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Ruling
Subject: Non-commercial losses - Assessable income test
Question:
Has your business activity passed the assessable income test in the 2010-11 financial year?
Answer: Yes.
This ruling applies for the following period
Year ended 30 June 2011
The scheme commenced on
1 July 2010
Relevant facts
You commenced your business activity during 2011 and have invested your own capital to fund the business.
In the first six months, your activities have produced over $25,000 of income.
Your business activity incurred start up costs in the 2010-11 financial year, resulting in an overall business loss for the year.
Your income for non-commercial loss purposes was less than $250,000 in the 2010-11 financial year.
Relevant legislative provisions
Income Tax Assessment Act 1997 - Division 35
Income Tax Assessment Act 1997 - section 35-10
Income Tax Assessment Act 1997 - section 35-30
Reasons for decision
Where a business activity is not in operation for the whole of an income year, paragraph 35-30(b) of the Income Tax Assessment Act 1997 (ITAA 1997) applies, so that the assessable income test is then based on a reasonable estimate of what the assessable income from the business activity would have been if the activity was carried on for the whole of that year.
The requirement in paragraph 35-30(b) is that a reasonable estimate be made of what the assessable income would have been had the business been carried on for a full year. Paragraph 62 of Taxation Ruling TR 2001/14 discusses how a reasonable estimate is made.
Making a 'reasonable estimate' of assessable income for the purposes of the Assessable income test
62. To make a 'reasonable estimate' under paragraph 35-30(b) of assessable income that would have been derived from the business activity if it had been carried on throughout the income year in question (i.e., an estimate of a notional annual amount) an individual can consider all relevant factors, including, but not limited to:
(a) the cyclical nature of the particular business activity which may result in variations in the pattern of receipts;
(b) any orders received and/or forward contracts entered into;
(c) the amount that could have been derived for a full income year based on a pro rata calculation of the assessable income already derived for the part of the year. The amount derived for the part of the year must be typical of the income derived in a full year;
(d) the type of business activity undertaken, considering the nature and type of income receipts of similar activities typical of the industry; and
(e) current size and investment in the activity.
In your case, your business activity produced income of more than $25,000 in the first six months of operation. A reasonable estimate of the assessable income you would have received had your business activity commenced on 1 July 2010 is over $20,000, based on these figures.
Therefore, your law and mediation business activity is considered to have passed the assessable income test in the 2010-11 financial year.
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