Private ruling: Non-commercial business losses
Published: March 2012
Ruling period: Year ended 30 June 2011 | Year ended 30 June 2012 | Year ended 30 June 2013 | Year ended 30 June 2014
Date scheme commenced: 1 July 2010

Ruling: Q1: Will the Commissioner exercise the discretion under paragraph 35-55(1)(c) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include losses from your property development activity in the calculation of your taxable income for the 2010-11, 2011-12, 2012-13 and 2013-14 financial years? | A1: 

Relevant facts and circumstances: You state your business activity has been carried out for over 20 years. The most recent time in which you made assessable income for the activity was in the 2005-06 financial year, which is also the most recent time in which the activity made a tax profit. The activity has returned a tax profit in 3 out of the past 11 financial years. You continue to incur expenses for the activity. You have provided information detailing market price fluctuations and discussions on the downturn in the industry. You expect to make a tax profit from the activity in the 2014-15 financial year. Your income for non-commercial loss purposes is expected to exceed $250,000.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 35 | Income Tax Assessment Act 1997 Paragraph 35-55(1)(c)

Reasons for decision: Summary: The Commissioner will not exercise the discretion for lead time to allow you to include the loss from your property development activity in the calculation of your taxable income for the 2010-11, 2011-12, 2012-13 and 2013-14 financial years. This is because the failure to make a tax profit from the activity is due to your business choices in relation to the development and subsequent sale of your properties, and is not inherent in the nature of the business activity. | Detailed Reasoning - Detailed reasoning: You have indicated that your property development activity commenced over 20 years ago. This ruling has, therefore, been determined on the basis of accepting your statement that you have been carrying on this business activity since this time. | Detailed Reasoning - Non-commercial losses: For the 2009-10 and later income years, Division 35 of the Income Tax Assessment Act 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. | Detailed Reasoning - Commissioner's discretion: The relevant discretion may be exercised for the income year in question where: · it is in the nature of your business activity that there will be a period before a tax profit can be produced · there is an objective expectation your business activity will produce a tax profit within the commercially viable period for your industry. The 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. Such activities have an inherent characteristic that cannot be overcome by conducting the business activity in a different way. 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, or, business choices made by an individual such as; hours of operation, business location, or level of debt funding. In your case, you acquired two properties in 2005, for which building approvals have been obtained. The properties have not been sold. You have stated that the commercially viable period for your industry could be up to 10 years, which includes the time from purchase of the property to completion of the building to the subsequent sale. You have provided information from newspapers and real estate websites providing details on housing market price fluctuations and discussions on downturns in the housing and tourism industries. However, there is no evidence provided that suggests there is any particular commercially viable period for your industry. In any case, it should be noted that the commercially viable period for an activity is measured from the commencement of the business activity itself: Applicant 1761 of 2011 v. Commissioner of Taxation [2011] AATA 779 at 27. A change to an aspect of that business activity which does not constitute a new discrete and distinct business activity, (see Taxation Ruling TR 2001/14), will not generally 'reset' this commencement date. Therefore, even if we accepted that the commercially viable period for your industry is 10 years, which we do not, the 10 year period would have finished several years prior to the period for which you are requesting the Commissioner's discretion. We consider that the reason your business activity is currently producing a loss is due to the business choice you have made due to unfavourable market conditions. This is not inherent to the nature of the business activity, rather, it is peculiar to your situation. As it is considered that the loss is not inherent in the nature of the business activity, the Commissioner will not exercise the discretion under paragraph 35-55(1)(c) of the ITAA 1997 to allow you to deduct a loss in the 2010-11, 2011-12, 2012-13 and 2013-14 financial years. Accordingly, under Division 35 of the ITAA 1997, your losses must be deferred in these 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.