Private ruling: Non-commercial losses - Commissioner's discretion
Published: August 2011
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
Date scheme commenced: 21 December 2009

Ruling: Q1: Will the Commissioner exercise his 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 calculating your taxable income for the 2009-10 to 2012-13 years of income? | A1: No. | Q2: Will the Commissioner exercise his discretion in paragraph 35-55(1)(c) of the ITAA 1997 in calculating your taxable income for the 2013-14 year of income? | A2: No.

Relevant facts and circumstances: During the 2009-10 financial year you entered a contract to purchase a boat. You entered into a management agreement with an entity to enter their fleet. The boat was prepared and hire began during the 2010-11 financial year and continue on a regular basis. You have provided a summary of your income and expenditure forecast. From the forecast you expect a positive cash flow from the 2010-11 financial year and expect a tax profit from the 2013-14 financial year. Your boat hire activity will make a loss for the years ended 30 June 2010 to 30 June 2013, inclusive, due to: · the boat only became available for hire at the end of the year ended 30 June 2010 · STS depreciation method was used to calculate the boat's decline in value · you have claimed the deduction under the small business tax break in the year ended 30 June 2010. You intend to sell the boat at the end of ten years which will result in an expected profit over the life of the boat activity. Your income for non-commercial loss purposes was more than $250,000 for the year ended 30 June 2010. You also expect this will be the case for the other years ruled on. This ruling has been prepared on the basis that your boat hire activity is being conducted as a business. A finance company has produced a spreadsheet that shows that you will produce assessable income greater than deductions attributable to it in the fifth year of commencing the business activity. No information on the subject of what the commercially viable period is for the charter boat industry was produced.

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

Reasons for decision: Summary: The Commissioner will not 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 2009-10 to 2012-13 years of income on the basis that that the information supplied by an independent source does not provide objective evidence of the commercially viable period to make a tax profit for your type of activity. The Commissioner will not exercise his discretion for the 2013-14 year of income as you expect to make a tax profit for this year from your boat charter activity. Therefore no discretion is required. | Detailed Reasoning - Detailed reasoning: 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. You have not provided objective evidence of the commercially viable period to make a tax profit for your type of activity. We acknowledge that you have provided information from one of the industry funders for most business activities similar to yours. However no information was produced that shows that the period that is commercially viable for the industry is five years. Therefore, without this information the Commissioner is not able to conclude that the five years your activity will take from commencement to the achievement of a tax profit is within a 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 for the 2009-10 to 2012-13 years of income and the losses from your business will be subject to the loss deferral rule in subsection 35-10(2) of the ITAA 1997. No discretion will be granted for the 2013-14 year of income as you expect to make an overall profit in this year.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.