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Ruling

Subject: Commissioner's discretion

Question:

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 activities in the calculation of your taxable income for the 2010-11 and 2011-12 financial years?

Answer: Yes.

This ruling applies for the following periods

Year ended 30 June 2011

Year ending 30 June 2012

The scheme commenced on

1 July 2010

Relevant facts

You commenced your business activities in the 20XX-XX financial year.

You have received your permit from relevant Government department in 20XX.

You have provided independent evidence which states that your product can take three and a half years to reach optimal size.

Your five year income and expenditure forecasts show you expect to meet the assessable income test in year three, or the 2012-13 financial year, and produce a tax profit in year four.

Your income for non-commercial loss purposes for the 2010-11 financial year was more than $40,000 and less than $250,000, and you expect this to be the case for the 2011-12 financial year as well.

Relevant legislative provisions

Income Tax Assessment Act 1997 - Division 35

Income Tax Assessment Act 1997 - Section 35-30

Income Tax Assessment Act 1997 - Section 35-35

Income Tax Assessment Act 1997 - Section 35-40

Income Tax Assessment Act 1997 - Section 35-45

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

Reasons for decision

Under Division 35 of the ITAA 1997, a loss made by an individual from a business activity will not be deductible in the financial year in which it arises unless certain conditions are met. Losses that cannot be taken into account in a particular year of income, because of subsection 35-10(2) of the ITAA 1997, can be applied to the extent of future profits from the business activity, or are deferred until one of the tests is passed, the discretion is exercised, or the exception applies. 

Under the rule in subsection 35-10(2) of the ITAA 1997 a loss made by an individual from a business activity will not be taken into account unless: 

· the exception in subsection 35-10(4) of the ITAA 1997 applies; or  

· you satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997 and one of the four tests is met; or  

· if you do not satisfy the income requirement or if one of the tests is not met, the Commissioner exercises the discretion in section 35-55 of the ITAA 1997.

Your assessable income from sources not related to this activity was more than $40,000 in the 2010-11 financial year and you expect this to be the case in the 2011-12 financial year as well. Therefore, the exception contained in subsection 35-10(2) of the ITAA 1997 does not apply.

Your income for non-commercial loss purposes is less than $250,000, therefore you satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997. However, your business activity has not, and will not, satisfied any of the four non-commercial loss tests contained in sections 35-30 (assessable income test), 35-35 (profits test), 35-40 (real property test) and 35-45 (other assets test) of the ITAA 1997 in the 2010-11 and 2011-12 financial years. 

The Commissioner's discretion - Lead time

Under paragraph 35-55(1)(b) of the ITAA 1997, the Commissioner's discretion can be exercised where: 

· the business activity has started to be carried on but because of its nature it has not satisfied, or will not satisfy, one of the tests set out in sections 35-30, 35-35, 35-40 or 35-45 of the ITAA 1997; and  

· there is an objective expectation that within a period that is commercially viable for the industry concerned the activity will meet one of the tests listed above or produce assessable income for an financial year greater than the deductions attributable to it for that year.  

TR 2007/6 sets out the exercise of the Commissioner's discretion under paragraph 35-55(1)(b) of the ITAA 1997. 

The discretion is provided to ensure that certain individuals who carry on genuine commercial businesses are not disadvantaged due to particular circumstances which prevent them from satisfying one of the tests or producing a tax profit. 

For the Commissioner to exercise the discretion you must be able to show that the business activity will satisfy one of the tests or produce a tax profit, within the period which a commercially viable business would do so.

You have provided independent evidence that shows your product can take three and a half years to reach optimal size. Your income and expenditure forecasts show you expect to meet the assessable income test in year three, or the 2012-13 financial year, and produce a tax profit in year four.

Based on the general evidence available, the Commissioner is satisfied that there is an objective expectation that, within a period that is commercially viable for the industry, your activities will satisfy one of the tests or produce a tax profit.

Therefore, the Commissioner will exercise the discretion in paragraph 35-55(1)(b) of the ITAA 1997 to allow you to include any losses from your activities in the calculation of your taxable income for the 2010-11 and 2011-12 financial years.