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Edited version of private ruling
Authorisation Number: 1011743469748
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Ruling
Subject: Non-commercial losses - Commissioner's discretion - lead time
Question
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 property development activity in your calculation of taxable income for the relevant financial years?
Answer
Yes.
This ruling applies for the following periods
For year ended 30 June 2010
For year ended 30 June 2011
The scheme commenced on
July 2007
Relevant facts
You have stated that you commenced a property development business. You acquired an existing residential property with the intention to subdivide the existing lot into two lots, demolish the existing house, build two new homes and sell them for a profit.
You have applied for the Commissioner's discretion for the relevant financial years on the basis of the nature of the activity.
Your other taxable income for the purposes of the non-commercial losses income requirement exceeds $250,000.
You have provided a development timeline for the project. Both houses and landscaping have been completed by the end of the relevant year. You have provided detail of each of the steps in the development and reasons for delays that were outside your control.
You have provided a business plan with projected cash flow (income and expenses) with an expected profit in the future financial year.
Reasons for decision
Summary
The Commissioner will exercise the discretion available under paragraph 35-55(1)(c) of the ITAA 1997 and allow the losses from your property development activity to be included in the calculation of your taxable income in the relevant financial years.
Detailed reasoning
Section 35-10 of the ITAA 1997 provides that an income requirement must be met (along with certain other tests), in order to include losses from a business activity in your taxable income calculation. If the income requirement is not met, the Commissioner may exercise discretion to allow the inclusion of the losses.
The income requirement under subsection 35-10(2E) of the ITAA 1997 is satisfied, if your income for non-commercial loss purposes is less than $250,000.
In your case, you do not satisfy the income requirement as your income for non-commercial loss purposes is above $250,000 in the relevant income year and you expect this will be the case in the following income year as well.
In order to exercise the discretion, the Commissioner must be satisfied there is an objective expectation, based on evidence from independent sources, that your business activity will produce assessable income greater than the deductions attributable to it for that year, within a commercially viable period (paragraph 35-55(1)(c) of the ITAA 1997).
For the Commissioner to exercise the discretion you must be able to show that the reason your business activity is producing a loss is inherent to the nature of the business and is not peculiar to your situation.
You purchased an existing property, demolished the house, divided the land into two lots and have built two new houses for purpose of sale and profit. The work was completed recently.
Based on the figures you have provided the Commissioner accepts that your property development business activity will produce assessable income greater than the deductions attributable to it within a commercially viable period for the property development industry.
Therefore, the Commissioner will exercise the discretion available under paragraph 35-55(1)(c) of the ITAA 1997 and allow the losses from your business activity to be included in the calculation of your taxable income for the relevant income years.