Private ruling: Income tax: non-commercial losses: Commissioner's discretion
Published: August 2013
Ruling period: Year ended 30 June 20AA
Date scheme commenced: 1 June 20AA

Ruling: Q1: Will the Commissioner exercise his discretion under section 35-55 of the Income Tax Assessment Act 1997 (ITAA 1997) to allow the taxpayer to claim a deduction for expenses incurred in starting a business? | A1: No

Relevant facts and circumstances: In May 20AA, the taxpayer resigned from his/her employment to commence a business In June 20AA, the taxpayer incurred business expenses. In July 20AA, the taxpayer commenced a business. The taxpayer advised the Tax Office that he/she expects to make an annual turnover of over $20,000 and the business will be his/her main source of income. The tax agent advised the Tax Office that although the taxpayer satisfied the income requirement under subsection 35-10(2E) of the ITAA 1997, he/she failed to satisfy any of the tests set out in sections 35-30, 35-35,-35-40 and 35-45 of the ITAA 1997 respectively for his/her business activity for the 20AA income year. Therefore, the taxpayer is requesting a Commissioner's discretion under section 35-55 of the ITAA 1997.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 35-10, | Income Tax Assessment Act 1997 section 35-30, | Income Tax Assessment Act 1997 section 35-35, | Income Tax Assessment Act 1997 section 35-40, | Income Tax Assessment Act 1997 section 35-45 and | Income Tax Assessment Act 1997 section 35-55.

Reasons for decision: Summary: The Commissioner considers that the taxpayer's business is not expected to satisfy a test nor produce a tax profit in the income year ended 30 June 20AA. Therefore, the Commissioner's discretion will not be exercised under section 35-55 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Subsection 35-10(1) of the ITAA 1997 provides that subsection 35-10(2) of the ITAA 1997 applies for an income year to each business activity carried on in that year unless: (a) subsection 35-10(2E) of the ITAA 1997 and one of the tests set out in any of the following provisions are satisfied for the business activity for that year: (i) section 35-30 of the ITAA 1997 (assessable income test); (ii) section 35-35 of the ITAA 1997 (profits test); (iii) section 35-40 of the ITAA 1997 (real property test); (iv) section 35-45 of the ITAA 1997 (other assets test); or (b) the Commissioner has exercised his discretion set out in section 35-55 of the ITAA 1997; or (c) the exception in subsection 35-10(4) of the ITAA 1997 applies for that year. Subsection 35-10(2) of the ITAA 1997 provides that if the amounts attributable to the business activity for that income year that you could otherwise deduct under this Act for that year exceed the assessable income from the business activity for that year, this Act will apply as if the excess were not incurred in the income year and were an amount attributable to the activity that can be deducted from the assessable income from the activity fro the next income year in which the activity is carried on. Subsection 35-10(2E) of the ITAA 1997 provides that the income requirement is satisfied for an income year if the sum of the taxable income, total reportable fringe benefits, reportable superannuation contributions and total net investment losses for that year is less than $250,000. Paragraph 35-55(1)(b) of the ITAA 1997 provides that the Commissioner, on application, may decide that the rule in subsection 35-10(2) of the ITAA 1997 does not apply to a business activity who satisfies subsection 35-10(2E) of the ITAA 1997 for one or more income years, if he is satisfied that it would be unreasonable to apply the rule because there is an objective expectation based on supporting materials presented that the business activity will satisfy a test or produce a tax profit in some future income year falling within a period that is commercially viable for the industry concerned. Paragraph 84 of Taxation Ruling TR 2007/6 Income tax: non-commercial business losses: Commissioner's discretion provides that the Commissioner needs to be satisfied that there is an objective expectation that the business activity will satisfy a test or produce a tax profit in some future income year falling within a period that is commercially viable for the industry concerned. If the business activity is not expected to satisfy a test or produce a tax profit within this period then the discretion will not be exercised. Paragraph 85 of TR 2007/6 further provides that the objective expectation does not have to be held by, or attributed to, a particular person. The Commissioner need only be satisfied that, based on the supporting available material, an objective expectation exists. The taxpayer here has failed to establish that there is an objective expectation that the activity will satisfy one of the tests or produce a tax profit, and that this will occur within a period that is commercially viable for the industry concerned. Historical evidence of how the industry in question has performed in the past is lacking. The Commissioner considers that the taxpayer's business is not expected to satisfy a test nor produce a tax profit in the income year ended 30 June 20AA. Therefore, the Commissioner's discretion will not be exercised under section 35-55 of the ITAA 1997.