Edited version of private ruling

Authorisation Number: 1011653196565

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Ruling

Subject: non-commercial losses and the Commissioner's discretion

Will the Commissioner exercise his discretion to allow you to include any losses from your charter boat activity in calculating your taxable income for the years ended 30 June 2010 to 30 June 2014, inclusive?

No.

This ruling applies for the following periods

1 July 2009 to 30 June 2010

1 July 2010 to 30 June 2011

1 July 2011 to 30 June 2012

1 July 2012 to 30 June 2013

1 July 2013 to 30 June 2014

The scheme commenced on

1 July 2009

Relevant facts and circumstances

You purchased a boat.

You entered into a management agreement with a charter boat operator for your boat to enter their charter fleet.

The boat was prepared and charters began during the 2010-11 income year.

You, in conjunction with the charter boat operator, manage the boat.

A summary of your income and expenditure forecast shows you do not expect to make a profit until the 2013-14 income year.

Your income for non-commercial loss purposes was more than $250,000 for the year ended 30 June 2010. You also expect this will be the case for the other years ruled on.

This ruling has been prepared on the basis that your boat charter activity is being conducted as a business.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 35-10

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)(c)

Reasons for decision

Summary

The Commissioner has not exercised his discretion to allow you to include any losses from your boat charter business activity in your calculation of your taxable income for the years ended 30 June 2010 to 30 June 2014, inclusive. It is considered that there is no lead time between the commencement of the business and the production of assessable income for a boat charter business. Therefore, the Commissioner cannot exercise his discretion in relation to your boat charter business.

Detailed reasoning

Division 35 of the Income Tax Assessment Act 1997 (ITAA 1997) applies to losses from certain business activities for the year ended 30 June 2001 and subsequent years. The provisions only apply to individuals who conduct a business activity as either a sole trader or a partner in a partnership and made a loss from that business activity.

Section 35-10 of the ITAA 1997 was amended to include an income requirement that must be met (along with certain other tests), in order to include losses from a business activity in your taxable income calculation. The income requirement applies in relation to the year ended 30 June 2010 and later years.

You satisfy the income requirements under subsection 35-10(2E) of the ITAA 1997 if your income for non-commercial loss purposes is less than $250,000.

Paragraph 35-55(1)(c) of the ITAA 1997 states that the Commissioner may exercise his discretion, for the years concerned, to allow the inclusion of losses from a business activity where the individual does not meet the income requirement when:

· because of its nature, your activity 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, that your activity will produce assessable income greater than the deductions attributable to it for that year, within a commercially viable period.

A note to the section states that paragraph (c) is intended to cover a business activity which 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.

For a boat charter business, there is no lead time for the production of assessable income because the term 'assessable income' refers to gross sales rather than net profit. Your boat charter business has produced income in its first year of operations. It follows the Commissioner cannot exercise his discretion in relation to your boat charter business.