Private ruling: Non-commercial losses
Published: March 2013
Ruling period: Year ended 30 June 2010 | Year ended 30 June 2011 | Year ended 30 June 2012 | Year ending 30 June 2013 | Year ending 30 June 2014 | Year ending 30 June 2015 | Year ending 30 June 2016 | Year ending 30 June 2017 | Year ending 30 June 2018
Date scheme commenced: 1 July 2009

Ruling: Q1: Will the Commissioner exercise the discretion in paragraph 35-55(1)(c) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include any losses from your business activity in your calculation of taxable income for the 2009-10 to 2017-18 financial year? | A1: No.


Relevant legislative provisions: Income Tax Assessment Act 1997 - Section 35-1. | Income Tax Assessment Act 1997 - Subsection 35-10(2E). | Income Tax Assessment Act 1997 - Subsection 35-55(1) | Income Tax Assessment Act 1997 - Paragraph 35-55(1)(c).

Reasons for decision: Detailed Reasoning - Non-commercial loss provisions: Section 35-1 of the ITAA 1997 provides that an income requirement must be met (along with certain other tests), in order to include losses from a business activity in your taxable income calculation. If the income requirement is not met, the Commissioner may exercise discretion to allow the inclusion of the losses. You satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997 if your income for non-commercial loss purposes is less than $250,000. In your case, you do not satisfy the income requirement as your income for non-commercial loss purposes was above $250,000 in the 2009-10 financial year and you expect this will be the case in the 2010-11 to 2017-18 financial years as well. In order to exercise the discretion, the Commissioner must be satisfied there is an objective expectation, based on evidence from independent sources, that your business activity will produce assessable income greater than the deductions attributable to it for that year, within a commercially viable period (paragraph 35-55(1)(c) of the ITAA 1997). For the Commissioner to exercise the discretion you must be able to show that the reason your business activity is producing a loss is inherent to the nature of the business and is not peculiar to your situation. For example, the discretion will not be available where the failure to make a profit is for reasons other than the nature of the business such as, a consequence of starting out on a small scale, the hours worked, the need to build a client base or a high level of debt funding. You have not been able to provide independent evidence on the commercially viable period for the industry. However, you stated in your application that lead time includes time required to secure, plan, design and construct facilities, source equipment and complete works as well as the payback period for the costs of funding these investments. These types of variables would not be considered to be inherent to the nature of the business activity but peculiar to your situation. You have stated that you commenced your business activities in the 2009-10 financial year and began providing services in early 2010. Without taking into account any addition expenditure incurred on new equipment or constructing a new premises, your business activity would still have produced a loss in the 2009-10 to 2012-13 financial years. This loss is due to the small scale of the activity in the early years and the need to build a client base. Taking into consideration the information you have provided, the Commissioner is not satisfied that the commercially viable period for your type of business is ten years. The reason your activities made a loss is due to the small scale of your operations and your high level of debt funding. This is peculiar to your situation and is not inherent to the nature of the business. Where the business does not produce a profit within the commercially viable period, the Commissioner is not able to exercise the discretion. Therefore, the Commissioner is unable to exercise the discretion available in accordance with subsection 35-55(1) and paragraph 35-55(1)(c) of the ITAA 1997 for the 2009-10 to 2017-18 financial years.

Relevant facts: You commenced your business activity in the 2009-10 financial year. | The business commenced at a suburban premises. | You obtained an Australian business number in late 2009 and established an accounting system and other business processes. | You employed a manager and commenced word of mouth promotion and advertising and took bookings for services. | Bookings were taken from late 2009 and the services were provided from early to mid 2010. | You ordered new equipment from overseas in late 2009 and it was delivered and installed into the suburban premises for use mid to late 2010. | You entered into a lease for new premises in mid 2010 to fit out and engaged an architect and builder. | A planning permit application was lodged in early 2011 and approved plans were obtained later that year. A builder was selected and a contract entered in late 2011. The building works were completed in mid 2012 and the equipment was relocated and installed in the new premises soon after. | You have stated that it has taken time to identify clients and receive income. | Your profit and loss statements show: | · for the 2009-10 financial year no income was received from the activity but produced a loss of around $X. | · for the 2010-11 financial year, the business activity produced income of less than $X and business running costs of almost $X, and incurring an overall loss of around $X. | · for the 2011-12 financial year, the business produced income of around $X and business running costs of almost $X, and incurring an overall loss in excess of $X. | Your projections for the 2012-13 to 2018-19 financial years show that you do not expect to produce a profit form the activity until the 2018-19 financial year or 10 years after commencing. | You have not provided independent evidence of the commercially viable period for the industry. | You stated that lead time includes time required to secure, plan, design and construct new facilities, source equipment and complete works as well as the payback period for the costs of funding these investments. | Your income for non-commercial loss purposes in the 2009-10 financial year was above $250,000 and you expect this will be the case for the 2010-11 to 2017-18 financial years as well.