Private ruling: Non-commercial losses
Published: February 2014
Ruling period: Year ended 30 June 2011 | Year ended 30 June 2012 | Year ended 30 June 2013 | Year ending 30 June 2014
Date scheme commenced: 1 July 2010

Ruling: Q1: Will the Commissioner exercise the discretion in paragraph 35-55(1)(c) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include any losses from your business activity in your calculation of taxable income for the 2010-11 to the 2013-14 financial years? | A1: No.


Relevant legislative provisions: Income Tax Assessment Act 1997 - section 35-1 | Income Tax Assessment Act 1997 - subsection 35-10(2E) | Income Tax Assessment Act 1997 - subsection 35-55(1) | Income Tax Assessment Act 1997 - paragraph 35-55(1)(c)

Reasons for decision: Summary: For the 2009-10 and later financial years, Division 35 of the ITAA 1997 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 · the Commissioner exercises his discretion. In your situation, you do not satisfy the income requirement and do not come under any of the exceptions. The relevant discretion may be exercised for the financial year in question where: · it is in the nature of your business activity that there will be a period before a tax profit can be produced · there is an objective expectation your business activity will produce a tax profit within the commercially viable period for your industry. Having regard to your full circumstances, it is not accepted that it is in the nature of the business activity that has prevented you from making a profit. 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 following paragraph 35-55(1)(c) states; Paragraphs (b) and (c) are intended to cover a business activity that has a lead time between the commencement of the activity and the production of any 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 above 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 deals with the exercise of the Commissioner's discretion under subparagraph 35-55(1)(c)(i) 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) and (c)(i) being met. The failure to make a profit is not due to the inherent characteristics of an accommodation activity rather it is the consequences of your business choices. Paragraph 35-55(1)(c) of the ITAA 1997 has two criteria that must each be satisfied. The conclusion that the first criterion has not been met, in that the failure to make a tax profit in your business activity is not an inherent characteristic of your business activity means that it is not necessary to consider whether the second criterion, regarding the commercially viable period, has been met. The Commissioner will not exercise the discretion under paragraph 35-55(1)(c) of the ITAA 1997. You cannot claim a deduction for your losses against other income in the relevant financial years.

Relevant facts: Your income for non-commercial loss purposes exceeds $250,000. | You bought and renovated an establishment prior to opening your business to the public in the relevant financial year. | You have not provided independent evidence that shows the commercially viable period for this industry. | You expect to produce a tax profit in the 20XX financial year.