ITAA 1997 Div 35 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, or
the Commissioner exercises his discretion.
The income requirement states that an individual must defer any non-commercial losses where the other income from non-business activities exceeds $250,000. The other income also includes items such as reportable fringe benefits, reportable superannuation contributions and net investment losses.
Generally, when an individual is above $250,000 in other income, the other four tests do not apply (i.e. assessable income, real property, other property, profit test). Where an individual is above $250,000, the only option available to them is ITAA 1997 s 35-55(1)(c). It states:
“… for an applicant who carries on the business activity who does not satisfy (the income requirement) for the most recent income year ending before the application is made — the business activity has started to be carried on and, for the excluded years:
because of its nature, it has not produced, or will not produce, assessable income greater than the deductions attributable to it, and
there is an objective expectation, based on evidence from independent sources (where available) that, within a period that is commercially viable for the industry concerned, the activity will produce assessable income for an income year greater than the deductions attributable to it for that year.”
Property development
The term “property development” takes many forms in business. For example, individuals or partnerships may conduct and operate the business directly or via intermediaries. It is these choices which may be vital in determining whether the taxpayer can claim a deduction in property development loss years (ie the lead time).
To highlight, here are two recent Private Binding Rulings:
PBR 1012979759550: Taxpayer commenced business by buying a block of land, and then began operations including earthmoving and road works. The taxpayer completed all development work themselves in order to reduce overall expenditure.
PBR 1051280978868: Taxpayer was in a partnership primarily concerned with property development. The business purchased a property, demolished the existing structure and was constructing a number of residential apartments. Money from a financial institution was borrowed to make this process quicker for the business.
“Hours of operations, size or scale of the activity”
The difference noted above between the taxpayer’s relevant facts and circumstances was critical for the Commissioner to exercise his discretion to allow a deduction on the loss.
Operational matters such as hours worked or size and scale of operations were paramount in determining the inherent characteristics common to property development businesses.
Obtaining the Commissioner’s discretion
To obtain the Commissioner’s discretion in PBR 1051280978868, the taxpayer provided a development timeline for the project, including each of the steps involved and reasons for delay. Discretion was granted despite the taxpayer providing no evidence from independent sources surrounding the reasonableness of the delays. Also, no evidence surrounding the commercially viable period to make a profit for the industry was given. From the ruling it appears as though the Commissioner has enough information on the industry as a whole to determine whether you are operating within acceptable time frames.
Client Implications
Property developers above $250,000 in annual income should be aware that project management and development timelines are a must when commencing a property development. It will be a key factor in determining whether the Commissioner would allow a deduction for lead time losses at the top marginal tax rate.
