Private ruling: Non-commercial business loss - commissioner's discretion
Published: February 2012
Ruling period: Year ended 30 June 2011 | Year ended 30 June 2010
Date scheme commenced: 1 July 2009

Ruling: Q1: Will the Commissioner exercise the discretion in paragraph 35-55(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include any losses from your tour operation activity in your calculation of taxable income for the 2009-10 and 2010-11 financial years? | A1: 

Relevant facts and circumstances: Your primary business relates to rental properties. In the 2009-10 financial year you purchased a vehicle to use in both your primary business and in a new activity as a tour operator. You incurred expenses under your tour operator activity for interest and depreciation in the 2009-10 financial year. You state your business commenced on 1 July 2010. You have not earned assessable income of over $20,000 in the 2010-11 financial year. You do not expect to earn over $20,000 in the 2011-12 financial year. However, you expect to earn over this amount in the 2012-13 financial year. You state that the reason for you not earning assessable income over the $20,000 threshold in the 2010-11 financial year is due to the short timeframe in which the tour activity operates in the region, which is from April to October. You state that in the 2010-11 financial year, you operated the activity from July to October 2010, but not from April to June 2011. In the 2011-12 financial year, you have operated the activity from July to October 2011 but do not intend to operate from April to June 2012.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 35 | Income Tax Assessment Act 1997 Subsection 35-10(2) | Income Tax Assessment Act 1997 Subsection 35-10(4) | Income Tax Assessment Act 1997 Subsection 35-10(2E) | Income Tax Assessment Act 1997 Section 35-30 | Income Tax Assessment Act 1997 Section 35-35 | Income Tax Assessment Act 1997 Section 35-40 | Income Tax Assessment Act 1997 Section 35-45 | Income Tax Assessment Act 1997 Paragraph 35-55(1)(b)

Reasons for decision: Summary: The Commissioner will not exercise the discretion under paragraph 35-55(1)(b) of the ITAA 1997 for lead time for the loss in the 2009-10 financial year as this only applies to a business activity that has started to be carried on. Likewise, the Commissioner will not exercise the discretion for lead time in the 2010-11 financial year as your failure to meet the assessable income test is due to the way in which you conduct your business and is not inherent to the nature of the business. | Detailed Reasoning - Detailed reasoning: If an activity is not carried on as a business, and cannot reasonably be expected to produce assessable income, for example, it is carried on as a hobby, then you cannot claim general deductions in relation to it, regardless of the operation of Division 35 of the Income Tax Assessment Act 1997 (ITAA 1997). In your case, you state that your tour operator business commenced on 1 July 2010. This ruling has, therefore, been determined on the basis of accepting your statement that you were carrying on a business during the 2010-11 financial year but not in the 2009-10 financial year. | Detailed Reasoning - Non-commercial losses: Under Division 35 of the ITAA 1997, a loss made by an individual from a business activity will not be deductible in the financial year in which it arises unless certain conditions are met. Losses that cannot be taken into account in a particular year of income, because of subsection 35-10(2) of the ITAA 1997, can be applied to the extent of future profits from the business activity, or are deferred until one of the tests is passed, the discretion is exercised, or the exception applies. Under the rule in subsection 35-10(2) of the ITAA 1997 a loss made by an individual from a business activity will not be taken into account unless: · the exception in subsection 35-10(4) of the ITAA 1997 applies; or · you satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997 and one of the four tests is met; or · if you do not satisfy the income requirement or if one of the tests is not met, the Commissioner exercises the discretion in section 35-55 of the ITAA 1997. Your business activity is not a primary production activity or a professional arts business activity. Therefore, the exception contained in subsection 35-10(2) of the ITAA 1997 does not apply. Your income for non-commercial loss purposes is less than $250,000, therefore, you satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997. However, your business activity has not satisfied any of the four non-commercial loss tests contained in sections 35-30 (assessable income test), 35-35 (profits test), 35-40 (real property test) and 35-45 (other assets test) of the ITAA 1997 in the 2010-11 financial year. | Detailed Reasoning - Commissioner's discretion: You have requested that the Commissioner exercise the discretion under paragraph 35-55(1)(b) of the ITAA 1997 for lead time. Under paragraph 35-55(1)(b) of the ITAA 1997, the Commissioner's discretion can be exercised where: · the business activity has started to be carried on but because of its nature it has not satisfied, or will not satisfy, one of the non-commercial loss tests set out in sections 35-30, 35-35, 35-40 or 35-45 of the ITAA 1997; and · there is an objective expectation that within a period that is commercially viable for the industry concerned the activity will meet one of the tests or produce assessable income for an income year greater than the deductions attributable to it for that year. Taxation Ruling TR 2007/6 sets out guidelines on how the Commissioner's discretion under paragraph 35-55(1)(b) of the ITAA 1997 may be exercised. The following has been extracted from paragraphs 70 to 104 of this ruling. The discretion is provided to ensure that certain individuals who carry on genuine commercial businesses are not disadvantaged due to particular circumstances which prevent them from satisfying one of the tests. This arm of the safeguard discretion will ensure that the loss deferral rule in section 35-10 of the ITAA 1997 does not adversely impact on taxpayers who have commenced to carry on activities which by their nature require a number of years to produce assessable income. The paragraph is intended to cover a business activity that has a lead time between the commencement of the activity and the production of any assessable income. 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. 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. In your case, you run a tour operation activity which you state commenced on 1 July 2010, as such, the Commissioner will not exercise his discretion for lead time for the 2009-10 financial year as paragraph 35-55(1)(b) of the ITAA 1997 only applies to business activities that have started to be carried on. You state that the tour season in the region only runs from April to October and coupled with the downturn in the tourism industry, you were unable to earn income over the $20,000 threshold in order to meet the assessable income test in the 2010-11 financial year. However, you have only operated the business from July to October 2010 and not in the April to June 2011 period of the 2010-11 financial year. As such, we consider that the failure to make sufficient assessable income in this year is due to the activity not being in operation for three of the seven months in which the tour season runs, therefore, it is due to the way you conduct your business and is not inherent to the nature of the business. You have also stated that you will not meet the $20,000 assessable income test in the 2011-12 financial year as you have only conducted the business activity from July to October 2011 and will not operate the tour activity again until July 2012. You advise that you do not intend to operate the activity for the full tour season until the 2012-13 financial year, in which you expect that you will then meet the assessable income threshold of $20,000. We consider that your failure to make sufficient assessable income in the 2010-11 financial year was due to you not operating the tour activity for the full tourist season. As such, the losses are due to the way you conduct your business activity and is not inherent in the nature of the business, therefore, the Commissioner will not exercise his discretion under paragraph 35-55(1)(b) of the ITAA 1997 to allow you to deduct a loss in the 2010-11 financial year. Accordingly, under Division 35 of the ITAA 1997, your loss must be deferred in the 2010-11 financial year.

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