Edited version of your private ruling

Authorisation Number: 1012592679022

Ruling

Subject: 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 2012-13 financial year?

Answer

No.

This ruling applies for the following period

Year ended 30 June 20XX

The scheme commenced on

April 20XX

Relevant facts and circumstances

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

You commenced to carry on a business in April 20XX.

You are currently building up your client base and intend to make a tax profit in the 2013-14 financial year.

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 and do not come under any of the exceptions. 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.

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 greater than deductions attributable to it. 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.

Paragraphs 73A to 76 of TR 2006/7 consider the innate or 'because of its nature' characteristics of your business activity.

73A. Because the tests are not automatically relevant if the income requirement is not met, the first factor in paragraph 35-55(1)(c) considers whether it is 'because of its nature' that the activity has not produced, or will not produce, a tax profit.

74. The note under paragraph 35-55(1)(c) states:

Paragraphs (b) and (c) are intended to cover a business activity that has a lead time between the commencement of the activity and the production of any 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.

75. Stone J in Eskandari confirmed this view when considering whether the Commissioner's discretion should be exercised in regard to losses incurred in a migration consultancy business. When looking at the type of activities referred to by the note and the EM, Stone J stated at FCA 31:

Such activities have an inherent characteristic that cannot be overcome by conducting the business activity in a different way but only by changing the nature of the business.

We do not consider that there is anything inherent or innate in the nature of your business activity that cannot be overcome by conducting the business in a different way. Therefore the Commissioner will not exercise the discretion under paragraph 35-55(1)(c) of the ITAA 1997 for the 2012-13 financial year.