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Ruling

Subject: Non Commercial Losses - Commissioner's Discretion

Question 1

Will the Commissioner exercise the discretion in subsection 35-55(1) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow losses that you incurred from your business activity in your calculation of taxable income?

Answer

Yes, for the financial years ended 30 June 2010 to 30 June 2018.

This ruling applies for the following periods:

Income Year 30 June 2010

Income Year 30 June 2011

Income Year 30 June 2012

Income Year 30 June 2013

Income Year 30 June 2014

Income Year 30 June 2015

Income Year 30 June 2016

Income Year 30 June 2017

Income Year 30 June 2018

Income Year 30 June 2019

The scheme commences on:

Income year 30 June 2010

Relevant facts and circumstances

The following description of the scheme is based on information you provided.

The arrangement is a forestry joint venture between three parties.

The funds will be provided in equal shares by the three joint venture partners for this particular operation. There are no finance providers.

The property proposed for this business comprises of a number acres.

The taxpayer provided relevant documents to support the operation of the business activity.

Independent evidence was provided indicating the expected return will be10 years.

The business being undertaken does not meet the income requirement under subsection 35-10(2E) of the ITAA 1997 due to the lead time of the business. There are no special circumstances that will prevent your business activity from passing one of the four tests set out in Division 35 of the ITAA 1997.

The applicant has requested the Commissioner to exercise the discretion in subsection 35-55(1) of the ITAA 1997 to allow the claiming of losses incurred from the business activity.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 35

Income Tax Assessment Act 1997 section 35-10

Income Tax Assessment Act 1997 subsection 35-10(2)

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

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

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

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

Reasons for decision

Division 35 - deferral of losses from non-commercial business activities

Division 35 of the ITAA 1997 applies to losses from certain business activities for the income year ended 30 June 2001 and subsequent years. Under the rule in subsection 35-10(2) of the ITAA 1997, a 'loss' made by an individual (including an individual in a general law partnership) from a business activity will not be taken into account in an income year unless:

· the 'Exception' in subsection 35-10(4) of the ITAA 1997 applies

· one of four tests in sections 35-30, 35-35, 35-40 or 35-45 of the ITAA 1997 is met, or

· if one of the tests is not satisfied, the Commissioner exercises the discretion in section 35-55 of the ITAA 1997.

Deferral of losses from non-commercial business activities and the Commissioner's discretion

Based on the information provided with the application, the applicat is expected to incur losses which will be subject to Division 35 of the ITAA 1997.

These losses will be subject to the loss deferral rule in section 35-10 of the ITAA 1997 unless an exception applies or, for each income year in which losses are incurred, the Commissioner exercises the discretion in subsection 35-55(1) of the ITAA 1997 on 30 June of that specific income year.

The exceptions to the loss deferral rule depend upon the applicants individual circumstances.

The Commissioner will apply the principles set out in Taxation Ruling TR 2007/6 Income tax: non commercial business losses: Commissioner's discretion when exercising the discretion.

In each individual year where the Commissioner's discretion is exercised an individual who would otherwise be required to defer a loss arising from their business activity under section 35-10 of the ITAA 1997 until a later income year is able to offset that loss against their other assessable income.

The section under which the Commissioner may exercise his discretion will depend on whether or not an individual satisfies the income requirement in subsection 35-10(2E) of the ITAA 1997.

Where an individual with income for Non Commercial Loss (NCL) purposes of less than $250,000 (i.e., the income requirement is satisfied) incurs a loss in an income year from carrying on their business activity, and the discretion in paragraph 35-55(1)(b) of the ITAA 1997 is exercised for that year, the Commissioner will be satisfied that:

it is because of its nature that the business activity will not satisfy one of the four tests in Division 35; and

there is an objective expectation based on evidence from independent sources that within a period that is commercially viable for the industry concerned, the business activity will satisfy one of the four tests set out in Division 35 or 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).

Where an individual with income for NCL purposes of $250,000 or more (i.e., the income requirement is not satisfied) incurs a loss in an income year from carrying on their business activity, and the discretion in paragraph 35-55(1)(c) of the ITAA 1997 is exercised for that year, the Commissioner will be satisfied that:

it is because of its nature that the business activity will not produce assessable income greater than the deductions attributable to it; and

there is an objective expectation, based on evidence from independent sources that within a period that is commercially viable for the industry concerned, the business 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).

An individual will satisfy the income requirement in subsection 35-10(2E) of the ITAA 1997 where the sum of the following amounts is less than $250,000:

· taxable income for that year (ignoring any loss arising from this or any other business activity);

· total reportable fringe benefits for that year;

· reportable superannuation contributions for that year; and

· total net investment losses for that year.

The applicant has provided independent evidence to suggest that the commercially viable period for the forestry activity is ten years from commencement. The income and expense statement provided indicates the first year of taxable profit will be produced in the income year ending 30 June 2019.

Income years ended 30 June 2010 to 30 June 2018

The Commissioner will exercise his discretion to allow losses from the business activity in the calculation of taxable income for the income years ended 30 June 2010 to 30 June 2018 in accordance with subsection 35-55(1) of the ITAA 1997 under

· paragraph 35-55(1)(b) of the ITAA 1997 if you satisfy the income requirement in subsection 35-10(2E) of the ITAA 1997;

or;

· paragraph 35-55(1)(c) of the ITAA 1997 if you do not satisfy the income requirement in subsection 35-10(2E) of the ITAA 1997

Income year ended 30 June 2019

The cashflow projections provided indicate a taxation profit will be produced in the income year ending 30 June 2019.

As the business activity will produce assessable income greater than the deductions attributable to it for the income year ended 30 June 2019, the Commissioner is precluded from exercising the discretion for that year.

Exercising the discretion

As the Commissioner has exercised his discretion, the rule in subsection 35-10(2) of the ITAA 1997 will not apply to the business activity for the income years 30 June 2010 to 30 June 2018. This means that any 'loss' for this activity can be taken into account in calculating the taxable income for those years, provided the arrangement carried out does not differ materially from that described in the ruling. If there is a material difference the applicant may need to apply for another private ruling on how subsection 35-55(1) of the ITAA 1997 would apply to those changed circumstances.