QUESTION 1:

On completing his Bachelor of Commerce degree at Macquarie University in June, 2017 Rick decides to enter private practice as a tax accountant. He joins the Australian Society of Certified Practising Accountants and he is hoping to complete all the necessary requirements in order for him to be certified shortly.

Rick sets up his business from home and converts one bedroom into an office. He places advertisements in various local newspapers in order to advise the public that he has commenced practice. His girlfriend, Emma who is a professional web-developer, designs and sets up a webpage for his business. He also has letterheads, business cards and other stationery printed. He also organises a leaflet drop to mailboxes in his area, advertising his services.

Unfortunately, Rick was not really established in his practice until late September 2018, and by this time the majority of the small business, which he hoped to attract, had been taken over by other firms. In an attempt to capture the clients and, mainly due to him charging fees which were two-thirds of what his competitors were charging, he did obtain a little work.

Rick decided to personally contact business clients and spent many months calling from door to door hoping to convince businesses that his firm should be tried - particularly given the very low fees he was prepared to charge. Rick had no success in this attempt and all in all, by June 2019, Rick was highly disillusioned about the prospect of running a private accounting practice, particularly from home.

Rick prepared and lodged tax own return for the financial year ending 30 June 2019. His gross income from his budding tax practice totalled $10,430 with expenses of $16,800. Rick received a substantial refund that was transferred to his ENZ Bank account from the Tax Office which was based on an offset of his business losses against other income totalling $34,500 which he had received during the year. Two months after receiving the refund, however, he was targeted for a desk audit. Following the audit, Rick received an adjustment sheet advising him that his income and expenses from his accounting practice had been disallowed as in the opinion of the Commissioner, such activities constituted a hobby and he was not deemed to be carrying on a business.

(ii) Is there any other possible ground on which Rick could be denied deductibility for the disputed claims? What likely repercussions would Rick incur should this ground succeed?