Edited version of private ruling

Authorisation Number: 1011556390534

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Ruling

Subject: Non-commercial loss - Commissioner's discretion - lead time

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: Non-commercial loss - Commissioner's discretion

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 in your calculation of taxable income for the 2009-10 to 2012-13 income years?

Answer: No

This ruling applies for the following periods:

This ruling applies for the following period:

1 July 2009 to 30 June 2013

The scheme commences on:

1 July 2009

Relevant facts and circumstances

You are operating a business and you commenced this business some years ago.

In your private ruling application form you advised the following facts:

Your business operates from more than one location.

You own, manage and operate the business.

Due to the changes implemented by the government the revised forecasts will mean that the business will make a tax profit in the future income years

Your income for non-commercial loss purposes for the relevant income year was above $250,000.

You are seeking Commissioner's discretion for the 2009-10 to 2012-13 income years in order to claim your expenses.

You provided a copy of your business plan of your business.

Reasons for decisions

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 meet the income requirement as your income for non commercial loss purposes is expected to be above $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.

The note to paragraphs (b) and (c) of subsection 35-55(1) of the ITAA 1997 does not support the view that the discretion should be exercised for any start-up activity that is unable to produce a profit because of the small scale on which it was started, or because a client base is being built up but rather for those business activities that have a lead time between the commencement of the activity and the production of assessable income.

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 (paragraph 35-55(1)(c) of the ITAA 1997).

Facts indicate that you are carrying on a business activity. Your business activity is capable of producing assessable income soon after its commencement. Your business activity does not have any innate or inherent feature about it that would mean it is not able to produce income in the year of commencement.

Based on the information available in the ATO, the Commissioner accepts that the commercially viable period for your business activity is far shorter than the estimate for your business.

Considering, you commenced your business activity quite some time ago and is not in its start-up stage, your business activity is capable of generating income soon after its commencement. However, the actual business income and expenses declared in the income tax return for the relevant income year and the projections in the private ruling application form confirms that you will be generating a profit in the future income year.

Rather, lead time normally applies to agricultural activities where for example, a fruit tree takes time between the planting of the tree and the production of any fruit, such that there will be no assessable income for a number of years.

Also, the commercially viable period is determined on an industry basis and not by commercial decisions and liabilities an individual business operator may make in regard to costs, financing, funding, cost efficiency, levels of debt, rates, depreciation, interest etc.

Based on the information provided the Commissioner is satisfied that the commercially viable period for your activity has lapsed.

Therefore the Commissioner will not exercise the discretion in paragraph 35-55(1)(c) of the ITAA

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