March 2010

Changes to the Non Commercial Loss Provisions -
the $250,000 question

The non commercial loss rules allow an individual to apply their business losses against their other income provided the business satisfies one of four commerciality tests, summarised as follows:

1. Assessable income test: Annual income exceeding $20,000;
2. Real property test: The value of real property used in the business exceeds $500,000;
3. Other assets test: The value of other assets used in the business exceeds $100,000;
4. Profits test: The business has reported a taxable profit in three of the last five years, including the current year.

For individual taxpayers with an “adjusted taxable income" of under $250,000, these rules will continue to apply.

From 1 July 2009, for individual taxpayers with an "adjusted taxable income" of over $250,000, any business losses will be quarantined (cannot be offset against other income) for utilisation against future profits of that business activity only. This is regardless of the fact that the business may have satisfied the existing commerciality tests.

"Adjusted taxable income" is defined as follows:

» Taxable Income +
» Reportable (salary sacrifice) super contributions +
» Tax Free government pensions or benefits +
» Target Foreign Income +
» Any reportable fringe benefit amounts +
» Any net investment losses.

Commissioner’s Discretion:
The Commissioner’s discretion to provide relief from these rules will continue to apply to all taxpayers notwithstanding their taxable income.

The Commissioner can exercise discretion in one of two circumstances:

» Events outside the control of the operator have prevented the activity from meeting one of the tests or returning a profit. This may include bushfires, drought or other natural disaster; or

» Because of the nature of the business activity, there is a period of time before it can pass one of the tests or make a profit. This lag period is due to the nature of the business activity.

An application for an exercise of the Commissioner’s discretion is in the form of a private ruling.

The ATO have recently released an evidentiary checklist which now must accompany this form.
The checklist covers the following:

Income Requirement
Is your adjusted taxable income $250,000 or more?

Business Activity
Are you carrying on a business activity?
When did your business activity commence?
In which year do you expect to make a tax profit in your business activity?

Investment Allowance
Did the loss arise solely because of deductions for the small business and general business tax break?

Business Plan
Have you included a business plan?

Nature of the Activity
Is the reason you did not make a tax profit due to the nature of the business activity you are conducting?

Is that reason a feature that other businesses of the type in your industry have in common with your business?

Have you provided evidence that supports your claim that it’s because of the nature of the business that you did not make a tax profit for the relevant year?

Evidence from independent sources
Have you included a copy of all relevant evidence from independent sources?

Does the evidence from the independent source provide a commercially viable period of time for the industry for the industry concerned when a tax profit will be produced?

Have you provided evidence of your current or projected yield and price forecasts for the goods and services that the business activity produces?

Have you provided industry articles, statistics, analyses, scientific research or other papers on the relevant industry that support the proposals or projections in your business plan?

Have you provided evidence on the suitability of your business activity to its location (such as soil and climate conditions, markets and transport requirements)?

How Stable Financial can Help
Our firm can assist in a variety of situations. These include:

» Exploring any restructuring opportunities that are available so that the taxable income of the affected individual is reduced below $250,000;

» Exploring any restructuring opportunities that are available so that business activity is transferred to an entity that is not caught by this legislation;

» Assisting with the preparation of the application for a Private Ruling, including assisting with the business plan and financial projections;

» Providing an Export Report that explores in detail many of the issues raised within the evidentiary checklist.

For further information, please contact us on (03) 9629 3023 or visit our website at www.stablefinancial.com.au

Current as at March 2010.