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Edited version of private ruling

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Ruling

Subject: Commissioner's discretion for non-commercial business losses

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 income year?

Answer

No.

Relevant facts

The following description of the scheme is based on information provided by you. The following documents form part of the scheme under consideration;

You are carrying on mixed primary production business activities which commenced more than 10 years ago.

Your income for non commercial loss purposes for the income year ended 30 June 2010 is more than $250,000.

You have not provided independent evidence on the commercially viable period for the industry for each of your business activities.

You have not specified in which income year each of your activities will become a commercially viable business activity.

However you produced assessable income from these business activities in the last ten years.

This ruling applies for the following period:

Year ended 30 June 2010

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 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.

Paragraph 35-55(1)(c) of the ITAA 1997 states that In order to exercise the discretion, the Commissioner must be satisfied 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. However this 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.

For the Commissioner to exercise the discretion you must be able to show that the reason your business activity is producing a loss is inherent to the nature of the business and is not peculiar to your situation. For example, the discretion will not be available where the failure to make a profit is for reasons other than the nature of the business such as, a consequence of starting out on a small scale, the hours worked or the need to build a client base.

You have produced assessable income from your business activity in the year ended 30 June 2009 hence the lead time for your business activities had already expired.

Therefore the Commissioner will not exercise the discretion available in accordance with paragraph 35-55(1)(c) of the ITAA 1997.

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