Private ruling: Non commercial losses
Published: June 2013
Ruling period: Year ending 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Will the Commissioner exercise the discretion in paragraph 35-55(1) (c) of the Income Tax Assessment Act 1997 to allow you to include any losses from your business activity in your calculation of taxable income for the 2012-13 financial year? | A1: No.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. You operate as a sole trader. The business is a consulting and advisory business. Your income for the 2012-13 financial year includes a termination payment and will exceed $250,000. Typically it will take six to 12 months to make the first sale, and 12 to 15 months before the business becomes commercially viable. Each client project may take up to 5 months to finish. New clients in this industry are typically peer-to-peer references. You intend to make at least $20,000 in assessable income in the 2013-14 year of income.

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: Summary: The Commissioner cannot exercise his discretion under section 35-55 of the Income Tax Assessment Act 1997 (ITAA 1997) in relation to your consultancy activity for the 2012-13 income year. Your activity is not of a type (such as, a forestry plantation) which by its very nature, requires a lead time before any income is produced. | Detailed Reasoning - Detailed reasoning: For the 2009-10 and later income years, Division 35 of ITAA 1997 applies to defer amounts attributable to a business activity that a taxpayer could otherwise deduct under the Act that exceed the taxpayer's assessable income from the business activity unless: the taxpayer meets the income requirement in subsection 35-10(2E) of the ITAA 1997 and passes one of the four tests outlined in paragraph 35-10(1)(a) of the ITAA 1997 the Commissioner exercises his discretion set out in section 35-55 of the ITAA 1997 for the business activity in that year, or the business activity is a primary production business, or a professional arts business, and the taxpayer's assessable income for that year (except any net capital gain gains) from other sources that do not relate to that activity is less than $40,000. Broadly, the income requirement outlined in subsection 35-10(2E) of the ITAA 1997 states that the taxpayer's taxable income (with certain adjustments) is less than $250,000. As your taxable income for the purposes of subsection 35-10(2E) of the ITAA 1997 exceeds $250,000, you will not meet the income requirement. Accordingly, in order for you to be able to deduct amounts which exceed your assessable income from your business activity, the Commissioner must exercise his discretion in section 35-55 of the ITAA 1997. The Commissioner's discretion in paragraph 35-55(1)(c) may be exercised for the financial year where there is an objective expectation, based on evidence from independent sources, that your business activity will produce assessable income greater than the deductions attributable to it for that year, within a commercially viable period. For the Commissioner to exercise the discretion you must be able to show that the reason your business activity is producing a loss is inherent to the nature of the business and is not peculiar to your situation. Taxation Ruling TR 2007/6 is about the Commissioner's discretion. It states the discretion is not intended to apply where a business activity makes a loss because of factors which can apply to any business and which do not affect the ability of the activity to satisfy one of the four tests. Rather, the discretion is intended to be available for a commercial business activity that has failed, or objectively is expected to fail for a period of time, to satisfy any of the tests for certain reasons outside the control of the operator. We do not consider that there is a lead time between the commencement of your activity and the production of any assessable income. Your business was able to generate income in your first financial year in operation. Therefore we do not consider that there is anything inherent or innate in the nature of your business activity that it has not yet been able to make a profit. Your activity is of a type that is able to produce assessable income quite soon after its commencement and you have demonstrated this. Based on the information provided by you, your situation is not of the kind for which section 35-55 of the ITAA 1997 was enacted. To conclude, the tax legislation does not permit the Commissioner to exercise his discretion in your case. | Detailed Reasoning - Further issues for you to consider: Where you cannot offset your business loss against any of your other assessable income in a financial year, your loss is simply deferred to future years. If your business makes a profit in a following year, you can offset the deferred loss against the amount of this profit.