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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 2009-10 year of income?
Answer
No.
This ruling applies for the following period
For year ended 30 June 2010
The scheme commenced on
1 July 2009
Relevant facts
You are members of a joint venture development syndicate which are seeking to rezone and develop large tracks of land.
You do not meet the income requirement, in that your income for non-commercial loss purposes exceeds $250,000 for the year.
The joint venture development syndicate is currently waiting on approval for the development.
The draft budget prepared by the building company forecasts a target profit with a return of X%.
The Nominee shall cause a partnership return for tax purposes to be prepared and lodged and shall provide each participant a schedule for inclusion in the income tax returns of each participant.
Relevant legislative provisions
Income Tax Assessment Act 1997 subsection 35-10(2)
Income Tax Assessment Act 1997 subsection 35-10(2E)
Income Tax Assessment Act 1997 paragraph 35-55(1)(c)
Reasons for decision
Summary
The Commissioner will not exercise the discretion in paragraph 35-55(1)(c) of the ITAA 1997 to allow you to include any losses from your property development activity in your calculation of taxable income for the 2009-10 year of income on the basis that the information supplied does show the period in which you forecast that a tax profit will be made and does not provide objective evidence of the commercially viable period to make a tax profit for your type of activity.
Detailed reasoning
Under paragraph 35-55(1)(c) of the ITAA 1997, the Commissioner's discretion can be exercised where the business activity satisfies these requirements.
for an applicant who carries on the business activity who does not satisfy subsection 35-10(2E) (income requirement) for the most recent income year ending before the application is made - the business activity has started to be carried on and, for the excluded years:
(i) because of its nature, it has not produced, or will not produce, assessable income greater than the deductions attributable to it; and
(ii) 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 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 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.
You have not provided objective evidence of the commercially viable period to make a tax profit for your type of activity. You have not shown at what point in time your activity will make a profit. The only information you have provided is a "Draft Budget" prepared by the building company involved. This draft budget forecasts a target profit that will give a return of X%, but there is no timeframe. Therefore, without this information the Commissioner is not able to reach any conclusion regarding the application of the non-commercial losses discretion for your circumstances.
The Commissioner will not exercise the discretion under paragraph 35-55(1)(c) of the ITAA 1997 for the 2009-10 year of income and the losses from your business will be subject to the loss deferral rule in subsection 35-10(2) of the ITAA 1997.