Private ruling: Non-commercial business losses
Published: May 2012
Ruling period: Year ended 30 June 2012 | Year ended 30 June 2013 | Year ended 30 June 2014 | Year ended 30 June 2015 | Year ended 30 June 2016 | Year ended 30 June 2017 | Year ended 30 June 2018 | Year ended 30 June 2019
Date scheme commenced: 1 July 2011

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 business activity in the calculation of your taxable income for the 2011-12 to 2018-19 income years? | A1: Yes .

Relevant facts and circumstances: You carry on a non-primary production business activity. The activity is conducted in partnership. The partners have been active in this type of business activity for several years. The partnership is the owner, developer and builder and will operate the activity. The same partners are also involved in a partnership which is undertaking a similar business activity, under similar arrangements. The activity will be developed in stages. The project is expected to employ many staff and contractors. The expected capital cost to develop the activity is significant. The project will be funded by a mix of capital contribution by the partners and bank finance. The activity commenced in the 2011-12 financial year. Income from the project is expected within two years of the commencement of the activity. You expect to make a tax profit from the activity in the 2019-20 financial year. You have provided the following information in regards to the activity: · details of the stages of the activity · the model used to generate income · projected income and expense statements · business plan for the activity · several independent reports from external parties within the industry detailing expected returns and lead times for similar activities You have advised that you will not satisfy the income requirement in subsection 35-10(2E) of the ITAA 1997 for the 2011-12 to 2018-19 financial years.

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

Reasons for decision: Detailed Reasoning - Detailed reasoning: The Commissioner will exercise the discretion in paragraph 35-55(1)(c) of the ITAA 1997 for an applicant who does not satisfy the income requirement in subsection 35-10(2E) of the ITAA 1997 if certain conditions are satisfied for the year(s) concerned. For the discretion to be exercised, the business activity must have started to be carried on and, for the excluded years: because of its nature, it has not produced, or will not produce, assessable income greater than the deductions attributable to it; and 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. For the first requirement to be satisfied, the business activity must have started to be carried on. The information provided suggests that you have satisfied this requirement. The second requirement to be satisfied is that, for the excluded years, the business activity has not produced, or will not produce assessable income greater than the deductions attributable to it because of its nature. Paragraphs 77 and 78 of Taxation Ruling TR 2007/6, which discusses non-commercial business losses and the Commissioner's discretion, state: Therefore, the phrase 'because of its nature' refers to inherent characteristics of the type of business activity being conducted by the taxpayer, which are common to any business activity of that type. These inherent characteristics must be the reason why the activity is unable to satisfy any of the tests. The discretion is not intended to be available where the failure to satisfy one of the tests is for other reasons. The consequences of business choices made by an individual (for example, the hours of operation, the size or scale of the activity, and the level of debt funding) are not inherent characteristics of a business activity. You have forwarded a copy of the partnership's estimated income and expense projections which indicate that you expect the business activity to not produce assessable income greater than the deductions attributable to it until the 2019-20 financial year. You have also stated that it is usual for this type of businesses activity to incur losses during the first few stages of development. You have forwarded a copy of a report from an external party which confirms that a typical time of maturity for your business activity is approximately 10 years based on historical experience and the necessity to develop the project in stages. This is also confirmed in a report from another external party. It is therefore accepted that the staging of the development, is an inherent characteristic of this type of business activity. The third requirement to be satisfied is that the Commissioner must be satisfied that an objective expectation exists, for each of the years in question, that the business activity will, within a period that is commercially viable for the industry concerned, produce assessable income for an income year greater than the deductions attributable to it for that year. The objective expectation must be based on independent information, where such information is available. Paragraph 92 of Taxation ruling TR 2007/6 states: Division 35 does not require that a determination be made as to how long it will take a business activity to become commercially viable. Rather, it involves an enquiry into whether the business activity in question will satisfy a test or produce a tax profit within the time frame in which other business activities in the same industry, which behave in a commercially viable manner, do so. Any business activity in the industry behaving in a commercial manner, reflecting normal industry practices and behaviour, is expected to be able to satisfy one of the tests or produce a tax profit within this time frame. The report provided states that you are adopting a specific income model for your business activity that is widely used within your industry. This report also states that the proposed time frame to develop the activity to maturity of 10 years is within the commercially viable period for the industry. The financial projections forwarded by you indicate that your business activity is expected to make a net profit by year 9, which is within the 10 year maturity period as indicated in the above documents. We consider that this maturity period would be the commercially viable period for your industry. You have therefore shown that the relevant objective expectation about future performance exists in this case, and this requirement is satisfied. Based on the information provided from both yourself, and external parties, the activity satisfies all of the relevant requirements in paragraph 35-55(1)(c) of the ITAA 1997. The Commissioner will therefore exercise this discretion to allow you to include your share of any losses from your retirement village activity in the calculation of your taxable income for the 2011-12 to 2018-19 income 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.