Disclaimer
This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4.

Edited version of your written advice

Authorisation Number: 1012702508256

Ruling

Subject: Non-commercial loss

Question 1

Will the Commissioner exercise the discretion in paragraph 35-55(1)(a) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include any losses from your primary production activity in the calculation of your taxable income for the 2011-12 financial year?

Answer

No.

Question 2

Will the Commissioner exercise the discretion under paragraph 35-55(1)(c) of the ITAA 1997 to allow you to include any losses from your primary production activity in your calculation of taxable income for the 2011-12 financial year?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2012

The scheme commenced on

1 July 2011

Relevant facts

The arrangement that is the subject of this ruling is described below. The following documents have been relied upon to reach a decision:

During the 2011-12 financial year, you received two lump sums which were used to partly purchase a business.

Your business activity is conducted through a partnership.

As a result of your lump sums, your income for non-commercial loss purposes in the 2011-12 financial year was above $250,000.

In the 2011-12 financial year, the business activity produced a loss.

The partnership has real assets of over $500,000 and other assets over $100,000.

The partnership has more than $20,000 business income in the 2013-14 financial year.

The projected budget shows decreasing losses for the years 2012-13 to 2015-16.

Relevant legislative provisions

Income Tax Assessment Act 1997 - Section 35-1.

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

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

Income Tax Assessment Act 1997 - Section 35-55

Income Tax Assessment Act 1997 - Paragraph 35-55(1)(a)

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

Reasons for decision

Special circumstances

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 his discretion to allow the inclusion of the losses.

You satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997 if your 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.

The Commissioner's discretion in paragraph 35-55(1)(a) of the ITAA 1997 may be exercised for the financial year where the business activity is affected by special circumstances outside the control of the operators of the business activity.

Special circumstances are those circumstances which are sufficiently different to distinguish them from the circumstances that occur in the normal course of conducting a business activity. For those individuals who do not satisfy the income requirement, special circumstances are those which have materially affected the business activity, causing it to make a loss.

Taxation Ruling TR 2007/6 Income tax: non-commercial business losses: Commissioner's discretion sets out the Commissioner's interpretation of the exercise of the Commissioner's discretion under paragraph 35-55(1)(a) of the ITAA 1997. The following has been extracted from paragraphs 47 to 53 of this ruling:

In your case, you received lump-sum payments on retirement. Receiving these payments did not affect the business, causing it to make a loss. Instead it caused you to fail the income requirement under subsection 35-10(2E) of the ITAA 1997. This is not considered to be 'special circumstances' for the purposes of paragraph 35-55(1)(a) of the ITAA 1997.

Therefore, the Commissioner will not exercise the discretion under paragraph 35-55(1)(a) of the ITAA 1997.

Commercially viable period

The Commissioner may also exercise a discretion under paragraph 35-55(1)(c) of the ITAA 1997 where:

It is accepted that it is in the nature of your business activity to require a lead time before a tax profit can be produced. However, the projected figures still show a business loss in the 2015-16 financial year.

You have not provided objective evidence of the commercially viable period to make a tax profit for your type of activity. Without this information the Commissioner is not able to conclude that the five or six years your activity will take from commencement to the achievement of a tax profit is within a period that is commercially viable for your industry.

Therefore, the Commissioner will not exercise the discretion under paragraph 35-55(1)(c) of the ITAA 1997 and the losses from your business will be subject to the loss deferral rule in subsection 35-10(2) of the ITAA 1997.

While we appreciate your situation, there is no other discretion available to the Commissioner in Division 35 of the ITAA 1997 that would allow you to claim your losses in the 2011-12 financial year.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).