Private ruling: Non-commercial losses
Published: June 2013
Ruling period: Year ended 30 June 2012 | Year ending 30 June 2013 | Year ending 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 in your calculation of taxable income for the 2011-12 to 2013-14 financial years? Answer No

Relevant facts and circumstances: You acquired land on which you operate a primary production business. The business is operated by a manager on a day to day basis. You are involved in the business activities on the weekends and provide management direction. The land was purchased from an administrator who was in the process of realising the assets of the previous owners to satisfy financiers. The existing business activity that was operated on the land by the previous owners had effectively ceased. Therefore, the property was purchased without plant and equipment. Necessary large items of plant and equipment were transported from your previous property. One of the major expenses of the business activity is interest expenses relating to the loan facilities utilised to purchase the land. You do not satisfy the income requirement contained in subsection 35-10(2E) of the ITAA 1997.

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: Summary: 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. A taxpayer will satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997 if their 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 is above $250,000. 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. A recent decision by the Administrative Appeals Tribunal (AAT) considered a case where a delay in a taxpayer's cattle breeding business achieving profitability was attributable to financing costs. In this case the AAT held that high financing costs are not a factor that was inherent to the nature of the taxpayer's business and therefore not an appropriate circumstance for the Commissioner to exercise his discretion under section 35-55 of the ITAA 1997 ( Hefner and Commissioner of Taxation [2013] AATA 407). In your case, you commenced a new business activity and your projected profit and loss statement show you do not expect to produce a tax profit until the 2014-15 financial year. Your interest expenses for the loan relating to the purchase of the land and cattle represent over X% of your total expenses for the 2011-12 to 2014-15 financial years. We consider that the reason your business activity will take X years to become commercially viable is peculiar to your situation, due, in part, to the level of borrowings needed to acquire the land, and is not solely due to the factors inherent to the nature of the business. 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 2011-12 to 2013-14 financial years.