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Ruling

Subject: Non-commercial losses

Question

Will the Commissioner exercise the discretion in paragraph 35-55(1)(c) of the ITAA 1997 to allow you to include any losses from your business activity in your calculation of taxable income for the 2010-11 to 2012-13 financial years?

Answer

No

This ruling applies for the following period

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

The scheme commenced on

1 July 2010

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You do not satisfy the <$250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997.

You carry on a business that leases commercial and office fit outs.

The terms of the lease are such as to assist the lessee both from a cash flow and profitability perspective during the start up years of the operation.

Lease payments are due annually in arrears.

You submit that due to the parlous state of the retail industry over the past two years targets have not been reached.

You submit that you made a loss in the 2010-11 financial year due to the depreciation deduction claimed on the fit out purchase in excess of the lease income

The goal of the business is to be profitable over a ten year horizon. You expect to make losses in the first 2-3 years which will be more than covered by profits in subsequent years.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 35-10(1)

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

For the 2009-10 and later financial years, Division 35 of the ITAA 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.

The relevant discretion may be exercised for the financial year in question where:

· it is in the nature of your business activity that there will be a period before a tax profit can be produced

· there is an objective expectation your business activity will produce a tax profit within the commercially viable period for your industry.

Having regard to your full circumstances, it is not accepted that it is in the nature of the business activity that has prevented you from making a profit.

This discretion is intended to cover a business activity where there is an inherent period of time between the commencement of the activity and the production of assessable income. For example, an activity involving the planting of hardwood trees for harvest, where many years would pass before the activity could reasonably be expected to produce income.

For the discretion to be applied there needs to be an inherent or innate feature of the activity resulting in an inability to make a profit in the year of commencement and (in most cases) a number of years thereafter. Further examples that fall into this category are forestry, viticulture and certain horticultural activities.

The note above does not support any view that the discretion should be exercised for any start-up activity that is yet, for example, to satisfy the assessable income test in section 35-30 of the ITAA 1997, simply because of the small scale on which it was started, or because a client base is being built up.

In your case, you have not provided any independent evidence as to the commercially viable period for this type of business. You do expect to produce a tax profit in relation to your business activities in the 2013-14 financial year or 3 years after you commenced but you have not shown that the reason your business activity will not produce a profit for 3 years is inherent to the nature of the business and not just peculiar to your situation.

Based on the general evidence available, the Commissioner is not satisfied that there is an objective expectation that the activity will produce assessable income greater than the expenses attributed to it within a period that is commercially viable for the industry.

Therefore, the Commissioner is unable to exercise the discretion available in accordance with subsection 35-55(1) and paragraph 35-55(1)(c) of the ITAA 1997 in relation to your charter boat enterprise for the 2010-11 to 2012-13 financial years.