Edited version of private ruling

Authorisation Number: 1011602713887

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Ruling

Subject: Non Commercial Losses- Commissioner's discretion - lead time.

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 your calculation of taxable income for the 2009-10 and subsequent income years?

Yes.

This ruling applies for the following period

1 July 2009 to 30 June 200Y

The scheme commenced on

1 July 2008

Relevant facts and circumstances

You are carrying on a non primary production business activity.

The activity is carried on in partnership. The partnership consists of several partners. The partnership is the owner and the developer of the activity.

The management of the overall business is carried on by three parties.

The activity is developed in stages. The project is funded by capital from the partners and loans from financial institutions.

The business activity started in the year commencing 1 July 2008. The stage 1 of the project was completed and the income generating activity commenced in subsequent years. Stage 2 of the activity also commenced during these years. Income from the activity is expected quite soon after the commencement of the activity.

You have provided the following information with regards to the activity:

· the stages of the activity

· the model used to generate income

· income and expense statements

· business plan/deed and letters and documents from external parties.

You have advised that you did not satisfy the income requirement in subsection 35-10(2E) of the ITAA 1997 in the relevant income years.

You have requested the Commissioner to exercise the discretion in paragraph 35-55(1)(c) of the ITAA 1997 for the activity for the 2009-10 and subsequent income years.

Relevant legislative provisions

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

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

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

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

Reasons for decision

The Commissioner will exercise the discretion in paragraph 35-55(1)(c) of the ITAA 1997 for an applicant who does not satisfy the income requirement in subsection 35-10(2E) of the ITAA 1997 if certain conditions are satisfied for the year concerned.

For the discretion to be exercised, the business activity must have started to be carried on and, for the excluded years:

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

· 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) of the ITAA 1997).

The note to subsection 35-55(1) of the ITAA 1997 states that paragraphs 35-55(1)(b) and 35-55(1)(c) of the ITAA 1997 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 the first requirement to be satisfied, the business activity must have started to be carried on.

You have stated that the business activity has commenced. Therefore, you have satisfied this requirement.

The second requirement to be satisfied is that, for the excluded years, the business activity has not produced, or will not produce assessable income greater than the deductions attributable to it because of its nature.

Paragraphs 77 and 78 of Taxation Ruling TR 2007/6, which discusses non-commercial business losses and the Commissioner's discretion, state:

Therefore, the phrase 'because of its nature' refers to inherent characteristics of the type of business activity being conducted by the taxpayer, which are common to any business activity of that type. These inherent characteristics must be the reason why the activity is unable to satisfy any of the tests. The discretion is not intended to be available where the failure to satisfy one of the tests is for other reasons.

The consequences of business choices made by an individual (for example, the hours of operation, the size or scale of the activity, and the level of debt funding) are not inherent characteristics of a business activity…

You have forwarded information which indicates that you expect the business activity to not produce assessable income greater than the deductions attributable to it until the 200Z year. You have also stated that it is usual for businesses similar to yours to incur losses during the early phases of the activity.

You commence deriving income a couple of years after the commencement of the activity. The turnover rate starts low in early years and builds up gradually.

You have forwarded independent evidence to suggest that the lead time for the activity is X years.

The information provided suggests that the activity has inherent characteristics which prevent it from generating profits for some time.

The question in this case, however, is whether these inherent characteristics will result in assessable income from your business activity not being greater than the deductions attributable to it for the excluded years.

While the above inherent characteristics would result in low levels of assessable income being produced in the early years for this type of activity, your projections indicate that your losses are also as a result of other reasons in the early years. The projections show that income can be received quite soon after the commencement. In this case, your losses appear to be as a result of both the inherent characteristics and for other reasons.

Paragraph 80 of Taxation Ruling TR 2007/6 states:

…Where both an inherent characteristic and some other factor are identified, this in itself will not mean that the requirement in subparagraph 35-55(1)(b)(i) is no longer met. It is only where it is clear that the reason the activity is unable to satisfy a test is not because of any inherent characteristic, but because of some other factor, that this requirement will not be met.

In your case, the inherent characteristics would be a factor in your not making profits from your business activity for the excluded years. This would mean that under paragraph 80 of TR 2007/6, the requirement in relation to the nature of the business activity would be satisfied, as the failure to satisfy this requirement is not solely because of some other factor. It is considered that the inherent characteristics would affect all of the excluded years. This requirement is therefore satisfied.

The third requirement to be satisfied is that the Commissioner must be satisfied that an objective expectation exists, for each of the years in question, that the business activity will, within a period that is commercially viable for the industry concerned, produce assessable income for an income year greater than the deductions attributable to it for that year. The objective expectation must be based on independent information, where such information is available.

The independent evidence you have provided suggests that your activity is generating profits within the commercially viable period for that industry.

The income projections provided by you indicate that you expect to make a net profit by year X-1, which is within the X year maturity period as indicated in the above documents. We consider that this maturity period would be the commercially viable period for your industry.

You have therefore shown that the relevant objective expectation about future performance exists in this case, and this requirement is satisfied.

As discussed above, your activity has a lead time before any profits can be made.

Your business activity is therefore of a kind contemplated by the note to subsection 35-55(1) of the ITAA 1997. The activity also satisfies all of the relevant requirements in paragraph 35-55(1)(c) of the ITAA 1997 as discussed above.

The Commissioner will therefore exercise this discretion to allow you to include any losses from your business activity in your calculation of taxable income for the period 1 July 2009 to 30 June 200Y.

Summary of reasons for decision

The Commissioner will exercise the discretion in paragraph 35-55(1)(c) of the ITAA 1997 because, on the facts provided:

· you will not satisfy the income requirement in subsection 35-10(2E) of the ITAA 1997 for the period 1 July 2009 to 30 June 200Y; and

· the Commissioner is satisfied that it is because of the nature of your activity that it has not produced, or will not produce assessable income greater that the deductions attributable to it for the period 1 July 2009 to 30 June 200Y.