Edited version of private ruling

Authorisation Number: 1011566932857

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Ruling

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

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 non-primary production activity in your calculation of taxable income for the year ended 30 June 2010?

Yes.

This ruling applies for the following period:

1 July 2009 to 30 June 2010

Relevant facts

You operate a non-primary production activity that you commenced in the year ended 30 June 2010. You have provided details of the scale of your activity. You have not satisfied the 'income requirement' for that year. You have operated your activity only part year.

It is not uncommon to take several months to accomplish a task in your activity. You receive income only once the task is completed.

You prepare your accounts for your activity on an accrual basis and for tax purposes on a cash basis.

Your actual and projected income and expenditure details show that you have made a loss in the year ended 30 June 2010 but will produce assessable income greater than the deduction attributable to it within a year of commencement of the activity.

You are carrying on your non-primary production activity as a business.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 35-1

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

Income Tax Assessment Act 1997 section 35-55

Income Tax Assessment Act 1997 section 35-30

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

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 (ITAA 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 of the ITAA 1936 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 of the ITAA 1936 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 of the ITAA 1936, 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

Division 35 of the ITAA 1997 applies to losses from certain business activities for the year ended 30 June 2001 and subsequent years. Under the rule in subsection 35-10(2) of the ITAA 1997, a loss made by an individual (including an individual in a general law partnership) from a business activity will not be taken into account in an income year unless:

· the 'Exception' in subsection 35-10(4) of the ITAA 1997 applies

· one of four tests in sections 35-30, 35-35, 35-40 or 35-45 of the ITAA 1997 is met (together with an income requirement), and/or

· if one of the tests (or the income requirement) is not satisfied, the Commissioner exercises the discretion in section 35-55 of the ITAA 1997.

If the 'income requirement' in subsection 35-10(2E) of the ITAA 1997 is not satisfied, then the Commissioner may exercise the discretion under paragraph 35-55(1)(c) of the ITAA 1997 to allow the inclusion of the losses.

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.

You state that your non-primary production activity is carried on as a business and this ruling is made on the basis of accepting this claim.

In your case, a task can continue for several months and you will receive income at the end of that period. Accordingly, there is a lead time of several months between the commencement of non-primary production activity and the production of any assessable income.

You have not provided any independent evidence for the lead time. However, as you do not receive income for several months until the conclusion of a task, it is accepted that there is a lead time in the relevant industry. The information provided by you suggests that you have received income from your activity in the same income year in which you have commenced your activity. Therefore, your lead time, that is the time between the commencement of the activity and production of any assessable income, cannot be more than one year.

You have operated your activity for part of the year ended 30 June 2010. On the basis of your actual and projected income and expenses, it is accepted that your non-primary production activity can reasonably be expected to produce assessable income greater than the deductions attributable to it for the twelve month period of its commencement.

The Commissioner is satisfied that there is an objective expectation, based on information you provided, that your business activity will produce assessable income greater than the deductions attributable to it within one year and it will be within the period that is commercially viable for the relevant industry. Accordingly the Commissioner will exercise the discretion under paragraph 35-55(1)(c) of the ITAA 1997 in respect of your non-primary production activity for the year ended 30 June 2010.

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