Edited version of private ruling

Authorisation Number: 1011667299868

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Ruling

Subject: Non commercial losses and the Commissioner's discretion

Question

Are you entitled to claim the losses from your business against your other income in the 2009-10 income year?

Answer: No.

This ruling applies for the following period

1 July 2009 to 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts and circumstances

You commenced a business in the 2008-09 income year.

In the 2009-10 income year you earned assessable income of more than $50,000 but have incurred an overall loss from your business activity.

Your business activity grew during the 2009-10 income year and you expect this to continue. The growth is due to word of mouth referrals from existing customers and the quality, fast turnaround and price competiveness of your products. You have an on-line presence and plan to further expand your marketing strategy using advertising in community newspapers and cold-calling clients in the vicinity.

You do not expect to earn a profit from the business until 2012.

This ruling has been prepared on the basis that:

· your activity is being conducted as a business, and

· your income for non-commercial loss purposes was more than $250,000 for the year ended 30 June 2010.

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 and

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 business activity in your calculation of your taxable income for the year ended 30 June 2010. It is considered that there is no lead time between the commencement of the business and the production of assessable income for your business. Therefore the Commissioner cannot exercise his discretion in relation to your 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 you do not meet the income requirement when:

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

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