Private ruling: Non-commercial losses
Published: June 2012
Ruling period: Year ending 30 June 2011
Date scheme commenced: 1 July 2010

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 your calculation of taxable income for the 2010-11 financial year? | A1: Yes

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. The arrangement that is the subject of this ruling is described below. The following documents have been relied upon to reach a decision: · your application for private ruling. · additional information which we received prior to 30 June 2012. Your income for non-commercial loss purposes in the 2010-11 financial year is above $250,000. You commenced your property development business in a month in 2010. You purchased the property in a month in 2009. You rented out the property until early 2010. You commenced property development preparatory work (such as obtaining council approvals) in early 2010 and commenced development activities in later in 2010. You demolished the dwelling on the property and began construction of a number of residential units. The construction of a residential unit requires at least 6 months. This timeframe can extend to several years. It is a common feature in the property development industry that there is a lead time between the commencement of property development activity and the production of any income. You sold some units in 2011. You devoted an amount of money to your property development business by 30 June 2011. This was comprised of an amount for purchases and an amount for expenses. In the 2010-11 financial year, your business produced no income and incurred expenses, producing a net loss. You expect to make a profit in the 2011-12 financial year and a profit in the 2012-13 financial year. You provided the projected income and expenses.

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

Reasons for decision: Summary: Division 35 of the ITAA 1997 applies to losses from certain business activities for the 2000-01 income year and subsequent years. Under the rule in subsection 35-10(2) of the ITAA 1997, a 'loss' made by an individual (including an individual in a general law partnership) from a business activity will not be taken into account in an income year unless: · the 'Exception' in subsection 35-10(4) of the ITAA 1997 applies, or · subsection 35-10(2E) of the ITAA 1997 is satisfied for that year and one of four tests in sections 35-30, 35-35, 35-40 or 35-45 of the ITAA 1997 is met, or · the Commissioner exercises the discretion in section 35-55 of the ITAA 1997. Section 35-1 of the ITAA 1997 provides that an income requirement must be met (along with certain 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 is above $250,000 in the 2010-11 financial year. Your property development activity will only be potentially subject to these provisions if it is carried on as a business. The Commissioner is satisfied that your activity is carried on as a business. | Detailed Reasoning - Nature of the activity: The Commissioner may, on application, decide that the rule in subsection 35-10(2) does not apply to a business activity for one or more income years (the excluded years) if the Commissioner is satisfied that it would be unreasonable to apply that rule because: (c) 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 Note to paragraph 35-55(1)(c) of the ITAA 1997 states that the particular 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. The note includes an example of an activity involving the planting of hardwood trees for harvest where many years would pass before the activity could reasonably be expected to produce income. 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… The construction of residential properties requires a period of time. This is an inherent characteristic that is common to other similar property development business activities and it cannot be overcome by conducting your business in a different way. The Commissioner is satisfied that your business activity has not produced a tax profit in 2010-11 financial year because of its nature. You stated in your private ruling application form that the commercial viable period is X years in your industry. Paragraphs 23 and 98 of TR 2007/6 provide that a tolerance of at least one year beyond the income year otherwise identified as the end of the period is to be applied in practice. Even though you have not provided evidence from independent sources to support this timeframe, the Commissioner is satisfied that the explanation you provided is reasonable. You have already sold residential units in 2011-12 financial year producing approximately $X sales income and provided profit projecting showing that you are expected to make $Y profit in the 2011-12 financial year. Therefore the Commissioner is satisfied that there is an objective expectation that your business activity will produce a tax profit in 2011-2 financial year, falling within a period that is commercially viable for the property development industry. The requirements of paragraph 35-55(1)(c) of the ITAA 1997 have been met. Therefore, the Commissioner will exercise the discretion available under ITAA 1997 for the 2010-11 financial year to allow you to include the loss from your property development business activity in the calculation of your taxable income.

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.