Private ruling: Commissioner's lead time discretion
Published: June 2012
Ruling period: Year ending 30 June 2012 | Year ending 30 June 2013
Date scheme commenced: 1 July 2010

Ruling: Q1: Will the Commissioner exercise his discretion under section 35-55 of the Income Tax Assessment Act 1997 (ITAA 1997) so the loss deferral rule in section 35-10 of the ITAA 1997 does not apply due to a required lead time between the commencement of your boat hire activity and the production of any assessable income? | A1: No

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. You purchased a boat, sailed it to a location for Australian customs purposes and then sailed it to another location to use in a boat hire activity. You argue due to the vessel being skippered between locations and the subsequent applications for necessary licenses to allow charter operation, including compulsory survey of the vessel, there is a lead time until the charter operation becomes profitable.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 35-55

Reasons for decision: Summary: Section 35-55 of the ITAA 1997 provides the Commissioner with a discretion to, on application, decide that the rule in subsection 35-10(2) does not apply to a business activity for one or more income years (the excluded years ) if the Commissioner is satisfied that it would be unreasonable to apply that rule because the business activity has started to be carried on and, for the excluded years: · because of its nature, it has not produced, or will not produce, assessable income greater than the deductions attributable to it; and · there is an objective expectation, based on evidence from independent sources (where available) that, within a period that is commercially viable for the industry concerned, the activity will produce assessable income for an income year greater than the deductions attributable to it for that year (apart from the operation of subsections 35-10(2) and (2C)). A note in section 35-5 of the ITAA 1997 explains the relevant discretion is intended to cover a business activity that has a lead time between the commencement of the activity and the production of any assessable income. For example, an activity involving the planting of hardwood trees for harvest, where many years would pass before the activity could reasonably be expected to produce income. Paragraph 92 of Taxation Ruling TR 2007/6 (which is about non-commercial business losses and the Commissioner's discretion) explains Division 35 does not require that a determination be made as to how long it will take a business activity to become commercially viable. Rather, it involves an enquiry into whether the business activity in question will satisfy a test or produce a tax profit within the time frame in which other business activities in the same industry, which behave in a commercially viable manner, do so. Paragraph 69 of Taxation Ruling TR 2001/14 (which is about Division 35 and non-commercial business losses) explains when a business commences. It states, broadly, this requires the taxpayer to 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. A mere intention to start carrying on the business activity will not be sufficient. Paragraph 84 of Taxation Ruling TR 2003/4 (which is about boat hire arrangements) states factors which may indicate that the boat hire activity is a business include: · the boat is available for charter to the general public; · the boat owner owns or leases the appropriate licences and permits required to carry on the charter activity; · the charter operator (whether the boat owner operates the activity directly or through another party) has the appropriate experience; · the owner and / or operator have appropriate indemnity cover; and · the use of the boat is not primarily directed at private use. In your case, there are no grounds for the Commissioner to exercise the discretion under section 35-55 of the ITAA 1997. The discretion cannot be exercised in a period where a business has not commenced. The period during which you were delivering your boat was not the conduct of a business because your boat was not available for charter to the general public, as you had not obtained the appropriate licences and permits required to carry on the charter activity. As for the period from when you boat was available for charter to the general public, there is no lead time between the commencement of a boat hire activity and the production of any assessable income that is relevant to the boat charter industry. The discretion in section 35-55 of the ITAA 1997 applies to industries (e.g., the timber industry) where a period of time is required from the commencement of the activity (e.g., the planting of trees) to the production of assessable income (e.g., the harvesting of trees). To the contrary, boat hire activities are generally expected to earn income immediately after the boat is commissioned, particularly, although not exclusively, when hired through a boat charter operator. However, whether your boat is hired through an established boat charter operator (via a boat hire arrangement) or whether you hire the boat yourself (via your own marketing activity) is irrelevant for the purposes of section 35-5 of the ITTA 1997 given any discretion exercised under section 35-55 must conform with an objective and established commercially viable for the industry concerned. In the case of boat hire, no such commercially viable industry period exists, or is required to exist, given boats can earn assessable income from the time they are commissioned for public hire. To conclude, the Commissioner will not exercise the relevant discretion in your case. Your application for the Commissioner to exercise his discretion is refused.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.