Edited version of private ruling

Authorisation Number: 1011579971419

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Ruling

Subject: Non-commercial losses - commissioner's discretion

Question

Will the Commissioner exercise the discretion in paragraph 35-55(1)(b) 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 to 2015-16 income years?

Answer: Yes

Will the Commissioner exercise the discretion in paragraph 35-55(1)(b) 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 subsequent income years?

Answer: No

This ruling applies for the following periods:

1 July 2009 to 30 June 201X.

The scheme commences on:

1 July 2009

Relevant facts and circumstances

You are carrying on a farming activity in the course of a business.

You are carrying on this activity in partnership.

The information provided in the private ruling application form confirms that you expect to satisfy a number of the tests under Division 35 within a commercially viable period.

You expect your business activity will make a tax profit in the future income year.

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

During the telephone conversation, you advised the following facts:

This business activity will take a few years to mature;

Your main source of income is from your full time employment.

You incurred expenses in starting up this business activity. Your outgoings included expenses related to labour hire cost, date palms, shed, tractor and fencing.

You are seeking Commissioner's discretion in order to claim your expenses.

You provided the following reports:

Independent evidence.

Your business plan.

Relevant legislative provisions

Income Tax Assessment Act 1997 - Section 35-1.

Income Tax Assessment Act 1997 - Subsection 35-55(1)

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

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

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

Commissioner's discretion for the 2009-10 to 2015-16 income years

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) as your income for non commercial loss purposes is below $250,000.

You have requested that the Commissioner exercise the discretion under paragraph 35-55(1)(b) of the ITAA 1997.

Subsection 35-5(2) of the ITAA 1997 states that Division 35 of the ITAA 1997 is not intended to apply to activities that do not constitute carrying on a business.

For the Commissioner to exercise the discretion, under the paragraph 35-55(1)(b) of ITAA 1997, you must be able to show that the reason your business activity did not make a profit or satisfy one of the tests 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.

Based on the information provided, it is accepted that you are carrying on your activity in the course of a business since 2009.

You have supplied evidence from an independent source and this establishes that your business activity will produce assessable income greater than the deductions attributable to it, within a period that is commercially viable for this industry, in the X income year.

Therefore, the Commissioner will exercise the discretion available under paragraph 35-55(1)(b) of the ITAA 1997 and allow the losses from your business activity to be included in the calculation of your taxable income up until that time..

Commissioner's discretion for the 2015-16 to 2021-22 income years

As your business activity is expected to generate a profit in the X income year, the Commissioner will not exercise the discretion for this and subsequent income years.

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