Edited version of private ruling

Authorisation Number: 1011509527823

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Ruling

Subject: Non-Commercial Losses: Commissioner's discretion

Will the Commissioner exercise his discretion under section 35-55 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 2010 income year?

No.

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts and circumstances

The following documents form part of the scheme under consideration:

· Your Private Ruling application.

· Income and expenditure trial balance for 2010 for your business activity.

You are carrying on a business.

Your business activity is a once off activity.

You did not provide independent evidence on the commercially viable period for the industry.

You did not provide a business plan.

You have not provided information that states whether you will or will not meet the income requirement under subsection 35-10(2E) of the ITAA 1997 for the income year ended 30 June 2010.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 35-10

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

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

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

Income Tax Assessment Act 1997 subsection 35-10(4)

Income Tax Assessment Act 1997 section 35-30

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 35-55

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

Income Tax Assessment Act 1997 subparagraph 35-55(1)(b)(i)

Income Tax Assessment Act 1997 subparagraph 35-55(1)(b)(ii)

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

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

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

Reasons for decision

Losses from activities that do not meet the income requirement and any of the four tests under Division 35 of the ITAA 1997, or the exceptions in subsection 35-10(4) of the ITAA 1997, will be subject to the loss deferral rules in subsection 35-10(2) of the ITAA 1997, unless the Commissioner exercises a discretion under section 35-55 of the ITAA 1997.

The discretion under section 35-55 of the ITAA 1997 regarding the lead time limbs provides that in order to exercise the discretion, the Commissioner must be satisfied where:

(b) for an applicant who carries on the business activity who satisfies subsection 35-10(2E) (income requirement) for the most recent income year ending before the application is made - the business activity has started to be carried on and, for the excluded years:

(i) because of its nature, it has not satisfied, or will not satisfy, one of the tests set out in section 35-30, 35-35, 35-40 or 35-45; and

(ii) 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 either meet one of those tests or will produce assessable income for an income year greater than the deductions attributable to it for that year (apart from the operation of subsections 35-10(2) and (2C)); or

(c) for an applicant who carries on the business activity who does not satisfy subsection 35-10(2E) (income requirement) for the most recent income year ending before the application is made - the business activity has started to be carried on and, for the excluded years:

(i) because of its nature, it has not produced, or will not produce, assessable income greater than the deductions attributable to it; and

(ii) 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 produce assessable income for an income year greater than the deductions attributable to it for that year (apart from the operation of subsections 35-10(2) and (2C)).

A note in section 35-55 of the ITAA 1997 provides that 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.

The example given in the note is 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.

Where you can demonstrate that your business activity is commercially viable but, because of its nature, there is a lead time between the commencement of the activity and the production of assessable income, you may apply for the exercise of the Commissioner's discretion.

For the 2009-10 and later income years, the conditions that apply to a Commissioner's discretion based on lead time also depend on whether or not you meet the income requirement.

Irrespective of whether you meet the income requirement, you must provide objective evidence (where available) that the reason your activity has not yet met one of the four tests or produced assessable income greater than available deductions (tax profit) is because of the nature of the business and not for some other reason that is peculiar to your particular business activity.

This means there must be an innate or inherent feature of the business activity that results in a period of time between when the activity starts and when it first produces assessable income. Examples of such activities include forestry, viticulture and other horticultural activities.

The discretion is not available in cases where the failure to make a profit is for reasons other than the nature of the business activity, such as:

· starting out on a small scale

· building up a client base

· business choices made by you that are not consistent with the ordinary or accepted practice in the industry concerned (such as hours of operation, location, climate or soil conditions, or the level of debt funding).

You must also provide objective evidence that there is an expectation that your business activity will pass one of the tests or make a profit within a period that is commercially viable for the industry concerned. The commercially viable lead time will vary from industry to industry, according to factors such as anticipated income, expenses and seasonal variations.

You have not provided:

· information that states whether you will or will not meet the income requirement under subsection 35-10(2E) of the ITAA 1997 for the income year ended 30 June 2010

· independent evidence on the commercially viable period for the industry

· a business plan.

Your business activity is a once off activity.

Therefore, the Commissioner will not exercise the discretion available relating to the lead time in accordance with section 35-55 of the ITAA 1997.