessable income from the business activity for the period 1 June to 30 June 2012 was $6,000.

Laura made a reasonable estimate of assessable income that would have been derived from the business activity had it been carried on throughout the 2011-12 income year by considering such factors as: (a) the amount that could have been derived for the full income year based on a pro rata calculation of the assessable income already derived for the month of June, that is, $6,000 (b) the cyclical nature of the taxpayer's business activity which may result in variations in the pattern of receipts (c) the type of business activity undertaken, considering the nature and type of income receipts of similar activities typical of the industry.

Based on a pro rata calculation of $6,000 per month for a full income year and given the nature of the business activity, Laura made a reasonable estimate of assessable income of approximately $72,000 for the 2011-12 income year. On that basis Laura's business activity met the requirements of paragraph 35-30(b). Subsequently Laura lodged her 2011-12 income tax return for the year and included the income and deductions from the business activity.

In the 2012-13 income year the green grocer business made assessable income in excess of $200,000. Laura requested an amendment to her 2011-12 income tax assessment on the basis that the reasonable estimate should be revoked and that the Assessable income test should now be considered not to have been satisfied. The purpose of the amendment was to enable Laura to claim the loss previously claimed in the 2011-12 income year against assessable income in the 2012-13 income year.

However, at the time Laura lodged her 2011-12 tax return the information it contained was correct and there is nothing contained in the ITAA 1997 that allows Laura to revoke the reasonable estimate made for the purposes of section 35 30. Consequently, Laura's amendment request was refused.

Jessie is a teacher earning a salary of $34,000 a year and has no other non-primary production assessable income. In addition to teaching, Jessie carries on a *business of alpaca farming and made a loss from this *business activity of $5,000 in the current year. As Jessie's non-primary production income is less than $40,000, the exception is satisfied and she does not need to satisfy any of the tests in Division 35 in order to offset her primary production loss against her teaching income.

Eric is an individual who has carried on a 'professional arts business', as defined in subsection 35-10(5), for some years. Otherwise allowable deductions attributable to this *professional arts business activity exceeded assessable income from the activity for the income year.

During the income year Eric was also employed as a lecturer in art at a tertiary institution. Eric's conditions of employment required him to undertake suitable research on an ongoing basis. This requirement could be met by the production and exhibition of works as a professional artist. Eric satisfied the research requirement by continuing to carry on a business as a professional artist. Eric's assessable income for the income year from employment as a lecturer in art was more than $40,000 and he also satisfied the income requirement in subsection 35-10(2E) for the income year. He wishes to know if his professional arts business activity is exempted by subsection 35-10(4) from the loss deferral rules applying.

Eric's employment, as a source of assessable income, is only indirectly and less than substantially related to their professional arts business: • whilst the activities conducted by Eric as part of the professional arts business may be relevant for employment purposes, the employment is not relevant for the purposes of the professional arts business; • different types of contract are used in the production of the assessable income from the two different sources, with different terms and conditions; • different assets are used in producing the different types of assessable income; • the nature of the income from the two sources is different (on the one hand, salary or wages are derived under a contract of service; on the other hand, business income from the sale of art is derived under contracts for the sale of goods); and • the level of risk attaching to whether income will be derived from either source is different and unrelated.

As a matter of overall impression, the assessable income from Eric's employment is from other sources not related to his professional arts business. Therefore Eric's professional arts business is not exempted from the loss deferral rule applying because his assessable income from sources not related to his professional arts business is greater than $40,000.

Eric 's situation is distinguishable to that of the taxpayers in Spriggs. Unlike the arrangements in Spriggs, Eric's contract of employment is solely a contract of employment between the taxpayer and the tertiary institution. It is not a broader contract involving additional parties that provides for the carrying on of other income-producing activities as well as the employment activities. There is no necessary connection effecting a clear 'synergy' between the employment as an art lecturer and the conduct of the professional arts business.

The amount of the employment income is therefore taken into account in determining whether the $40,000 threshold in subsection 35-10(4) is exceeded.

Assume the following figures for Michelle's pearl farming *business activity where the Exception does not apply to her and the Commissioner's discretion has not been exercised in her favour: Year Assessable Income (1) Allowable deductions (2) Deferred deduction from previous year Net (1) - (2) Deferred deduction for current year 1 $4,000 $5,000 Nil ($1,000) $1,000 2 $4,000 $5,500 $1,000 ($1,500) $2,500 3 $6,000 $5,000 $2,500 $1,000 $1,500

In each year none of the tests of Division 35 is passed. Therefore subsection 35-10(2) applies. The excess of allowable deductions over assessable income in relation to the *business activity is deemed not to be deductible in each income year. It is deemed to be a deductible amount attributable to the activity for the next income year in which that activity is carried on and, thus, potentially subject to Division 35 in that year.

