1011872634597 | Legal database

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Edited version of private ruling

Authorisation Number: 1011872634597

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Ruling

Subject: 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 financial services business activities in the calculation of your taxable income for the 2006-07 and 2008-09 financial years?

Answer: No.

This ruling applies for the following periods

Year ended 30 June 2007

Year ended 30 June 2009

The scheme commenced on

1 July 2008

Relevant facts

You commenced your business in 20XX, providing financial services to the general public.

You undertook the necessary training and spent significant time and effort establishing the business with a view to being commercially viable.

You worked in the business on a full-time basis but due to insufficient sales in a competitive market the business never became profitable.

You incurred additional expenses for advertising in an attempt to increase sales and gain a market share, however sales did not increase enough and the business ceased in the 20XX financial year.

You were a small business entity and did not elect to be an STS taxpayer in the 20XX-XX financial year.

The business did not produce income of more than $10,000 in any financial year in which it was carried on and did not pass any of the four non-commercial loss tests in the 20XX-XX or 20XX-XX financial year.

Relevant legislative provisions

Income Tax Assessment Act 1997 - Section 35-1
Income Tax Assessment Act 1997 - Section 35-30
Income Tax Assessment Act 1997 - Section 35-35
Income Tax Assessment Act 1997 - Section 35-40
Income Tax Assessment Act 1997 - Section 35-45
Income Tax Assessment Act 1997 - Paragraph 35-55(1)(b).

Reasons for decision

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

Under paragraph 35-55(1)(b) of the ITAA 1997, the Commissioner's discretion can be exercised where:

the business activity has started to be carried on but because of its nature it has not satisfied, or will not satisfy, one of the non-commercial loss tests set out in sections 35-30, 35-35, 35-40 or 35-45 of the ITAA 1997; and

there is an objective expectation that within a period that is commercially viable for the industry concerned the activity will meet one of the tests or produce assessable income for an income year greater than the deductions attributable to it for that year.

Taxation Ruling TR 2007/6 sets out guidelines on how the Commissioner's discretion under paragraph 35-55(1)(b) of the ITAA 1997 may be exercised. The following has been extracted from paragraphs 70 to 104 of this ruling.

The discretion is provided to ensure that certain individuals who carry on genuine commercial businesses are not disadvantaged due to particular circumstances which prevent them from satisfying one of the tests.

This arm of the safeguard discretion will ensure that the loss deferral rule in section 35-10 of the ITAA 1997 does not adversely impact on taxpayers who have commenced to carry on activities which by their nature require a number of years to produce assessable income. The paragraph is intended to cover a business activity that has a lead time between the commencement of the activity and the production of any assessable income. Such activities have an inherent characteristic that cannot be overcome by conducting the business activity in a different way but only by changing the nature of the business.

In your case, you have not provided any independent evidence to show the lead time for a business of your type. However, it is accepted that the nature of this type of industry or business generally does not prevent it from producing assessable in the first year it is commenced.

The inability of your business activity to satisfy one of the four non-commercial loss tests was due to insufficient sales in a competitive market and was not due to lead time, as set out in paragraph 35-55(1)(b) of the ITAA 1997.

Therefore, the Commissioner will not exercise the discretion in section 35-55 of the ITAA 1997 to allow you to offset the losses made from your mortgage broking business activities against your other assessable income for purposes of calculating your taxable income for the 20XX-XX and 20XX-XX financial years.

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