Private ruling: Non-commercial losses
Published: December 2012
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Will you pass the assessable income test in the relevant income year? | A1: Yes

Relevant facts and circumstances: You run a business. You run the business from home and do not have any other employees. You commenced the business activities part way through the relevant income year. Your business activities incurred a loss in the relevant income year that you attribute to business set up costs and the purchase of assets that will generate ongoing revenue for you. In the period that you were operating in the relevant income year, you derived less than $20,000 of assessable income. You have provided a profit and loss statement for a period in the subsequent income year. In this period, you have made sales of over $20,000. Based on your year to date figures, you anticipate that the business activity will return a profit in the subsequent income year. You satisfy the income requirement for non-commercial losses.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 35 | Income Tax Assessment Act 1997 Paragraph 35-30(b) | Income Tax Assessment Act 1997 Paragraph 35-55(1)(a)

Reasons for decision: Summary: For the 2009-10 and later income years, Division 35 of the Income Tax Assessment Act 1997 (ITAA 1997) will apply to defer a non-commercial loss from a business activity unless: · you satisfy the income requirement and you pass one of the four business tests · the exceptions apply · the Commissioner exercises his discretion. The four business tests are: · The business produces assessable income of at least $20,000 · The business has produced a profit in three of the past five years (including the current year) · The business uses real property or an interest in real property worth at least $500,000 on a continuing basis · The business uses other assets worth at least $100,000 on a continuing basis You will pass the assessable income test if the amount of assessable income you derive from the relevant business activity for an income year is at least $20,000. Calculation of the assessable income from the activity can involve making a 'reasonable estimate' of a notional annual amount if the activity has not been carried on for the whole year (paragraph 35-30(b) ITAA 1997). When making a reasonable estimate of a notional annual amount, Taxation Ruling TR 2001/14 lists the relevant factors to be taken into consideration; · orders you have received · forward contracts you have entered into · the size of your business activity · the amount you have invested in the business activity · the type of business activity you are engaged in, and the typical income patterns for that industry · how your actual income would translate into an annual income on a pro-rata basis · cyclical or seasonal patterns in your business area, and the effect they would have on your annual income. You satisfy the income requirement (that is your taxable income, reportable fringe benefits and reportable superannuation contributions but excluding your business losses, does not exceed $250,000). Your year-to-date figures for the subsequent income year show that you have earned well in excess $20,000 of assessable income from your business activities. From the information you have provided, it would be reasonable to estimate that the assessable income derived from your business would have been at least $20,000 if you had operated the business for the full relevant income year. In accordance with paragraph 35-30(b) ITAA 1997, you are therefore deemed to have passed the assessable income test.

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