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Ruling

Subject: Non-commercial losses - 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 activity in your taxable income for the 2012-13 financial year to the 2014-15 financial year?

Answer

No.

This ruling applies for the following periods:

Year ending 30 June 2013

Year ending 30 June 2014

Year ending 30 June 2015

The scheme commenced on

1 July 2012

Relevant facts and circumstances

You satisfy subsection 35-10(2E) of the ITAA 1997 as you earned less than $250,000 in the relevant financial year.

You currently carry on a business activity (activity 1).

You plan to commence another business activity (activity 2).

Activity 2 is currently in the design and planning stage and you expect approvals from this stage to be obtained in subsequent year.

You expect that activity 2 can start to operate in a later year and pass a test several years after that.

You do not expect to ever meet the assessable income test, the real property test or the other assets test.

You have provided a business plan detailing information about activity 2. The financial projection shows you expect your first income in the 20XX-XX financial year and your first tax profit in the 20YY-YY financial year.

Financing of activity 2 is through an initial loan followed by an additional loan.

Relevant legislative provisions

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

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

Reasons for decision

Non-commercial losses

Under paragraph 35-55(1) of the ITAA 1997, the Commissioner's discretion can be exercised where the business activity satisfies four requirements. These are: 

a)     the business activity has started to be carried on; and

b)    the business activity was or will be affected in that or those income years by special circumstances outside the control of the operators of the business activity, including drought, flood, bushfire or some other natural disaster; or

c) because of its nature it has not yet satisfied a test in Division 35; and

d) there is an objective expectation that within a period that is commercially viable for the industry concerned it will pass one of the tests or make a tax profit.

Whether the second business has commenced

Paragraph 98 of Taxation Ruling TR 2001/14 establishes that for a business activity to have commenced a person must have:

· made a decision to commence the business activity;

· acquired the minimum level of business assets to allow that business activity to be carried on; and

· actually commenced business operations.

In your circumstances the decision to commence activity 2 has been made as evidenced by your business plan and having the design and plans submitted for approval in the first half of the subsequent year.

The second and third points of paragraph 98 of TR 2001/14 have not been met as you have not yet acquired the minimum level of activity 2 assets and activity 2 operations have not yet commenced.

Therefore as activity 2 has not commenced the provisions of Division 35 of the ITAA 1997 do not apply and the Commissioner will not exercise the discretion.