Private ruling: non-commercial losses
Published: March 2012
Ruling period: Year ended 30 June 2012 | Year ended 30 June 2013 | Year ended 30 June 2014
Date scheme commenced: 1 July 2011

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 2011-12 to 2013-14 financial years? | A1: No.

Relevant facts and circumstances: You do not satisfy the <$250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997. You carry on a residential construction business. You commenced business in the 2010-11 financial year. As an initial activity you plan to build a display project. The display is to be built in a new estate in a popular area to allow maximum exposure. Promotion of the display will be achieved during construction by website, logo, printed material, printed security fence logos and signage at the front of the site. A second display is planned at a later date. The first building contracts are expected within 12 months of the completion of the first display home. Completion of the initial sale project is expected in the first quarter of 2014. The business will be administered from a home office within your residence staffed by paid part time administrative staff. You will manage the business whilst maintaining paid employment. You have provided independent evidence as to the period it would take to break even, taking into account factors unique to your situation.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 35-10(1) | Income Tax Assessment Act 1997 subsection 35-10(2) | Income Tax Assessment Act 1997 subsection 35-10(2E) | Income Tax Assessment Act 1997 paragraph 35-55(1)(c)

Reasons for decision: Summary: For the 2009-10 and later financial years, Division 35 of the ITAA 1997 will apply to defer a non-commercial loss from a business activity unless: · you meet the income requirement and you pass one of the four tests · the exceptions apply · the Commissioner exercises his discretion. In your situation, you do not satisfy the income requirement (that is, your taxable income, reportable fringe benefits and reportable superannuation contributions but excluding your business losses, exceeds $250,000) and do not come under any of the exceptions. Your business losses are therefore subject to the deferral rule unless the Commissioner exercises his discretion. The relevant discretion may be exercised for the income year in question where: · because of its nature, there will be a period before your business activity will produce a tax profit · there is an objective expectation your business activity will produce a tax profit within the commercially viable period for your industry. The note to section 35-55 of the ITAA 1997 states that this 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 and provides an example of a hardwood plantation, where there is many years between the planting and harvesting of the trees [emphasis added]. The phrase 'because of its nature' refers to inherent characteristics of the type of business activity being conducted by the taxpayer, which are common to any business activity of that type. It is these inherent characteristics which must be the reason why the activity is unable to make a tax profit. The phrase because of its nature was discussed in Commissioner of Taxation v. Eskandari [2004] FCA 8. The Court considered that an exercise of the Commissioner's discretion to allow a loss must be a result of some inherent feature that a taxpayers business activity has in common with business activities of that type. In this case, the phrase because of its nature required the AAT to have regard to the nature of the migration consultancy industry and not just the taxpayer's particular business practices. You have indicated that you commenced a residential construction business on during 2011. You do not expect to make a tax profit until 2014-15 financial year, three years later. You have provided independent evidence as to the lead time and break even point of your activity, taking into account factors unique to your situation such as the scale and locality of the developments. These factors are not inherent to the industry but rather unique to your situation. Furthermore, your decision to build a display home, rather than first obtaining commissions or building contracts, is a strategy particular to your business and not a common feature of the industry in general. It is standard practise in the building industry to enter contracts and receive progress payments throughout each stage of construction and therefore generate assessable income quite soon after commencement. We do not consider that there is anything inherent or innate in the nature of your business activity which will prevent you from making a tax profit. Therefore, the Commissioner will not exercise the discretion under paragraph 35-55(1)(c) of the ITAA 1997 for the 2011-12 to 2013-14 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.