Edited version of private ruling

Authorisation Number: 1011752828839

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Ruling

Subject: Commissioner's discretion

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 business activities in the calculation of your taxable income for the 2009-10 financial year?

Answer: No.

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts

You commenced your business activities in the 2008 financial year.

The business services are provided by a service entity which is responsible for the payment of all costs and the payment of operating expenses.

The service entity then charges you a service fee to cover all the operating costs associated with the business.

All sales revenue from the business is received by you.

You declare all revenue received as business income and claim, as tax deductions against this income, the service fees paid to the service entity. To date, this has resulted in an overall business loss to you.

You have stated that you are trying to access a niche market within the industry and have had to be extremely price competitive; reducing margins well below your competitors.

In the 2009-10 financial year your business revenue increased by 51% while the industry average for your industry declined by 1.1%.

You anticipate that your business activity will not produce a profit until the 2010-11 financial year.

Your income for non-commercial loss purposes in the 2009-10 financial year was above $250,000.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 35-1.

Income Tax Assessment Act 1997 Subsection 35-55(1)

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

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

Reasons for decision

Section 35-1 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.

You satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997 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 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. For example, the discretion will not be available where the failure to make a profit is for reasons other than the nature of the business such as, a consequence of starting out on a small scale, the hours worked or the need to build a client base.

You have not provided any evidence from an independent source to establish the commercially viable period for your industry/business. You have provided independent evidence on current trends in the industry generally which may impact on the profitability of this type of business. However, you have stated that your business revenue increased by 51% in the 2009-10 financial year, against current market trends of a 1.1% decline. Even so, you anticipate that your business activity will not produce income greater than deductions attributable to it until the 2010-11 financial year, or 3 years after your business began.

Taking into consideration the information you have provided, the Commissioner is not satisfied that the commercially viable period for your type of business activity is three years.

Overall, the reason your business activities have continued to make a loss is due to you charging less for your services than it costs you to provide them. You have done this in order to under cut your competitors to access a niche market and build a client base. This is peculiar to your situation and is not inherent to the nature of the business.

Where the business does not produce a profit within the commercially viable period, the Commissioner is not able to exercise the discretion.

Therefore, the Commissioner will not exercise the discretion available in accordance with subsection 35-55(1) and paragraph 35-55(1)(c) of the ITAA 1997 for the 2009-10 financial year.