Private ruling: Non-commercial losses - Commissioner's discretion
Published: June 2012
Ruling period: Year ended 30 June 2010 | Year ended 30 June 2011
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 business in your calculation of taxable income for the 2009-10 to 2010-11 financial years? | A1: No.


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: 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 subsequent financial years. It is considered that there is no lead time between the commencement of the business and the production of assessable income for a business of commercial property leasing. Therefore, the Commissioner cannot exercise his discretion in relation to your commercial property leasing business. | Detailed Reasoning - Detailed reasoning: Division 35 of the ITAA 1997 applies to losses from certain business activities for the year ended 30 June 2001 and subsequent years. The provisions only apply to individuals who conduct a business activity as either a sole trader or a partner in a partnership and made a loss from that business activity. Section 35-10 of the ITAA 1997 was amended to include an income requirement that must be met (along with certain other tests), in order to include losses from a business activity in your taxable income calculation. The income requirement applies in relation to the year ended 30 June 2010 and later years. You satisfy the income requirements 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. Paragraph 35-55(1)(c) of the ITAA 1997 states that the Commissioner may exercise his discretion, for the years concerned, to allow the inclusion of losses from a business activity where the individual does not meet the income requirement when: · because of its nature, your activity 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, that your activity will produce assessable income greater than the deductions attributable to it for that year, within a commercially viable period. A note to the section states that paragraph (c) is intended to cover a business activity which has a lead time between the commencement of the activity and the production of any assessable income. For example, 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. The type of feature contemplated by the phrase 'because of its nature', in the context in which it appears, is that referred to in the note quoted above. That is, that there is an inherent or innate feature of the activity resulting in an inability to produce income in the year of commencement and (in most cases) a number of years thereafter. Further examples that fall into this category are forestry, viticulture and certain horticultural activities. The note above does not support any view that the discretion should be exercised for any start-up activity that is yet, for example, to make a tax profit in section 35-30 of the ITAA 1997, simply because of the small scale on which it was started, or business choices made by an individual that are not consistent with the ordinary or accepted practice in the industry concerned - such as the hours of operation, location, climate or soil conditions, or the level of debt funding. These are subjective and impermissible considerations, as affirmed in the cases of Commissioner of Taxation v . Eskandari (2004) 134 FCR 569 and Scott v. Commissioner of Taxation [2006] AATA 542; VS2005/31-33 . These features cannot be used as determinative factors in this private ruling. You have not provided any evidence to suggest that there is a lead time between the commencement of your activity and the production of assessable income. Your business was able to generate income from leasing from the first financial year that the facility was available for lease. Therefore we do not consider that there is anything inherent or innate in the nature of your business activity that prevented you from making a tax profit in your early years of operation. Furthermore, you have not provided objective evidence from an independent source of the commercially viable period to make a tax profit for your type of activity. We acknowledge that you have provided an opinion from an accounting firm that, for such a significant investment, your expected timeframe to start turning a taxable profit is within 'standard acceptable timeframes'. However, we consider that no firm conclusions about a commercially viable period can be drawn from these general comments. It follows the Commissioner cannot exercise his discretion in relation to your commercial property leasing business in accordance with paragraph 35-55(1)(c) of the ITAA 1997 for the later financial years. Therefore the losses from your business will be subject to the loss deferral rule in subsection 35-10(2) of the ITAA 1997.

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. | You are carrying on a business of commercial property leasing. | Prior to December 2008 you commenced building a development property on land that you own. | You lease the development at full arm's length and on commercial terms. | You have provided a valuation report providing a comprehensive overview of the development and its market income to substantiate that the rent charged is commercial. | You part own a similar development property. | You have provided financial projections showing you expect to make a profit in the 2015-16 financial year. | Your financial data shows the actual and projected income and expenses for the business. | Your income for non-commercial loss purposes in the later financial years was above $250,000. | You state that the building and leasing of this development and its unique nature makes it difficult to substantiate what a commercially viable period would be to return a profit, as there are not many comparable businesses. | You have provided a general opinion from a leading chartered accountancy firm that for such a significant investment to start turning a taxable profit by 2016 is within 'standard acceptable timeframes'. | You state that your activity is carried on as a business and this ruling is made on the basis of accepting this claim.