Edited version of private ruling

Authorisation Number: 1011528226307

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Ruling

Subject: NCL - Commissioner's discretion - Commercially viable period

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

This ruling applies for the following periods:

1 July 2009 to 30 June 2010

The scheme commences on:

30 June 2010

Relevant facts and circumstances

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

Your Private Ruling application

You incurred expenses in starting up your business activity during the 2009-10 income year

Your income for non commercial loss purposes for the income year(s) will be more than $250,000.

During the telephone conversation with your accountant, he/she advised the following facts:

You purchased some equipment during the year ended 30 June 2010 with the intention to carry on your business activity.

One of the items of equipment that was purchased required considerable work to qualify for the working standards.

Working standards test was completed and you received the certificate only in the following financial year.

Your business activity will become commercially viable in the 2010-11 income year.

You did not carry out any business activity until after 30 June 2010 and therefore your business activity did not generate any income during the relevant income year.

You incurred expenses in relation to your commencement of your business activity.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 35-1.

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

Reasons For Decision

Division 35 of the ITAA 1997 is an integrity measure to prevent losses from non-commercial activities that are carried on as businesses by individuals being offset against other assessable income in the income year the loss is incurred.

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.

For the Commissioner to exercise the discretion you must be able to show that the reason your business activity is not making a profit is inherent to the nature of the business and is not peculiar to your situation.

In your case, your business activity will only be subject to the non-commercial losses provisions if it is carried on as a business. If your activity is not carried on as a business (or has not yet started to trade), and cannot reasonably be expected to produce income, then you cannot claim general deductions in relation to it, regardless of the operation of Division 35 of the ITAA 1997.

The activities you engaged in until 30 June 2010 are considered to be preparatory activities, being those to do with preparing the capital assets for the business operations.

Preparatory expenses are expenses which are incurred once a decision to commence a business has been made.

Based on the information provided, your purchase of the equipments during the year ended 30 June 2010 is considered as preparatory expenses incurred to conduct your business activity. A deduction can therefore not be claimed and such expenses fall outside of the non-commercial losses regime.

As your activity has not commenced trading as a business until the year ended 30 June 2011, the Commissioner is unable to exercise the discretion under paragraph 35-55(1)(c) of the ITAA 1997 for the year ended 30 June 2010.

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