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Subject: non-commercial business losses
Question 1
Will the Commissioner exercise the discretion under paragraph 35-55(1)(a) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include losses from your business activity in the calculation of your taxable income for the 2010-11 financial year?
Answer:
No.
Question 2
Is the business activity, conducted under two separate partnerships, considered the same business activity, thereby ensuring that the activity returns an overall tax profit for the 2010-11 financial year?
Answer: Yes
This ruling applies for the following period
Year ended 30 June 2011
The scheme commenced on
1 July 2010
Relevant facts and circumstances
You have conducted a business activity since 1998.
The activity was conducted under a partnership structure between, you, your wife, and the family trust for 11 months of the 2010-11 financial year.
At the end of the 11th month, your wife ceased to be a partner in the partnership.
At the end of the 11th month, a new partnership, under a new tax file number (TFN), was created between you and the family trust. This partnership continued to run the business activity until the end of the 2010-11 financial year (and beyond).
You state that apart from your wife ceasing to be a partner, no changes have occurred to the business operations.
Your received a share of the (old) partnership profit from the business activity for the 11 month period of the 2010-11 financial year.
Your received a share of the (new) partnership loss from the business activity for 1 month of the 2010-11 financial year.
When combined, the business activity makes a tax profit for the 2010-11 financial year.
Your income for non-commercial loss purposes was over $250,000 in the 2010-11 financial year.
Relevant legislative provisions
Income Tax Assessment Act 1997 Division 35
Income Tax Assessment Act 1997 Paragraph 35-55(1)(a)
Reasons for decision
Detailed reasoning
Non-commercial losses
For the 2009-10 and later income years, Division 35 of the Income Tax Assessment Act 1997 will apply to defer a non-commercial loss from a business activity unless:
· you meet the income requirement and you pass one of the four tests
· the exceptions apply
· the Commissioner exercises his discretion.
In your situation, you do not satisfy the income requirement (that is, your taxable income, reportable fringe benefits and reportable superannuation contributions but excluding your business losses, exceeds $250,000) and do not come under any of the exceptions. Your business losses are therefore subject to the deferral rule unless the Commissioner exercises his discretion.
However, the Commissioner cannot exercise the discretion in situations where the activity has made a tax profit in a financial year.
Application to your circumstances
In your case, the business activity was initially operated as a partnership, between yourself, your wife and the family trust for 11 months of the 2010-11 financial year. At the end of 11 months your wife ceased to be a partner. However, the business activity continued, as a partnership between yourself and the family trust for the final month of the year (and beyond). You state that there were no changes to the business activity apart from the fact that your wife ceased to be a partner in the activity.
Therefore, as the business activity is the same and, overall, made a tax profit, you have not incurred a loss for the 2010-11 financial year. Accordingly, as there is no loss from the activity, the loss deferral rule in Division 35 of the ITAA 1997 will not apply and nor will the Commissioner be able to exercise the discretion under paragraph 35-55(1)(a) of the ITAA 1997.