Edited version of private ruling

Authorisation Number: 1011461609166

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Ruling

Subject: Non Commercial Losses- Commissioner's discretion - lead time.

Question

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 2009-10 to 2016-17 income years?

Answer

No

This ruling applies for the following periods

Year ending 30 June 2010

Year ending 30 June 2011

Year ending 30 June 2012

Year ending 30 June 2013

Year ending 30 June 2014

Year ending 30 June 2015

Year ending 30 June 2016

Year ending 30 June 2017

The scheme commenced on

14 May 2009

Relevant facts and circumstances

You are carrying on a non primary production business activity.

The activity is carried on in partnership. The partnership consists of several partners. The partnership is the owner and the developer of the activity.

The management of the overall business is carried on by a small number of parties.

The activity is developed in stages. The project is funded by capital from the partners and loans from financial institutions.

The business activity commenced in the particular year. The stage 1 of the project was completed and the income generating activity commenced in January the recent year. Income from the activity is expected by 30 June the subsequent year. Stage 2 of the activity also commenced in January of the recent year.

You have provided the following information with regards to the activity:

· the stages of the activity

· the model used to generate income

· income and expense statements

· business plan/deed and letters and documents from external parties.

You have advised that you did not satisfy the income requirement in subsection 35-10(2E) of the ITAA 1997 in the 2008-09 income year and will not satisfy the income requirement for the 2009-10 to 2016-17 income years.

You have requested the Commissioner to exercise the discretion in paragraph 35-55(1)(c) of the ITAA 1997 for the activity for the 2009-10 to 2016-17 income years.

Relevant legislative provisions

Income Tax Assessment Act 1997 paragraph 35-55(1)(c).

Income Tax Assessment Act 1997 sub paragraph 35-55(1)(c)(ii).

Income Tax Assessment Act 1997 paragraph 35-10(2).

Income Tax Assessment Act 1997 paragraph 35-10(3).

Income Tax Assessment Act 1997 subsection 35-10(2E).

Reasons for decision

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 the calculation of taxable income. The 'income requirement' is set out in subsection 35-10(2E) of the ITAA 1997. If the income requirement is not met, the Commissioner may exercise discretion to allow the inclusion of the losses.

In order to exercise the discretion, the Commissioner must be satisfied that there is an objective expectation, based on evidence from independent sources, 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).

The Commissioner's discretion in paragraph 35-55(1)(c) of the ITAA 1997 reads -

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)).

Note:

Paragraphs (b) and (c) are intended to cover a business activity that 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.

In your case, you do not meet the income requirement in subsection 35-10(2E) of the ITAA 1997 for the 2009-10 to 2012-13 income years. Therefore you need the Commissioner's discretion to claim the losses in those income years.

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 business and the production of any assessable income.

Your activity commenced in mid recent year. The 1^st stage was completed at the end of the same year. The management and the operations commenced in the subsequent year.

In your case, you receive income from the activity within two years of its commencement. Therefore, for your activity the lead time cannot be more than two years.

Your income and expense statement shows that income from the activity is expected in the recent income year, two years from the commencement of the activity. As the activity is capable of generating income within two years of its commencement, the lead time cannot be more than two years.

You suggest that the lead time for the activity is 10 years as the activity is built up in stages.

It is your decision to build up the activity in stages. The ten year lead time you have suggested is not due to any inherent feature of the industry concerned.

Where the business would not produce a profit within the commercially viable period, the Commissioner would not exercise the discretion in paragraph 35-55(1)(c) of the ITAA 1997. Therefore, the discretion has not been exercised for your activity for the 2009-10 to 2016-17 income years.

Summary of reasons for decision

The Commissioner will not exercise the discretion in paragraph 35-55(1)(c) of the ITAA 1997 because, on the facts provided:

· you will not satisfy the income requirement in subsection 35-10(2E) of the ITAA 1997 for the 2009-10 to 2016-17 income years; and

· the Commissioner is not satisfied that it is because of the nature of your activity that the business is not expected to produce a taxation profit for those income years.

As you do not expect a taxation profit in the 2009-10 to 2016-17 income years, the rule in subsection 35-10(2) of the ITAA 1997 will apply to defer to a future income year any loss that arises from your activity for those years. A deferred loss is not disallowed and will be deductible against any taxation profit from your activity, or similar business activity, in future years.

If your business activity, or similar activity should satisfy an exception or satisfy the income requirement and one of the other tests in any given year, then the whole of the deferred loss will be deductible in that year.

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