Edited version of private ruling

Authorisation Number: 1011562414689

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Ruling

Subject

NCL - assessable income test -reasonable estimate

Question 1

1. Does your business activity satisfy the assessable income test in section 35-30 of the Income Tax Assessment Act 1997 (ITAA 1997) based on a reasonable estimate?

Answer:

Yes

Question 2

2. Can you offset any losses from your activity against your other income in your calculation of taxable income for the 2009-10 income year?

Answer:

Yes

This ruling applies for the following periods:

1 July 2009-30 June 2010

The scheme commences on:

1 July 2009

Relevant facts and circumstances

You commenced your business activity in 2009.

In your application form, you have indicated the following:

For the year ended 30 June 2010, you earned some income from your business and incurred expenses. Thus your business incurred a net loss.

Your business activity would have passed the assessable income test if your business was operated for the whole of the relevant income year.

During the telephone conversation with you the following facts were provided:

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

Your expenses included cost trading stock and home office expenses.

You are seeking private ruling for the 2009-10 income year in order to claim your expenses.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 35-55.

Income Tax Assessment Act 1997 Paragraph 35-30(b).

Income Tax Assessment Act 1997 Paragraph 35-55(1)(a).

Income Tax Assessment Act 1997 Section 6-5.

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

Assessable income test

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.

In your case, you meet the income requirement under subsection 35-10(2E) of the ITAA 1997 as your income for non commercial loss purposes is below $250,000. As such, if you satisfy one of the four tests, you can offset your business activity losses against your other assessable income.

Of those tests is the assessable income test under section 35-30 of the ITAA 1997.

In terms of paragraph 35-30(b) of the ITAA 1997 the rule in section 35-10 of the ITAA 1997 does not apply to a business activity for an income year if you started to carry on the business activity, or stopped carrying it on, during the year, and a reasonable estimate of what would have been the amount of that assessable income if you had carried on that activity throughout the year is at least $20,000.

You advised that you commenced your business activity by acquiring your trading stock and your first record of sale was part way through the financial year.

During the period of carrying on your business activity, you returned $X of gross income and incurred $Y of expenses. This results in a net loss for your business.

We have made a reasonable estimate of what would have been the amount of that assessable income if you had carried on that activity throughout the year on the following basis:

Income earned period of carrying on your business activity

Extrapolated over the 2009-10 income year, the reasonable estimate would be equal or more than $20,000.

You have carried on your business activity for a period of Z number of months and earned $X of assessable income. Therefore, Commissioner accepts that based on a reasonable estimate, your assessable income from the activity had you carried on the activity throughout the year would have been at least $20,000 and thereby you have satisfied the assessable income test in section 35-30 of the ITAA 1997 for the 2009-10 income year.

Ability to claim loss

As your business activity has satisfied the assessable income test in subsection 35-30(b) of the ITAA 1997, the deferral on non-commercial loss rule in subsection 35-10(2) of the ITAA 1997 does not apply to your loss. This means that any loss from your business activity can be included in calculating your taxable income for the 2009-10 income year.

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