Disclaimer
This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4.

Edited version of private ruling

Authorisation Number: 1011611818904

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 losses - Commissioner's discretion

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 to 2018-19 income years?

Yes.

This ruling applies for the following periods:

1 July 2009 to 30 June 2010

1 July 2010 to 30 June 2011

1 July 2011 to 30 June 2012

1 July 2012 to 30 June 2013

1 July 2013 to 30 June 2014

1 July 2014 to 30 June 2015

1 July 2015 to 30 June 2016

1 July 2016 to 30 June 2017

1 July 2017 to 30 June 2018

1 July 2018 to 30 June 2019

The scheme commences on:

1 July 2009

Relevant facts and circumstances

You are a member of a partnership formed to develop and operate a business.

Development is to be staged over a period of years.

Residential villas will be leased to eligible tenants by way of long term leases. The tenant will provide an interest free loan to the partnership which will be repaid on the termination of the lease.

The lease also contains a nominal rent payable for the duration of the lease.

The outgoing tenant will pay you a deferred management fee calculated with reference to the period of occupancy.

Construction commenced during the 2008-09 income year and will continue progressively.

The real property test was met in the 2008-09 income year.

You have provided income and expenditure projections which show you expect to meet the assessable income test in the 2011-12 income year and make a tax profit in the 2018-19 income year.

You have provided a copy of an independent paper discussing and supporting your income and expenditure projections.

You expect your income for non commercial loss purposes will be more than $250,000 for the years ruled on.

This ruling has been prepared on the basis that your activity is being conducted as a business.

Reasons for decision

Summary

The Commissioner will exercise the discretion to allow you to include any losses from your business activity in your calculation of taxable income for the 2009-10 to 2018-19 income years.

Detailed reasoning

The Commissioner will exercise the discretion in paragraph 35-55(1)(c) of the ITAA 1997 for an applicant who does not satisfy the income requirement in subsection 35-10(2E) of the ITAA 1997 if certain conditions are satisfied for the year concerned.

For the discretion to be exercised, the business activity must have started to be carried on and, for the excluded years:

The note to subsection 35-55(1) of the ITAA 1997 states that paragraphs 35-55(1)(b) and 35-55(1)(c) of the ITAA 1997 are intended to cover a business activity that has a lead time between the commencement of the activity and the production of assessable income.

Taxation Ruling TR 2007/6 discusses non commercial business losses and the application of the Commissioner's discretion. The ruling states that the phrase 'because of its nature' refers to inherent characteristics of the type of business activity that is conducted by the taxpayer. These characteristics are common to any business activity of that type and must be the reason why the activity is unable to satisfy any of the tests. The discretion is not intended to be available where the failure to satisfy one of the tests is due to other reasons.

The consequences of business choices made by an individual (for example, the hours of operation, the size or scale of the activity, and the level of debt funding) are not inherent characteristics of a business activity. Failure of the business to satisfy any of the tests due to this type of business choice would not result in the Commissioner's discretion being granted.

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.

Similar businesses operate under a variety of different models which affect the timing of income from residents. The operating model used will affect when the particular business becomes profitable.

You will operate your business by way of long term lease and a deferred management fee. Other than a nominal rent, you will not receive assessable income from a tenant until they leave the property and the deferred management fee is paid to you.

Whilst it is your choice to operate your business using this method, the Commissioner accepts that deferred management fees are a common arrangement used by such businesses. Thus, this business choice is viewed as a characteristic common to the industry and not a choice specific to your business activity.

The Commissioner accepts that your business activity will produce assessable income greater than the deductions attributable to it for that year within ten years and that this period is commercially viable for the industry.

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

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).