Subsection 35-10(2) will continue to operate in this manner until one of the tests of Division 35 is met, or the Commissioner's discretion is exercised. If any of the tests had been met in Year 3 in the above example, the $1,500 would have been deductible in full in that year.

Anura carried on a primary production business activity within Australia for the whole of the 20014-15 income year.

In the 2012-13 income year Anura made a valid farm management deposit (FMD) in accordance with Subdivision 393. The funds for this deposit were from the operation of the particular primary production business activity. In the 2014-15 income year Anura made the decision to have the FMD repaid and this resulted in an amount being included in Anura's assessable income for that income year by section 393-10.

Anura wishes to know if the assessable income that arises as a result of the operation of section 393-10, because the FMD is repaid, is assessable income 'from' the business activity when: (a) applying the loss deferral rule in Division 35, in subsection 35-10(2); and/or (b) determining whether the Assessable income test in section 35-30 has been satisfied?

On the facts of this particular case, the Commissioner accepts that the extent and nature of Anura's business activity is such that the relationship between the assessable income resulting from the FMD repayment and the conduct of the business means that the amount is assessable income 'from' the business activity for the 2014-15 income year. Therefore Anura can take this assessable income into account for the purposes of applying the loss deferral rule in subsection 35 10(2) or determining whether the Assessable income test in section 35-30 has been satisfied.

For the example below, assume the profit or loss in each year is from the same or a similar activity and the activity is regarded as a *business for taxation purposes, but does not satisfy the Assessable income test, the Real property test or the Other assets test. Also, assume that the Exception in subsection 35-10(4) does not apply. Yr Profit or loss from activity Other income Taxable income Cumulative loss deferred 1 Loss $10,000 $50,000 $50,000 Note 1 $10,000 2 Profit $2,000 $50,000 $50,000 Note 2 $ 8,000 3 Profit $5,000 $50,000 $50,000 Note 3 $ 3,000 4 Loss $10,000 $50,000 $50,000 Note 4 $13,000 5 Profit $5,000 $50,000 $42,000 Note 5 $ 0 Notes: (1) Year 1 - loss deferral rule applies, loss deferred to next year activity is carried on. Loss from Year 1 to be held over. (2) Year 2 - the deferred loss from Year 1 can only be offset against the profit from the activity in Year 2 (paragraph 35-10(2)(b)). Balance of loss deemed to be deduction attributable to activity in the next year it is carried on. (3) Year 3 - the deferred loss from Year 2 can only be offset against the profit from the activity in Year 3 (paragraph 35-10(2)(b)). Balance of loss deemed to be deduction attributable to activity in the next year it is carried on. (4) Year 4 - loss deferral rule applies. (5) Year 5 - The activity has made profits in three out of the past five years, including the current year. It has passed the Profits test. Deferred loss can now be offset against other income in full.

Cathy purchased a primary production business from a family trust part way through the current income year.

The family trust had made profits in the four previous income years, prior to the change of ownership, as the sum of the deductions attributable to the activity was less than the assessable income from it for each of those four previous income years.

Although Cathy continued to carry on the business in the manner it was conducted by the family trust, she made a loss from the business activity for the current income year.

However, as the change in ownership did not result in a loss of continuity of identity of the business activity, Cathy is able to take into account the profits made under the family trust for the purposes of the Profits test to determine whether the deferral of losses rules in section 35-10 applies in her circumstances.

The Darryl and Peter Partnership operate a business activity.

Darryl has sole legal title to the land that is used exclusively in carrying on the partnership business activity. He does not charge the partnership rent for use of the land.

In this case, as Darryl is using the land exclusively for the partnership business and is not charging the partnership rent for the use of the land it would be reasonable to conclude that Darryl is treating the property as a partnership asset.

As it can be concluded that the property is a partnership asset, and that it is used in carrying on the partnership business activity, paragraph 35-25(d) does not exclude the value of the asset from being used by Peter, ie. the partner who does not have legal title to the land, for the purposes of the Real property test to determine whether the deferral of losses rules in section 35-10 applies in his circumstances.

Anura carries on a business activity of mixed farming on 20 hectares of land which she owns. She uses one hectare for private purposes comprising her private dwelling, tennis court, swimming pool and gardens. Anura uses the other 19 hectares on a continuing basis solely for the mixed farming business activity.

