Private ruling: Non-commercial Losses and the Commissioner's discretion for lead time
Date of advice: 13 September 2017
Published: January 2018
Ruling period: Year ended 30 June 2013 to 30 June 2016
Date scheme commenced: 1 July 2012

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 2012-13 to 2015-16 financial years? | A1: Yes

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 business in a partnership. The business is primarily concerned with property development. You commenced business operations in the 2012-13 financial year. You purchased a property, demolished an existing structure and constructed a number of residential apartments. You borrowed funds from a financial institution to purchase the property and finance the construction of the apartments. You have provided a development timeline for the project. You have provided details of each of the steps in the development which caused delay and the reasons for delays were outside your control. The constructions of the apartments were completed in 2016 and titles were issued in January 2017. Two units were sold in the 2016-17 financial year. You intend to make a tax profit in the 2017-18 financial year.

Relevant legislative provisions: 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: | ● 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 construction of residential units requires a period of time. This is an inherent characteristic that is common to other similar property development business activities and it cannot be overcome by conducting your business in a different way. | Even though you have not provided evidence from independent sources, the Commissioner is satisfied that the explanation you provided is reasonable. The Commissioner is satisfied that your business activity has not produced a tax profit in 2012-13 to 2015-16 financial years because of its nature. It is also accepted that you will make a tax profit within the commercially viable period for your industry. | Consequently the Commissioner will exercise his discretion in the 2012-13 to 2015-16 financial years.

Reasons for decision: Summary: 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)