Edited version of your private ruling

Authorisation Number: 1012449933844

Ruling

Subject: Non-Commercial Losses

Question

Can Commissioner exercise the discretion in paragraph 35-55(1)(a) of the ITAA 1997 to allow you to include any losses from your business activity in your calculation of taxable income?

Answer No

Relevant facts

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

Prior to your business opening it's doors there were issues concerning your Final Occupancy certificate.

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)(a)

Reasons for decision

Individuals who make a net loss from a business activity may, under certain circumstances, claim that loss by offsetting it against their income from other sources.

Division 35 of the Income Tax Assessment Act 1997 (ITAA 1997) provides for the treatment of losses that are incurred from a non-commercial business activity for a particular year of income. Division 35 of the ITAA 1997 sets out a number of tests that must be satisfied by a taxpayer in order for losses incurred from one business activity to be deducted against income from a separate activity. If the rules are not satisfied, the taxpayer will not be eligible to deduct losses against other income.

For the non-commercial loss rules to apply, a taxpayer must be able to demonstrate that a business is being carried on. Whether an activity amounts to the carrying on of a business is a question of fact, not law. The facts of each case must be considered in order to determine if a business activity exists.

In addition, the commencement date of the business activity is also a question of fact, not law.

In order to determine the commencement date of the business, the large and general impression gained from objectively viewing the activity must be considered. Guidance on the commencement date is provided in Taxation Ruling TR 2001/14 Income Tax: Division 35 non-commercial losses. Paragraph 98 of TR 2001/14 states 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.

The actual commencement of a business must be distinguished from activities which are merely preparatory to commencing a business.

Expenditure incurred prior the commencement of a business (preliminary expenses) are usually incurred at a point too soon to be deductible and are considered capital in nature. Furthermore Division 35 of the ITAA 1997 dose not apply to preliminary expenses. This principle is demonstrated in Taxation Ruling TR 97/11 Income Tax: am I carrying on a business of primary production?

Paragraph 41 of TR 97/11 states that:

Sometimes a taxpayer may have incurred expenses before commencing a particular business of primary production. For example, expenses associated with experimental or pilot activities which do not amount to a business and do not result in any assessable income being produced are not deductible.

From the information provided, we consider that you had not yet commenced business when the Final Occupancy Certificate was applied for. We consider that your business commenced when you commenced trading. The negative effects of the delay in obtaining the Final Occupancy Certificate happened prior to the commencement of your business. Therefore, as you were not deemed to be carrying on a business the Commissioner is unable to exercise his discretion under Division 35 of the ITAA 1997.