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Ruling

Subject: Non-commercial losses

Question

Do the provisions under Division 35 of the Income Tax Assessment Act 1997 apply to your circumstances requiring you to defer your business losses?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2011

The scheme commenced on:

1 July 2010

Relevant facts and circumstances

You acquired a food business in March 20XX.

You did not prepare a business plan before purchasing the business but you state that you were confident that a viable business could be developed.

You carried out renovations to the business premises.

You began trading in April 20XX.

The weekly turnover for the business at the time of purchase was $X00 per week.

The current weekly turnover for the business is $X,X00 per week.

The assessable income for the business for the 2010-11 income year was $12,219.

You state that if you had operated the business for the full income year you would have satisfied the assessable income test.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 35,

Income Tax Assessment Act 1997 Paragraph 35-30(b) and

Reasons for decision

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:

· you satisfy the income requirement and you pass one of the four business tests

· the exceptions apply

· the Commissioner exercises his discretion.

The four business tests are:

· The business produces assessable income of at least $20,000.

· The business has produced a profit in three of the past five years (including the current year)

· The business uses real property or an interest in real property worth at least $500,000 on a continuing basis

· The business uses other assets worth at least $100,000 on a continuing basis

You will pass the assessable income test if the amount of assessable income you derive from the relevant business activity for an income year is at least $20,000. Calculation of the assessable income from the activity can involve making a 'reasonable estimate' of a notional annual amount if the activity has not been carried on for the whole year (paragraph 35-30(b) ITAA 1997).

When making a reasonable estimate of a notional annual amount, Taxation Ruling TR 2001/14 lists the relevant factors to be taken into consideration;

· orders you have received

· forward contracts you have entered into

· the size of your business activity

· the amount you have invested in the business activity

· the type of business activity you are engaged in, and the typical income patterns for that industry

· how your actual income would translate into an annual income on a pro-rata basis

· cyclical or seasonal patterns in your business area, and the effect they would have on your annual income.

You satisfy the income requirement (that is your taxable income, reportable fringe benefits and reportable superannuation contributions but excluding your business losses, does not exceed $250,000).

From the information you have provided, it would be reasonable to estimate that the assessable income derived from your food business would have been at least $20,000 if you had operated the business for the full income year. In accordance with paragraph 35-30(b) ITAA 1997, you are therefore deemed to have passed the assessable income test.

As you have satisfied the income requirement and the assessable income test, Division 35 of the ITAA 1997 does not apply to your circumstances.