Private ruling: Non-commercial losses - Commissioner's discretion
Published: October 2012
Ruling period: Year ended 30 June 2011 | Year ended 30 June 2012 | Year ending 30 June 2013 | Year ending 30 June 2014 | Year ending 30 June 2015 | Year ending 30 June 2016 | Year ending 30 June 2017 | Year ending 30 June 2018 | Year ending 30 June 2019 | Year ending 30 June 2020
Date scheme commenced: 1 July 2010

Ruling: Q1: 1. Is your ownership and rental of assets considered to be a business activity for the purposes of Division 35 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A3: No.


Relevant legislative provisions: Income Tax Assessment Act 1997 - Division 35. | Income Tax Assessment Act 1997 - Section 35-1. | Income Tax Assessment Act 1997 - Subsection 35-10(2E). | Income Tax Assessment Act 1997 - Subsection 35-55(1) | Income Tax Assessment Act 1997 - Paragraph 35-55(1)(c). | Income Tax Assessment Act 1997 - Section 995-1.

Reasons for decision: Detailed Reasoning - Carrying on a business: In your application, you answered 'yes' to the question 'Are you carrying on a business' but have also indicated that you would like the Commissioner to consider whether your activity is a business activity. Whether a business is being carried on depends on the large or general impression gained ( Martin v. Federal Commissioner of Taxation (1953) 90 CLR 470; (1953) 10 ATD 226; (1953) 5 AITR 548) from looking at all the indicators of carrying on a business, and no one indicator will be decisive ( Evans v. Federal Commissioner of Taxation 89 ATC 4540; (1989) 20 ATR 922). Taxation Ruling TR 97/11 provides the Commissioners view of the factors used to determine if you are in business for tax purposes. In the Commissioner's view, the factors that are considered important in determining the question of business activity are: · whether the activity has a significant commercial purpose or character · whether the taxpayer has more than just an intention to engage in business · Whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity · whether there is regularity and repetition of the activity · whether the activity is of the same kind and carried on in a similar manner to that of ordinary trade in that line of business · whether the activity is planned, organised and carried on in a businesslike manner such that it is described as making a profit · the size, scale and permanency of the activity, and · whether the activity is better described as a hobby, a form of recreation, or sporting activity. No one indicator is decisive. Whether a 'business' is carried on depends on the large or general impression. Your rental activities are of a significant size and scale and are carried on in planned, organised and business like manner similar to that of ordinary trade in that line of business. Considering all the indicators in combination and as a whole, your activities would constitute a business for the purposes of Division 35 of the ITAA 1997. | Detailed Reasoning - Capital gains: Assessable income is defined in section 995-1 of the ITAA 1997 to include statutory income as well as ordinary income (paragraph 61 of Taxation Ruling TR 2001/14). The assessable income from your business activities will include: · ordinary income - such as the rental income; and · statutory income - including capital gains from the sale of the assets. In your case, your rental income in the relevant financial year was over $X million and your net capital gains were more than $Y million. Your expenses for the same period were more than $Z million, giving you an overall profit. Where your business activity has deferred losses from prior years, you can offset the deferred loss against the amount of this profit. | Detailed Reasoning - Commissioner's discretion: Section 35-1 of the ITAA 1997 provides that an income requirement must be met (along with certain other tests), in order to include losses from a business activity in your taxable income calculation. If the income requirement is not met, the Commissioner may exercise discretion to allow the inclusion of the losses. You satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997 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 was above $250,000 in the relevant financial years and you expect this will be the case in the subsequent year to 2019-20 financial years as well. In order to exercise the discretion, the Commissioner must be satisfied there is an objective expectation, based on evidence from independent sources, that your business activity will produce assessable income greater than the deductions attributable to it for that year, within a commercially viable period (paragraph 35-55(1)(c) of the ITAA 1997). 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. In your case, your rental activities commenced numerous years ago and you do not expect to produce a tax profit until a future financial year, or more than X years after you commenced. However, your activity did produce a tax profit in the relevant financial year when statutory income, in the form of capital gains, is included. You have not provided any independent evidence of the commercially viable period for this type of industry. The reason your activities have made a loss and will continue to do so until the future financial year due to your level of debt finance. This is peculiar to your situation and is not inherent to the nature of the business. Your ability to continue to service losses from the business activity for more than X years is due to your access to other funds and would not be sustainable in the industry generally. Taking into consideration the information you have provided, the Commissioner is not satisfied that the commercially viable period for your type of business is X years. Where the business does not produce a profit within the commercially viable period, the Commissioner is not able to exercise the discretion. Therefore, the Commissioner will not exercise the discretion available in accordance with subsection 35-55(1) and paragraph 35-55(1)(c) of the ITAA 1997 for the 2010-11 to 2019-20 financial 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. | 2. Can the net capital gain from the sale of rental assets be reduced by deferred prior year losses pursuant to Division 35 of the ITAA 1997? | 3. Will the Commissioner exercise the discretion in paragraph 35-55(1)(c) of the ITAA 1997 to allow you to include any losses from your business activity in your calculation of taxable income for the 2010-11 to 2019-20 financial years? | Relevant facts: You own a number of rental assets valued at over $X million. | Most of the assts were purchased years ago for the purpose of investment and have been used for rental since then. | Total borrowings on the assets are over $Y million. | You hold 100% of the interest in all the assets. | You have never used any of the assets for private purposes and all assets are leased to third parties at arms length. | Due to the large number of assets, you registered a trading name and set up a website. | You manage the rental assets yourself with the help of some staff who undertake daily activities, such as cleaning and maintenance and administration. | In most years the business expenses have exceeded the income, resulting in a loss. | In the relevant financial year, total business income was over $Z million and total expenses were over $X million. | In the relevant financial year, you sold some assets resulting in a net capital gain of over $X million. | Your income from other sources, such as interest and dividends, is greater than $Z per year.