While the total area of land is 20 hectares, as Anura's dwelling and adjacent land used solely for private purposes in association with that dwelling is one hectare, the one hectare of land cannot be counted for the Real property test.

However, the apportionment rule in section 35-50 will apply in relation to the remaining 19 hectares of land that is used for the purpose of carrying on the business activity.

Ron operates as a sole trader. He runs a 4WD driving school on his 40-hectare property. On the same property he also grows dahlias for sale and exhibition. Both are *businesses. The property also contains his residence and surrounding land he uses for private purposes.

The two *business activities are not similar activities. The value of the real property and other assets must be apportioned between each *business activity and the private use of the property. The value of the *dwelling should be excluded before any apportionment exercise is undertaken under section 35-50.

Ron will need to keep adequate records to allow him to make a reasonable apportionment of his assets between his *business activities and his private *dwelling.

Julie conducts a business activity of beef cattle grazing. She currently owns an Ag-Bike which is used when she checks on the cattle. While the Ag-Bike is useful for this purpose she is considering purchasing an All-terrain vehicle (ATV), a four wheel motorcycle, for the extra stability that is provided by having four wheels and would like to know if both machines are able to be counted for the Other assets test in section 35-45.

Ag-Bikes are motorcycles with special heavy duty features to make them suitable for farm use. Some Ag-Bikes can also be registered for on-road use. Ag-Bikes are considered to be motor cycles within the ordinary meaning of that term and therefore come within the category of '*cars, motorcycles and similar vehicles'.

ATVs are commonly referred to as three-wheeled and four-wheeled motorcycles. This is because they share a number of features similar to two-wheeled motorcycles such as: • ATVs have similar engines, transmissions and brakes to two-wheeled motorcycles • ATVs are designed and manufactured by two-wheeled motorcycle manufacturers • ATVs are sold by motorcycle dealers.

It is therefore considered that ATVs fall within the category 'cars, motorcycles and similar vehicles' in paragraph 35-45(4)(b).

Accordingly, Julie is not able to include the value of the Ag-Bike and ATV for the purposes of the Other assets test in section 35-45.

Ashley conducted a business activity of building rally cars for sale during the 2014 income year. The vehicles are individually built to suit customer requirements or constructed and held in stock. The vehicle is based on a sedan passenger car platform. In the car's standard passenger sedan form, the vehicle satisfies the definition of the term 'car'.

To build a rally car, a passenger car is modified by having the rear seat removed, which means that the vehicle can only accommodate two passengers including the driver. The vehicle's passenger protection is also enhanced (roll cage etc) and engine modifications are carried out to improve the vehicle's performance. These rally vehicles are generally only driven on public roads that are closed to the public.

Ashley had one of these rally cars in stock at the end of the 2014 income year.

The rally car is an item of trading stock [19] whose value can be included for the Other assets test unless specifically excluded by subsection 35-45(4). Subsection 35-45(4) specifically excludes '*cars, motor cycles and similar vehicles' from being counted for the test.

Whether a vehicle satisfies the definition of '*cars, motor cycles and similar vehicles' and is excluded, depends on the nature of the vehicle. That is, whether the vehicle in question satisfies the relevant definitions, or ordinary meanings of the relevant terms, as the case requires.

The critical issue in this case is whether rally cars are '*cars, motor cycles and similar vehicles' for the purposes of paragraph 35-45(4)(b). The term 'cars' is defined in section 995-1. A 'car' is a motor vehicle designed to carry a load of less than one tonne and fewer than nine passengers. It does not include motor cycles or similar vehicles.

The term 'motor vehicle' is then defined in section 995-1 to mean 'any motor-powered road vehicle', including a four-wheel drive vehicle.

Therefore, to determine if a rally car comes within the definition of 'cars' it must be determined whether the rally car: • is designed to carry a load of less than one tonne; • is designed to carry less than nine passengers; and • is a motor vehicle; • or is a vehicle similar to 'cars'.

When a vehicle is modified, the modifications will need to be significant, not easily reversed and fundamentally change the vehicle to remove it from the classification of 'cars, motor cycles and similar vehicles' for the purposes of section 35-45.

Where a vehicle, that is a derivative of a car, has undergone significant modifications, it may be necessary to assess on a case by case basis, whether the vehicle is a 'similar vehicle' for the purpose of paragraph 35-45(4)(b). Each case would need to be determined on its individual facts, as not all modifications will affect the nature of the vehicle (Miscellaneous Taxation Ruling MT 2033).

