1012680918098 | Legal database

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Edited version of private advice

Authorisation Number: 1012680918098

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 in your calculation of taxable income for the 2013-14 financial year?

Answer

This ruling applies for the following period:

Year ended 30 June 2014

The scheme commenced on:

1 July 2013

Relevant facts and circumstances

You operate a business.

You commenced your business operations with an X acre property.

In a subsequent year, you purchased an additional X acre property to use in your property.

You do not meet the income requirement contained in subsection 35-10(2E) of the ITAA 1997.

You anticipate that the business will produce a profit in the 2015-16 financial 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.

A taxpayer will satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997 if their 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 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).

For the Commissioner to exercise the discretion 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. For example, the discretion will not be 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 on a small scale, the hours worked or the need to build a client base.

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 paragraph 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.

In your case, you commenced a new business with an X acre property and acquired an additional X acres in a subsequent year. You anticipate that your business will produce a tax profit by the 2015-16 financial year.

We consider that the reason your business activity will take a number of years to become commercially viable is peculiar to your situation, due, in part, to the staggered acquisition of land and stock, and is not solely due to the factors inherent to the nature of the business.

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 2013-14 financial year.

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