Edited version of private ruling

Authorisation Number: 1011783469951

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Ruling

Subject: non-commercial losses

Question 1:

Will the Commissioner exercise the discretion in paragraph 35-55(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include any losses from your business 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 and circumstances

You are carrying on a business.

Prior to opening this business you operated a like business in the area for many years.

The business commenced on 1 July 2009.

You ran the business with another operator until you bought them out.

You have distributed advertising materials widely throughout the region.

This type of business is new in the area and it is taking some time to establish.

Income earned by the business has increased significantly from the initial year.

Your income for non-commercial loss purposes will not exceed $250,000.

Relevant legislative provisions

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

Reasons for decision

Summary

There is nothing inherent in the nature of your business which would warrant the Commissioner to exercise his discretion under paragraph 35-55(1)(b) of the ITAA 1997 for the 2009-10 financial year. The discretion is not exercised for any start-up activity that is yet to satisfy the assessable income test simply because of the small scale on which it was started, or because a client base is being built up.

Your income in the 2010-11 financial year will exceed $20,000. You will pass the income test therefore you will not have to defer the non-commercial loss from the business activity in the 2010-11 financial year.

Detailed reasoning

For the 2009-10 and later income years, division 35 of the Income Tax Assessment Act 1997 (ITAA 1997) will apply to defer a non-commercial loss from a business activity unless (relevant to this division):

· you meet the income requirement and you pass one of the four tests

· the exceptions apply

· the Commissioner exercises his discretion.

The relevant discretion may be exercised for the income year in question where:

· it is in the nature of your business activity that there will be lead time before it can be expected to pass one of the four tests

· there is an objective expectation your business activity will produce a tax profit or meet one of the four tests within a commercially viable period for your industry.

Under paragraph 35-55(1)(b) of the ITAA 1997, the Commissioner's discretion can be exercised for an applicant who satisfies the income requirement, where the business activity satisfies the following conditions:

· the business activity has started to be carried on and, for that or those income years:

· because of its nature, it has not satisfied, or will not satisfy, one of the tests set out in section 35-30, 35-35, 35-40 or 35-45; 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 either meet one of those tests or 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)).

The note to this paragraph states that it is:

…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 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.

The note and the passage do not support any view that the discretion should be exercised for any start-up activity that is yet, for example, to satisfy the assessable income test in section 35-30 of the ITAA 1997, simply because of the small scale on which it was started, or because a client base is being built up.

You satisfied the income requirement, however you were unable to satisfy any of the four tests under Division 35 of the ITAA 1997 in the 2009-10 income year. You have travelled within the state and spoke to owners in the same business to gauge how they operate. You are relying on your own experience in the business and your extensive advertising campaign to make the business viable.

There is nothing inherent in the nature of the business which would warrant the Commissioner to exercise his discretion under paragraph 35-55(1)(b) of the ITAA 1997 for the 2009-10 financial year.