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Ruling
Subject: Commissioner's discretion non-commercial losses
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 business activity in your calculation of taxable income for the 2010-11 financial year?
Answer: No.
This ruling applies for the following period
Year ended 30 June 2011
The scheme commenced on
1 July 2010
Relevant facts
Your business activity commenced in 2010. You purchased a number of capital assets, to be used by the general public for a nominal fee, which were installed ready for use in 2010.
Under your contractual agreements, you will receive a portion of the fees charged or a minimum amount per month, depending on which is higher, providing a minimum income of approximately $57,000 per year.
Due to depreciation and interest payments, the business activity produced an overall loss of in the 2010-11 financial year.
The capital assets are depreciated at a rate of 20% over five years, or $56,000 per year.
Your Investment appraisal figures show that apart from a profit in the commencement year(when no depreciation was claimable), you do not expect to produce a profit until the sixth year of operation.
Your income for non-commercial loss purposes in the 2010-11 financial year was above $250,000.
Relevant legislative provisions
Income Tax Assessment Act 1997 - Section 35-1.
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)(c).
Reasons for decision
Section 35-1 of the ITAA 1997 provides that an income requirement must be met (along with certain other tests), in order to include losses from a business activity in your taxable income calculation. If the income requirement is not met, the Commissioner may exercise discretion to allow the inclusion of the losses.
You satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997 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 in the 2010-11 financial year
In order to exercise the discretion, the Commissioner must be satisfied there is an objective expectation, based on evidence from independent sources, that your business activity will produce assessable income greater than the deductions attributable to it for that year, within a commercially viable period (paragraph 35-55(1)(c) of the ITAA 1997).
For the Commissioner to exercise the discretion you must be able to show that the reason your business activity is producing a loss is inherent to the nature of the business and is not peculiar to your situation.
In your case, the minimum income to be received from the activity is approximately $57,000 per year. The maximum depreciation expense in each of the first five years is $56,000.
Taking into consideration the information you have provided, there nothing to prevent your business activity from producing a tax profit from the year it commenced. The reason your activity has made a loss is peculiar to your situation and is not inherent to the nature of the business.
The Commissioner is not satisfied that the commercially viable period for your type of business is six years. Where the business does not produce a profit within the commercially viable period, the Commissioner is not able to exercise the discretion.
Therefore, the Commissioner will not exercise the discretion available in accordance with subsection 35-55(1) and paragraph 35-55(1)(c) of the ITAA 1997 for the 2010-11 financial year.