Private ruling: Non-commercial losses
Published: December 2014
Ruling period: Year ended 30 June 2010 | Year ended 30 June 2011 | Year ended 30 June 2012 | Year ended 30 June 2013 | Year ended 30 June 2014 | Year ended 30 June 2015
Date scheme commenced: 1 July 200X

Ruling: Q1: Will the Commissioner exercise his discretion under 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 calculating your taxable income for the years ended 30 June 2010 to 30 June 2015? | A1: No.

Relevant facts and circumstances: You do not satisfy the less than $250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997. You carry on a business that is primarily conducted through related entities. You have carried out various projects over the years. You have entered into a project management agreement with a related entity. Under the agreement, you are entitled to a reimbursement of costs plus a fee. You have made claims for your expenses but have not been paid by the related entity. You have applied Taxation Ruling IT 2450 to this contract. This is consistent with other developments carried out by you.


Reasons for decision: Summary: 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. | Detailed Reasoning - Commissioner's discretion: The relevant discretion may be exercised for the financial years 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. This discretion is intended to cover a business activity where there is an inherent period of time between the commencement of the activity and the production of assessable income. For example, (as per the note in the legislation) an activity involving the planting of hardwood trees for harvest, where many years would pass before the activity could reasonably be expected to produce income. For the discretion to be applied there needs to be an inherent or innate feature of the activity resulting in an inability to make a profit in the year of commencement and (in most cases) a number of years thereafter. Further examples that fall into this category are forestry, viticulture and certain horticultural activities. There is clearly a period of time where income cannot be derived due to the very nature of the business (product has to be grown before it is available for sale) and you cannot conduct the business in a different manner, that would enable income to be earned in this initial period of the business activity. Stone J in Eskandari (Federal Commissioner of Taxation v. Eskandari; (2004) 134 FCR 569; [2004] FCA 8; 2004 ATC 4042; (2004) 54 ATR 695) confirmed this view when considering whether the Commissioner's discretion should be exercised in regard to losses incurred in a migration consultancy business. When looking at the type of activities referred to by the note in the legislation and the explanatory memorandum, Stone J stated at FCA 31: Such activities have an inherent characteristic that cannot be overcome by conducting the business activity in a different way but only by changing the nature of the business. The discretion is not intended to be available where the failure to make a tax profit is for other reasons. | Detailed Reasoning - Application to your circumstances: In this case, the only income you will directly receive in relation to the project is outlined in the project management agreement. Under the agreement you are entitled to a return of costs plus a fee You have been paid a fee on an annual basis under the project management agreement. You have also made an annual claim for reimbursement of expenses you have incurred. The amounts of reimbursements have been claimed but not paid by the unit trust. You have not declared the income as you have chosen to account for income on a cash basis. We consider that your losses are due to your choice of accounting method and the fact that you have failed to demand payment from an associated entity. Generally, it would be common business practice for an entity to make claims for payment on a regular, scheduled basis as per the written agreement. Further, we anticipate the entity would demand payment should the principal fail to meet its obligations. We do not consider that there is anything inherent or innate in the nature of your business activity that prevents it from producing assessable income for any extended period of time for the commencement of the activity. The Commissioner is unable to exercise the discretion available in paragraph 35-55(1)(c) of the ITAA 1997 in relation to your business activity for the 200X to 2014-15 financial years.