Private ruling: non-commercial losses - Commissioner's discretion
Published: June 2012
Ruling period: Year ended 30 June 2010 | Year ended 30 June 2011 | Year ending 30 June 2012 | Year ending 30 June 2013 | Year ending 30 June 2014
Date scheme commenced: 1 July 2000

Ruling: A1: No.

Relevant facts and circumstances: As the project operator you have secured the rights to develop and operate a project. You intend to fund the development of the site in accordance with a cost reimbursement agreement and in return will maintain the rights to operate the completed venture. The costs to date have been met by you without finance but with the construction to be stepped-up finance will be sought. The venture commenced in the year 2000. Between 2000 and 2010 the main focus and cost was the planning with some construction taking place but the first official sod turning occurred in the 2010-11 financial year. The project is expected to be completed and accepting its first customers in 2013. You expect the project will be cash flow positive in the 2014-15 financial year and as the finance will be minor the cash flow projection will be the same as the tax profit figure. Your income for non-commercial loss purposes is more than $250,000. The two industry independent sources state the commercially viable period for this type of project is five years.

Relevant legislative provisions: 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: Under paragraph 35-55(1)(c) of the ITAA 1997, the Commissioner's discretion can be exercised where the business activity satisfies these requirements. for an applicant who carries on the business activity who does not satisfy subsection 35-10(2E) (income requirement) for the most recent income year ending before the application is made - the business activity has started to be carried on and, for the excluded years: (i) because of its nature, it has not produced, or will not produce, assessable income greater than the deductions attributable to it; and (ii) there is an objective expectation, based on evidence from independent sources (where available) that, within a period that is commercially viable for the industry concerned, the activity will produce assessable income for an income year greater than the deductions attributable to it for that year (apart from the operation of subsections 35-10(2) and (2C). The income requirement under subsection 35-10(2E) of the ITAA 1997 is satisfied 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 is above $250,000. Where a business does not produce a profit within the commercially viable period, the Commissioner is not able to exercise the discretion. The objective evidence you have provided show the commercially viable period to make a tax profit for your type of activity is five years therefore a profit would have been expected in the 2004-05 financial year. You predict a profit will be made in the 2014-15 financial year fifteen years after the commencement of your activity and ten years outside the period that is commercially viable for your industry. The Commissioner will not exercise the discretion under paragraph 35-55(1)(c) of the ITAA 1997 and the losses from your business will be subject to the loss deferral rule in subsection 35-10(2) of the ITAA 1997.

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. | Subject: non-commercial losses - Commissioner's discretion: Will the Commissioner exercise his discretion under section 35-55 of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include any losses from your business activities in calculating your taxable income for the years ended 30 June 2010 to 30 June 2014?