Private ruling: Non-commercial losses
Published: September 2014
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Will the Commissioner exercise the discretion in paragraph 35-55(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include any losses from your business activity in the calculation of your taxable income for the 2013-14 financial year? | A1: No.

Relevant facts and circumstances: You have been marketing your business concept for several years. In the 2013-14 financial year you did not pass the assessable income test of Division 35 of the ITAA 1997. In future years you expect to pass the assessable income test and also make a profit. You meet the income requirement of Division 35 of the ITAA 1997.

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)(b)

Reasons for decision: Summary: For the 2009-10 and later income years, Division 35 of the Income Tax Assessment Act 1997 will apply to defer a non-commercial loss from a business activity unless: • you satisfy the income requirement and you pass one of the four tests • the exceptions apply • the Commissioner exercises the discretion. In your situation, none of the exceptions would apply and although you satisfy the income requirement, you do not meet any of the four tests in the year of income under consideration. Your losses are therefore subject to the deferral rule, unless the Commissioner exercises the discretion. The relevant discretion may be exercised for the income year in question where: • it is in the nature of the business activity that there will be a period of time before it can be expected to pass one of the four tests • there is an objective expectation your business activity will produce a tax profit or meet one of the four tests within a 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. 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. The note in paragraph 35-55(1)(b) of the ITAA 1997 does not support any view that the discretion should be exercised for any start-up activity that is yet, for example, to satisfy the assessable income test in section 35-30 of the ITAA 1997, simply because of the small scale on which it was started, or because a client base is being built up. Paragraph 17 of Taxation Ruling TR 2007/6 Income tax: non-commercial business losses: Commissioner's discretion (TR 2007/6) deals with the exercise of the Commissioner's discretion under this subparagraph and the meaning of 'because of its nature' For the failure to satisfy one of the four tests to be 'because of its nature', the failure must be because of some inherent characteristic that the taxpayer's business activity has in common with other business activities of that type (see Federal Commissioner of Taxation v. Eskandari ). Paragraph 78 of TR 2007/6 states; The consequences of business choices made by an individual (for example, the hours of operation, the size or scale of the activity, and the level of debt funding) are not inherent characteristics of a business activity and would not result in the requirements of subparagraph 35-55(1)(b)(i) being met. The example at paragraph 139 of TR 2007/6 explains the taxpayer was new to the region and industry in which he chose to commence his business. He had no clientele. His funding and his advertising were limited, he kept his part time employment and he worked at his business when he could. He chose where his business premises were located and also his opening and closing times. He made losses each year and didn't satisfy any of the four tests. The Commissioner's view on this example is found at paragraph 140 of TR 2007/6; The inability of Andrew's business activity to satisfy any of the four tests is due to his personal business choices as to hours of business, location and advertising, not any inherent characteristics that affect clock repair businesses. Accordingly the requirement of subparagraph 35-55(1)(b)(i) is not met and the Commissioner would not exercise the discretion. In your circumstances the timing, size and scale of your business contribute to the losses in the 2013-14 financial year. Therefore in reference to the above paragraphs you have not shown that the lead time is an inherent characteristic of your industry. The Commissioner will not exercise the discretion under paragraph 35-55(1)(b) of the ITAA 1997.