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Edited version of private advice
Authorisation Number: 1012687003670
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 the calculation of your taxable income for the 2012-13 to the 2013-14 financial years?
Answer
No.
This ruling applies for the following periods:
Year ended 30 June 2013
Year ended 30 June 2014
The scheme commenced on
1 July 2012
Relevant facts and circumstances
Your income for non-commercial loss purposes is greater than $250,000.
Your business commenced in 200X and you made a profit in that 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
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 and do not come under any of the exceptions. Your business losses are therefore subject to the deferral rule. Under paragraph 35-55(1)(c) of the ITAA 1997 the Commissioner's 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.
This note following paragraph 35-55(1)(c) states;
Paragraphs (b) and (c) are intended to cover a business activity that has a lead time between the commencement of the activity and the production of any assessable income. For example, an activity involving the planting of hardwood trees for harvest, where many years would pass before the activity could reasonably be expected to produce income.
We do not consider that there is a lead time between the commencement of your trading activity and the production of any assessable income. Your business was able to generate income in your first financial year of operation.
Paragraph 79 of Taxation Ruling TR 2007/6 Income tax: non-commercial business losses: Commissioner's discretion (TR 2007/6) states:
The inherent characteristics may be present for an initial period from the time the business activity commences. After that initial period has elapsed, which can be several years, the inherent characteristics may cease to be the cause of business activities of the type in question being unable to satisfy any of the statutory tests.
Paragraph 35-55(1)(c) of the ITAA 1997 has two criteria that must each be satisfied. The conclusion that the first criterion has not been met, in that the failure to make a tax profit in your trading activity is not an inherent characteristic of your business activity means that it is not necessary to consider whether the second criterion, regarding the commercially viable period, has been met. However the comments of the Tribunal in Applicant 1761 of 2011 and Commissioner of Taxation [2011] AATA 779 paragraph 27 explains how this period is viewed:
…whether, as a matter of objective expectation, the Applicant's business activity will produce the excess of assessable income specified. In so doing, we must act on objective evidence where available. On that evidence, six years is a commercially viable period. But that period runs from when the business activity commences…
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.
Your business has been in operation for a number of years and was able to generate a profit in previous financial years. Therefore we do not consider that there is anything inherent or innate in the nature of your business activity that it has not been able to make a tax profit in the 2012-13 and 2013-14 financial years.
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