Private ruling: Commissioner's discretion
Published: June 2013
Ruling period: Year ended 30 June 2010 | Year ended 30 June 2011 | Year ended 30 June 2012 | Year ending 30 June 2013
Date scheme commenced: 1 July 2009

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 venue/accommodation hire business in your calculation of taxable income for the 2009-10 to 2011-12 financial years? | A1: 


Relevant legislative provisions: 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).

Reasons for decision: Summary: 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 2009-10 to 2011-12 financial years The Commissioner's discretion in paragraph 35-55(1)(c) of the ITAA 1997 may be exercised for the financial year where he is 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. 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. For example, the discretion will not be available where the failure to make a profit is for reasons other than the nature of the business such as, a consequence of starting out on a small scale, the hours worked or the need to build a client base. You commenced the business in the 2007-08 financial year. Your projected income and expenses statement shows that you expect to produce a profit in the 2012-13 financial year, or six years after you commenced. You have not provided any evidence from an independent source to establish the commercially viable period for your industry/business. However, you have stated the reasons the business has not been able to produce a profit to date is due to the nature of the property and the condition of the gardens; local council limitations; marketing and competition and the lead time for functions. Taking into consideration the information you have provided, the Commissioner is not satisfied that the commercially viable period for your type of business is six years. While it is accepted that some functions can have a long lead time, that lead time would generally not exceed 12 months. Using your own figures, had you been able to secure the maximum number of functions allowed by council, at the average price, in each of the 2009-10 to 2011-12 financial years, your business would still have produced a loss due to the high business expenses incurred. The reason your business has continued to make a loss is peculiar to your situation and is not inherent to the nature of the business. 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 2009-10 to 2011-12 financial years. As your figures show that your business will produce a profit in the 2012-13 income year, the Commissioner cannot exercise the discretion for this year.

Relevant facts: You are carrying on a business as a venue/accommodation provider (the business). | The property was acquired in the 2007-08 financial year and was also to be used for another unrelated business. | The business activity commenced in the year the property was acquired, not withstanding there were renovations and improvements carried out. | Bookings were received almost immediately and income received from these bookings was returned as income in the first year. | Local council restrictions limited the use of the property. | Your business plan shows the average price per event as follows: | Your actual and projected income and expenses statement shows that your actual expenses in the 2009-10 to 2011-12 financial years were between $350,000 and $450,000. | Your projected expenses in the 2012-13 financial year are less than $300,000 and you expect to produce an overall profit. | Due to personal reasons, you have now sold the property. | You have stated the reasons the business has not been able to produce a profit to date as follows: | · The property required specialised attention to ensure it was fit for the purpose | · One of the main attractions was the garden that required time to establish to their full potential | · Marketing, local competition and capturing paying clients; and | · The long lead time for functions. | Your income for non-commercial loss purposes in the 2009-10 to 2011-12 financial years was above $250,000.