ATO Interpretative Decision

ATO ID 2003/329 (Withdrawn)

Income Tax

• This ATO ID is withdrawn. The current ATO position on this issue is contained in Taxation Ruling TR 2007/6 Income tax: non-commercial business losses: Commissioner's discretion.
  This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Is the sale of a business activity part way through an income year a decisive factor when the Commissioner is considering exercising the discretion under paragraph 35-55(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) for an income year?

Decision

No, the sale of the business activity is not a decisive factor for the purposes of exercising the discretion under paragraph 35-55(1)(b) of the ITAA 1997.

Facts

An individual taxpayer commenced a horticultural activity in the year ended 30 June 2001. The activity has produced only taxation losses in the first few years of its operations.

The taxpayer provided income and expense projections showing that the activity will meet the Assessable income test in section 35-30 of the ITAA 1997 and make a taxation profit within the period that is commercially viable for the particular horticultural industry. These projections are supported by independent evidence.

The taxpayer sold the horticultural activity as a going concern, in the year ended 30 June 2002.

Reasons for Decision

Division 35 of the ITAA 1997 will apply to defer a non-commercial loss from a business activity carried on by a taxpayer who is an individual, unless:

•

their business activity satisfies one of the four tests in Division 35; or

•

the Commissioner has exercised the discretion in section 35-55 for the activity; or

•

the individual comes within the Exception to Division 35, contained in subsection 35-10(4).

(refer subsection 35-10(1) of the ITAA 1997)

As the activity has commenced and is carried on by an individual taxpayer as a business in the years ended 30 June 2001 and 30 June 2002, the losses made from the activity will be potentially subject to the provisions in Division 35 of the ITAA 1997.

The activity has not satisfied any of the four tests under Division 35 of the ITAA 1997 for several years and neither will the Exception to the Division in subsection 35-10(4) of the ITAA 1997 apply. Losses made from the activity in these years are therefore subject to the loss deferral rule in subsection 35-10(2) of the ITAA 1997 unless the Commissioner decides under paragraph 35-55(1)(b) of the ITAA 1997 that it would be unreasonable for this to occur.

The discretion in paragraph 35-55(1)(b) of the ITAA 1997 can only be exercised where:

(i)

the business activity has started to be carried on; and

(ii)

because of its nature it has not satisfied, or will not satisfy, one of the tests set out in Division 35 of the ITAA 1997; and

(iii)

there is an objective expectation based on independent evidence that the business activity will either meet one of the tests, or produce a taxation profit, within a period that is commercially viable for the industry concerned.

Therefore, the discretion is intended to be exercised for the income years from when the business activity first commenced until it could be expected to satisfy one of the four tests or make a taxation profit. This period must be within the commercially viable period for the industry concerned.

When the Commissioner is considering whether to exercise the discretion in subsection 35-55(1)(b) of the ITAA 1997 for the particular year, the Commissioner must be satisfied that the objective expectation of the activity meeting a test or producing a profit within a period that is commercially viable for the industry concerned existed for the whole year. This expectation may change from year to year and therefore the exercise of the discretion in each year is dependant on this expectation existing.

The taxpayer has provided information supported by independent evidence that demonstrates that there is an objective expectation that the horticultural business activity will satisfy the Assessable income test and produce a taxation profit within the 'period that is commercially viable for that industry' (subparagraph 35-55(1)(b)(ii) of the ITAA 1997). As the new owner purchased the business activity as a going concern, this expectation continued to exist at the end of the income year. The Commissioner is satisfied therefore, that for this income year, the objective expectation referred to in paragraph 35-55(1)(b) of the ITAA 1997 is present.

The fact that the taxpayer's interest in the business activity was sold before it satisfied a test or produced a taxation profit is not a decisive factor for the purposes of paragraph 35-55(1)(b) of the ITAA 1997.

Hence, the Commissioner is satisfied that the requirements of paragraph 35-55(1)(b) of the ITAA 1997 have been met and will decide that it would be unreasonable for the loss deferral rule to apply and exercises the discretion under paragraph 35-55(1)(b) of the ITAA 1997 for the 2001 and 2002 income years. The taxpayer is able to include the loss from the business activity in their calculation of the taxable income for those income years.

Year of income:  Year ended 30 June 2001 Year ended 30 June 2002

Legislative References:
Income Tax Assessment Act 1997
   Division 35
   section 35-55
   paragraph 35-55(1)(b)
   subparagraph 35-55(1)(b)(ii)
   section 35-10
   subsection 35-10(2)
   subsection 35-10(4)

Related Public Rulings (including Determinations)
Taxation Ruling TR 2001/14
Taxation Ruling TR 2001/14A - Addendum

Keywords
NCL commissioner's discretion
Commissioner's discretion
Primary production losses
Non commercial losses
Carry forward non commercial losses

Business Line:  Private Groups and High Wealth Individuals

Date of publication:  15 May 2003

ISSN: 1445-2782