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Edited version of your written advice
Authorisation Number: 1013104532860
Date of advice: 17 October 2016
Ruling
Subject: Commissioner's discretion for non-commercial business loss
Question
Will the Commissioner exercise the discretion in paragraph 35-55(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include any losses from your activity in your calculation of taxable income for the 20ZZ-XX and 20XX-YY financial years?
Answer
Yes
This ruling applies for the following period(s)
Financial year ending 20XX
Financial year ending 20YY
The scheme commences on
1 July 20ZZ
Relevant facts and circumstances
In financial year ending 30 June 20XX you started a X production business.
It will take up to X months to reach full mature yield and you have provided independent sources to support this.
You have provided a projection for the financial years ending 20XX-XY. You expect the business to make a tax profit in the financial year ending 30 June 20YZ.
Your income for non-commercial loss purposes is less than $250,000.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 35-10
Income Tax Assessment Act 1997 section 35-35
Income Tax Assessment Act 1997 section 35-40
Income Tax Assessment Act 1997 section 35-45
Income Tax Assessment Act 1997 section 33-55
Reasons for decision
Division 35 of the Income Tax Assessment Act 1997 (ITAA 1997) prevents losses from non-commercial activities that are carried on as businesses by individuals (alone or in partnership) being offset against other assessable income in the income year the loss is incurred.
The rule in subsection 35-10(2) of the ITAA 1997 defers losses from business activities unless:
a) you satisfy subsection 35-10(2E) of the ITAA 1997 (income requirement) and pass one of the four objective tests contained in sections 35-10, 35-35, 35-40 or 35-45 of the ITAA 1997;
b) an exception applies; or
c) the Commissioner exercises a discretion set out in section 35-55 of the ITAA 1997 for the business activity for that year.
To satisfy the income requirement your taxable income, reportable fringe benefits, report superannuation contributions and total net investment losses for that income year must be less than $250,000. You have stated that you meet the income requirement however you do not expect to meet any of the objective tests until the 20YY-YZ financial year. Further, the exceptions contained in subsection 35-10(4) do not apply as your assessable income from other sources is greater than $X0,000.
On the facts provided, to allow losses from your business activity to be offset against your other income, you must rely on the Commissioner exercising a discretion set out in section 35-55 of the ITAA 1997.
Commissioner's discretion
Paragraph 35-55(1)(b) of the ITAA 1997 provides that the Commissioner may exercise a discretion not to apply the loss deferral rule in section 35-10 where the income requirement is met but the objective tests are not satisfied because of the nature of the business activity.
This paragraph is intended to cover a business activity that has a lead time between the commencement of the activity and the production of assessable income.
TR Taxation Ruling TR 2007/6 Income tax: non-commercial business losses: Commissioner's discretion provides guidelines on how the discretion may be exercised to determine when it would be unreasonable for the loss deferral rule to apply.
Three elements must be satisfied to be eligible for the exercise of this discretion:
a) the business activity must have started to be carried on;
b) it is because of the nature of the activity that the activity does not satisfy any of the objective tests, and
c) the individual can show that there is an objective expectation, based on evidence from independent sources (where available) that, within a period that is commercially viable for the industry concerned, the activity will meet one of the objective tests or produce a tax profit.
Having regard to your full circumstances, it is accepted that it is in the nature of the business activity that has prevented one of the four tests being passed. It is also accepted that you will pass one of the four tests or make a tax profit within the commercially viable period for your industry.
Consequently the Commissioner will exercise the discretion not to apply the loss deferral rule for the 20ZZ-20XX and 20XX-YY financial years.
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