A car modified for rallying will remain a car or similar vehicle. This is because the modifications for the purpose of Division 35 will need to extend beyond changing the function of the vehicle, to altering the fundamental design of the vehicle.

Even though Ashley's rally car is only used on closed public roads and there have been some modifications to the vehicle, the nature or fundamental design of the vehicle has not changed. The rally car is: • designed to carry a load of less than one tonne; • designed to carry less than nine passengers; and • is a motor vehicle; • or is a vehicle similar to 'cars'.

Ashley's rally car satisfies the definition of 'cars, motor cycles and similar vehicles' in paragraph 35-45(4)(b) and as a result, is an asset that cannot be counted for the other assets test.

Two sisters, Erin and, Katie, and their family trust, the EK Trust, are partners in a chocolate manufacturing *business. The partnership (through the partners) owns a number of 'other assets' which have a *written down value of $135,000 and which are used on a continuing basis in the *business. Each partner has an equal share in these partnership assets. Erin also owns a depreciating asset that has a *written down value of $15,000. She allows the partnership to use the asset in its *business activity on a continuing basis. However, at no stage does Erin's asset become a partnership asset.

In determining whether Erin's *business activity satisfies the Other assets tests, she can take into account the value of other assets of the partnership which is attributable to only the individuals of the partnership, that is, $90,000 (2/3 of $135,000). However, she can also take into account the value of the asset she owns and allows the partnership to use, that is, $15,000. The total value of other assets that Erin can take into account for the test is therefore $105,000. Erin's *business activity satisfies the Other assets test threshold of $100,000.

Katie cannot include the value of Erin's plant for the Other assets test. This is because it is not an asset that is either attributable to her, or to an individual's interest in the partnership assets. (The item of plant is not a partnership asset, and so cannot be attributable to the interest of the individuals in the partnership.) The value of other assets attributable to Katie is $90,000 (2/3 of $135,000).

Katie (or Erin) cannot count the one-third interest of their family trust for any of the tests. Katie's *business activity does not satisfy the Other assets test. She will need to consider one of the other tests. If her *business activity does not satisfy one of the other tests, where it would be unreasonable for the loss deferral rule in subsection 35-10(2) to apply, she can ask the Commissioner to exercise the discretion under subsection 35-55(1).

Bob and Brendan are partners in a general law partnership which carries on a publishing *business and they each receive a $2,000 distribution from it. Bob has no other attributable expenses and the result for him is a profit from the *business activity for the income year.

Brendan took out a loan to fund his contribution to the partnership on which he pays interest of $5,000 during the year. Brendan's $5,000 interest expense is attributable to his interest in the partnership net income. Brendan's deductions that are attributable to the activity ($5,000) exceed the income he has *derived from it ($2,000). Brendan has a loss for the income year from the activity. If this pattern of income and attributable expenses were to continue for a further two years (years 2 and 3), with the partnership distributing losses to Bob and Brendan in years 4 and 5: • Bob would pass the Profits test in years 4 and 5, as when testing for each of those years he would have profits from the activity in three out of the past five years (i.e., years 1 to 3); whereas • Brendan would not pass the Profits test in any of the five years, as even in the years in which he received a distribution of partnership income, his attributable expenses meant that overall he did not make a tax profit from that activity in any year.

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Besides her part time office job Heather has a driving school *business. In the current year Heather has a non-commercial loss of $10,000 from her driving school *business activity, and *derived *exempt income of $2,000. Heather has no tax losses under Division 36. The non-commercial loss deferred under paragraph 35-10(2)(b) to Heather's next year of *business is $8,000 ($10,000 - $2,000).

If in the following year income year Heather earns more than $20,000 from her driving school *business and passes the Assessable income test, she may deduct the deferred loss of $8,000 from her other income. This is so whether or not she has *derived any net *exempt income in that year.

In Year 1 Rhonda has a $2,000 non-commercial loss from a *business activity. The rule in subsection 35-10(2) defers that loss and deems it to be attributable to that activity in the next year it is carried on. If in Year 2 Rhonda's *business activity made a profit of $4,000, her Year 1 non-commercial loss would normally be deductible against her Year 2 profit. However, if she is declared bankrupt in Year 2, her loss from Year 1 will no longer be available for deduction in Year 2 or in any subsequent year.

This is the last Taxation Ruling for the 2001 calendar year. The next Ruling will be Taxation Ruling TR 2002/1.

