Private ruling: Non-commercial losses - Commissioner's discretion - lead time
Date of advice: 7 August 2015
Published: August 2015
Ruling period: Year ended 30 June 2010 | Year ended 30 June 2011 | Year ended 30 June 2012 | Year ending 30 June 2013 | Year ending 30 June 2014 | Year ending 30 June 2015
Date scheme commenced: 1 July 2008

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 2014-15 financial years? | A1: Yes.


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 relevant financial years. The relevant discretion may be exercised for the income year in question where: • it is in the nature of your business activity that there is a period before a tax profit can be produced; and • there is an objective expectation your business activity will produce a tax profit within the commercially viable period for your industry. It is accepted that the business activity is a separate business activity from the other activities. It is in the nature of this activity that there will be a period of time before full production is reached and the potential to make a tax profit. In order to exercise the discretion, the Commissioner must be satisfied there is an objective expectation, based on evidence from independent sources (where available), that your business activity will produce assessable income greater than the deductions attributable to it for that year, within a commercially viable period (paragraph 35-55(1)(c) of the ITAA 1997). You have provided a report from an industry expert stating that based on the knowledge of the industry in your region and similar businesses to that of your business, they would expect the business will reach profitability within 7-9 year timeframe from commencement, being by the 2015-16 income year, which is within the commercially viable timeframe for other similar businesses in the same industry. Your profit and loss projections show you expect to produce an overall profit from the business activity in the 2015-16 financial year or the seventh year after the commencement of the business activity. Based on the general evidence available, the Commissioner is satisfied that there is an objective expectation that within a period that is commercially viable for the industry, the activity will produce assessable income greater than the expenses attributed to it. Therefore, the Commissioner will exercise the discretion available in accordance with subsection 35-55(1) and paragraph 35-55(1)(c) of the ITAA 1997 in relation to your business activity for the relevant financial years.

Relevant facts: Your annual income external to the relevant business activity exceeds $250,000. | You have commenced your activity and continued to conduct it for a number of years. | You have provided actual and forecast figures in the form of profit and loss statements to show when you forecast a profit to be made in a year. | You have provided several industry reports and expert report on your business to support your arguments for the length of the commercially viable period.