Private ruling: Non-commercial losses - Commissioner's discretion
Published: January 2012
Ruling period: Year ended 30 June 2010 | Year ended 30 June 2011
Date scheme commenced: 1 July 2009

Ruling: Q1: 1. Are activities conducted under a trust structure, and your sole trader business activity considered similar activities for non-commercial loss purposes? | A2: 


Relevant legislative provisions: Income Tax Assessment Act 1997 - Section 35-1. | Income Tax Assessment Act 1997 - Subsection 35-10(3). | 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 - Grouping provisions: The non-commercial loss provisions contained in Division 35 of the ITAA 1997 only apply to business activities you carry on as an individual, either as a sole trader or in a partnership. If you are carrying on more than one business activity, business activities of a similar kind can be grouped together under this Division to establish whether a loss can be deducted (subsection 35-10(3) of the ITAA 1997). The High Court in Doherty v. FC of T (1933) 48 CLR 1 held that a beneficiary in a trust did not carry on the business, rather it was the trustee of the trust (in their capacity as trustee) which carried on the business. In your case, you conduct your medical practice through a trust, of which you are a beneficiary. These are not considered to be business activities carried on by you as an individual. The only business activity that you carry on as an individual is the medical facility as a sole trader. Therefore, the grouping provisions in Division 35 of the ITAA 1997 do not apply. | Detailed Reasoning - Commissioner's discretion: 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 and 2010-11 financial years. 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 or the need to build a client base. In your case, you purchased the medical facility in 2006, however, the facility itself was established in 1994. Where an ongoing business activity is purchased by a new owner, the 'period that is commercially viable for the industry concerned' is taken from the commencement of the activity, not from when the business was purchased by the new owner: Applicant 1761 of 2011 v. Commissioner of Taxation [2011] AATA 779 at 27. You have projected that your sole trader business activity will produce a tax profit in the 2011-12 financial year, or approximately 17 years after it commenced. You have not provided any independent evidence of the commercially viable for this type of business activity. Without this information the Commissioner is not able to conclude that 17 years is within a period that is commercially viable for your industry. Taking into consideration the information you have provided, the Commissioner is not satisfied that the commercially viable period for your type of business is 17 years. The reason your activities made a loss is peculiar to your situation. High debt levels and the need to find medical practitioners to use the facilities are not considered to be 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 will not 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 and 2010-11 financial years.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | 2. 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 sole trader business activity in your calculation of taxable income for the 2009-10 and 2010-11 financial years? | Relevant facts: You are a medical professional and have conducted your practice through a family trust (the trust) for a number of years. The trust also maintains a day surgery facility which is used by you and other medical practitioners under either a sub-lease or fee for service arrangement. | You and your spouse are beneficiaries of the trust. | During the 2009-10 financial year, the trust produced a net income of approximately $X. | During the 2010-11 financial year, the trust produced a net income of approximately $X. | In 20XX, you personally acquired a medical facility and operate it as a sole trader. | The medical facility was established in19XX. | The purchase included freehold title to the land and buildings and the accompanying business. | The facility has produced a loss each year to date, however, your projections show you expect to produce a profit in the 2011-12 financial year | You believe the reasons for the losses produced over the past five years are as follows: | § Debt levels - the high annual interest costs | § Utilisation rates - utilisation of the facility by medical practitioners | § Industry trends - changes in the medical industry | Your income for non-commercial loss purposes in the 2009-10 and 2010-11 financial years was above $250,000.