Edited version of your private ruling

Authorisation Number: 1012564074622

Ruling

Subject: non-commercial losses

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 business activity in your calculation of taxable income for the 2012-13 to 2014-15 financial years?

Answer

No.

This ruling applies for the following periods

Year ended 30 June 2013

Year ending 30 June 2014

Year ending 30 June 2015

The scheme commences on:

1 July 2008

Relevant facts and circumstances

The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:

· the application for private ruling, and

· the business plan.

You do not satisfy the income requirement set out in subsection 35-10(2E) of the ITAA 1997.

You carry on a business.

You were issued a private ruling and in this ruling, the Commissioner exercised the discretion in paragraph 35-55(1)(c) of the ITAA to allow you to include losses from your business activity in the calculation of your taxable income for the 2009-10 to 2011-12 financial years.

You provided documentation that stated that the first opportunity to be profitable would be the 2012-13 financial year.

You did not make a profit in the 2012-13 financial year for various reasons including the expansion of your business operations.

You expect to make a profit in the 2015-16 financial year.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 35-10(1)

Income Tax Assessment Act 1997 subsection 35-10(2)

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

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

Reasons for decision

For the 2009-10 and later financial years, Division 35 of the ITAA 1997 will apply to defer a non-commercial loss from a business activity unless:

· you meet the income requirement and you pass one of the four tests

· the exceptions apply

· the Commissioner exercises his discretion.

In your situation, you do not satisfy the income requirement (that is, your taxable income, reportable fringe benefits and reportable superannuation contributions but excluding your business losses, exceeds $250,000) and do not come under any of the exceptions. Your business losses are therefore subject to the deferral rule unless the Commissioner exercises his discretion.

The relevant discretion may be exercised for the financial year in question where:

· it is in the nature of your business activity that there will be a period before a tax profit can be produced

· there is an objective expectation your business activity will produce a tax profit within the commercially viable period for your industry.

Commercially viable period

TR 2007/6 states that the 'lead time' discretion provided for by paragraph 35-55(1)(c) of the ITAA 1997 is available for a business activity if there is an initial period from when the activity commenced where the nature of the activity prevents a tax profit from being made.

TR 2007/6 does not support any view that the discretion should available where the failure to make a profit is for reasons other than the nature of the business, such as, a consequence of starting out small and needing to build up a client base, or business choices made by an individual that are not consistent with the ordinary or accepted practice in the industry concerned - such as the hours of operation, location, climate or soil conditions, or the level of debt funding.

Where an operator chooses to carry on the business activities in a manner that does not produce a tax profit within the period that is commercially viable for the industry concerned, paragraph 35-55(1)(c) of the ITAA 1997 may not be satisfied.

For example, in Scott v. Commissioner of Taxation [2006] AATA 542, the court upheld the Commissioner's decision not to exercise the discretion. Mr Scott initially planted olive trees in 1997 and 1998. He then planted further trees in July 2000. No income was produced in the subsequent four years.

The Commissioner contended that the losses fell outside the commercially viable period for that industry, which was determined on an objective basis.

In relation to the commercially viable period, Mr Scott argued that there were other circumstances which should be taken into account when determining this time frame. On this issue, the court expressed the following view:

It seems to me that if it were permissible to take into account subjective considerations of each individual grower, there might be an almost infinitely variable period which could be described as the commercially viable period…The fact that a grower elects not to plant sufficient trees at the outset to ensure the business is commercially viable is a decision for that individual grower. Such a grower could not expect the Commissioner to exercise his discretion under s 35-55 in his or her favour because, to do so, would effectively render nugatory the rule dealing with losses from non-commercial business activities.

Similarly, in Case 1/2013 2013 ATC 1-050; [2013] AATA 3, the AAT found that a taxpayer who staggered the planting of their vineyard over several years, so that the operation would not reach full production for approximately ten years, was not entitled to the discretion in section 35-55 of the ITAA 1997.

The AAT accepted that it may be commercially prudent to approach the development of the vineyard in a gradual way, but that is not the test outlined in section 35-55(1)(c) of the ITAA 1997. The AAT said it was required to look at whether the failure to produce sufficient assessable income during a given year of income was a result of some inherent feature that the taxpayer's business activity has in common with business activities of that type, in line with FC of T v Eskandari 2004 ATV 4042.

Application to your circumstances

In your case, the documentation provided states that the first opportunity for your business to be profitable was in the 2012-13 financial year. However due to several reasons the business is not expected to make a profit until the 2015-16 financial year.

We do not accept that your business' inability to produce sufficient assessable income during the 2012-13 financial year was a result of some inherent feature of your business activity. We consider that the reason your business activity will take X years to become commercially viable is peculiar to your situation, due, in part, to the expansion of the business operations.

Therefore, the Commissioner will not exercise the discretion available in accordance with subsection 35-55(1) and paragraph 35-55(1)(c) of the ITAA 1997 for the 2012-13 to 2014-15 financial years.

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