Edited version of private ruling

Authorisation Number: 1011718609409

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Ruling

Subject: 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 hotel enterprise in the calculation of your taxable income for the 2009-10 and 2010-11 income years?

Answer: Yes

This ruling applies for the following period

Year ended 30 June 2010

Year ending 30 June 2011

The scheme commenced on

1 July 2009

Relevant facts

Your income for non-commercial loss purposes in the 2009-10 income year was above $250,000 and you expect this will be the case in the 2010-11 income year as well.

You obtain an interest in a joint venture to construct and operate a hotel.

The joint venture is not a separate legal entity and is a contractual arrangement between the participants for the sharing of costs and outputs.

Under the joint venture agreement each participant has an undivided interest in each asset and liability supervised by the joint venture operator.

Each participant is also entitled to an agreed proportion of its output after bearing the same proportion of its cost of production.

All expenditure of the joint venture is recovered through cash calls.

Your interest in the joint venture is held in partnership with your spouse.

The hotel construction was completed in 200X and then sublet to a hotel operator.

Under the terms of the sublease, the operator charges a management fee with the balance of the hotel's net earnings passing to the hotel owners.

You have stated that a new hotel operation takes time to become profitable as an extensive period of marketing and brand awareness is required and discounting is often required to attract guests to a new development.

Independent evidence

You have provided independent evidence that states the typical ramp up period for a new hotel to become profitable in the existing market conditions is about three to five years, depending on its location and financial leverage.

Partnership accounts

Your projected partnership profit / loss statements show that a profit is expected in the 2011-12 income year.

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 - Subsection 35-55(1)

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

Reasons for decision

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 satisfy the income requirement as your income for non-commercial loss purposes is above $250,000 in the 2009-10 income year and you expect this will be the case in the 2010-11 income year as well.

In order to exercise the discretion, 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).

You must be able to show that the reason your business activity is producing a loss is inherent to the nature of the business and is not peculiar to your situation.

The hotel construction was completed in 200X. In your projected income and expenditure statement you believe that your interest in the joint venture will not produce income greater than deductions attributable to it until the 2011-12 income year or after four years of operation.

You have provided any evidence from an independent source that states the typical ramp up period for a new hotel to become profitable in the existing market conditions is about three to five years, depending on its location and financial leverage.

Based on the general evidence available, there is an objective expectation that within a period that is commercially viable for the industry, the activity will produce assessable income greater that the expenses attributed to it.

Therefore, the Commissioner will exercise the discretion available in accordance with subsection 35-55(1) and paragraph 35-55(1)(c) of the ITAA 1997 in relation to your hotel enterprise for the 2009-10 and 2010-11 income years.

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