Below is a detailed contents list for this Ruling: Paragraph What this Ruling is about 1 Interpretation 1C Class of person/arrangement 2 Date of effect 4 Flowchart: operation of Division 35 5 Legislative framework 6 Introduction to Division 35 6 *Primary Production and *Professional Arts businesses Exception 9 *Business needs to be carried on 10 Calculating the non-commercial loss 11 Effect of passing one of the tests, coming within the Exception or an exercise of the Commissioner's discretion 13 Income requirement 13A Income years before the one in which the business activity starts to be carried on 13B Income year in which the business activity starts to be carried on 13C Post-business capital expenditure 13D The four tests and their operation 14 Assessable income test 14 Profits test 15 Real property test 16 Other assets test 21 When is an asset's value determined? 25 Leased assets and the two assets tests 26 Depreciating assets and the two assets tests 27 The operation of the tests when the *business activity is conducted by individuals in partnership 28 Exercise of the Commissioner's discretion 30 Exercise of the Commissioner's discretion - pre-business capital expenditure 30A Latest time for exercise of the Commissioner's discretion 31 Application of Division 35 when an individual has *exempt income 32 Application of Division 35 if an individual becomes bankrupt 33 Key Terms 34 Ruling 35 *Business needs to be carried on 35 Meaning of '* business activity' 36 Identifying separate *business activities 40 Table 1 - relevant factors concerning identifying separate *business activities 45 A common-sense approach 47 *Business activities ' of a similar kind' 49 Determining whether *business activities are ' of a similar kind' 51 Ceasing to carry on a *business activity 55 Application of Division 35 year by year 56 Calculating the non-commercial loss on a year by year basis 57 Deductions allowable after *business carried on 58 *Primary Production and *Professional Arts businesses Exception 59 Distinguishing a Division 35 loss from a Division 36 loss 60 Assessable income 61 Making a 'reasonable estimate' of assessable income for the purposes of the Assessable income test 62 Profits test 63 Partnership assets for the purposes of the Real property test 63B What is the meaning of 'any adjacent land used in association with the *dwelling' for the Real property test 64A What are '*cars, motorcycles and similar vehicles' for the Other assets test? 64D Whether to value the real property or the interest in real property in applying the Real property test 64 Values to be used in applying the Other assets test 65 What is continuing use in the *business activity for the purposes of the Real property test and the Other assets test? 66 All tests - determining whether general law partnership exists 68 When does a business activity start to be carried on for the purposes of the second limb of the Commissioner's discretion in section 35-55? 69A Explanations 83 Meaning of '*business activity' and identification of separate and distinct *business activities within the one *business 83 Alternative view 84 *Business activities ' of a similar kind' 86 *Primary Production and *Professional Arts businesses Exception 89 Calculating the non-commercial loss 91 Assessable income from the business activity 92A Profits test 93 Whether a business activity has started to be carried on for the purposes of the Commissioner's discretion in section 35-55 97 Decision to commence 100 Business structure 103 Business operations 105 Application of Division 35 when an individual has *exempt income 115 Application of Division 35 if an individual becomes bankrupt 117 Applying for a private ruling 119 Examples 120 Example 1 - no separate *business activities 120 Example 2 - separate *business activities not 'of a similar kind' 124 Example 2A - Retail activities of a similar interrelated kind 130A Example 2B - Separate *business activities not 'of a similar kind' 130E Example 2C - Separate *business activities not 'of a similar kind' 130I Example 2D - Separate *business activities which are 'of a similar kind' 130N Example 3 - *business activity ceases 131 Example 3A - Assessable income test - revoke 'reasonable estimate' 132A Example 4 - the *Primary Production business Exception 133 Example 4A - *Professional Arts businesses Exception 133A Example 5 - operation of the loss deferral rule 134 Example 5A - assessable income from the business activity - farm management deposits 136A Example 6 - operation of the Profits test 137 Example 6A - Profits test - change in ownership 137A Example 6B - Real property test - partnership asset 137E Example 6C - Land adjacent to dwelling for the purposes of the Real property test 137I Example 7 - apportioning asset values across different *business activities 138 Example 7A - motorcycles and similar vehicles for the purposes of the Other assets test 140A Example 7B - cars and similar vehicles for the Other assets test 140F Example 8 - operation of the other assets test where general law partnership involved 141 Example 9 - operation of the Profits test where general law partnership involved 145 Example 15 - deferral of loss affected by *exempt income 171 Example 16 - deferral of loss affected by bankruptcy 173 Last Ruling 174 Detailed contents list 175