Non commercial loss rules and commissioner's discretion

The Non Commercial Loss Rules of Division 35 limit the ability of taxpayers to offset business losses against other assessment income unless one or more of the following tests are met.

• Assessable Income Test (Assessable Income of at least $20,000)

• Profits Test (at least three out of the last five years showed a profit

• Real Property Test (property or an interest in real property with at least $500,000 on a continuing basis)

• Other Assets Test (at least $100,000 on a continuing basis)

However if one or more of these tests are not met the Commissioner still has the discretion, under Section 35-551, to waive the effective deferral of the business loss that would occur under the normal loss rule provisions.

Tax Ruling 2007/6 discusses circumstances where the Commissioner would apply his discretion.

The commissioner has discretion under two separate limbs to waive the application of Non Commercial Losses.

The first limb would be where the discretion would be exercised where it would be unreasonable to apply the Non Commercial Loss Rules as the Business Activity was, or will be, effected in that or those income years by special circumstances outside the control of the operator’s Business Activity including drought, bushfires or other natural disasters.

The second limb is because of the nature of business, the business has not satisfied or will not satisfy one of the tests and based on evidence from independent sources, that within a period that is commercially viable for the industry concerned, the activity will either meet one of the tests or will produce assessable income greater than the deductions attributable for that year.

For those who have got commercial businesses affected by these non commercial non loss provisions this discretion provides an opportunity for you to contact your accountant to discuss making an application to the Commissioner to exercise his discretion.

Particularly in the second limb of the discretion there is evidence that they will need independent consultant reports to support the application.

Given that 30 June 2008 is our next tax year end it would be a good idea to contact your Chartered Accountant to discuss preparing an application to be lodged with the Commissioner for him to exercise his discretion.

Leaving it until after 30 June 2008 will create problems in terms of getting the commissioner’s discretion affected and your tax return lodged on time.