Private ruling: Non-commercial losses discretion
Date of advice: 20 May 2026
Published: 3 August 2026
Ruling period: Year ended 30 June 20YY | Year ending 30 June 20YY | Year ending 30 June 20YY | Year ending 30 June 20YY | Year ending 30 June 20YY
Date scheme commenced: 1 July 20YY

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 2024-25 to 2028-29 financial years? | A1: No.

Relevant facts and circumstances: Your income in the 20YY income year for non-commercial losses purposes under section 35-10(2E) is in excess of X. You operate an X which generates income from various streams, including X. Audience reach and brand recognition continue to grow steadily, with specified number of X gained in less than X years, alongside comparable growth on X. The X operates regular public hours from X to X, with additional hours for events, and hosts specified number of X. You contribute specified number of hours per week to the business and employ few casual staffs. The X also delivers consistent education programs year-round, including children's programs, adult and school holiday classes, led by a X. You do not have a formal business plan; however, you advised that you operate the X with a clear commercial strategy, supported by many years of experience running a profitable business. You further stated that: • the X has been structured with multiple revenue streams and a long-term pathway to profitability, informed by industry conditions, established networks, and demonstrated demand; • you have X of experience in the X, particularly in supporting X, including Xs, building long-standing relationships in the sector, and developing a strong regional professional network; • prior to establishing the X, you sought expert mentorship and consulted with key X, which identified unmet demand for an affordable, community-focused X in the area. You also bring significant experience operating a successful business locally, providing strong expertise in financial management and day-to-day operations; and • you have personally funded the early-stage losses through income from your other business while the X established itself. Prior to and during the establishment of the X, you: • secured premises within a shopping precinct and paid the required bond; • conducted extensive market research through industry contacts and community engagement; • established a website, set up X accounts ; • commenced paid X advertising; and • employed a casual manager and a casual X. Your business recorded a loss in the relevant year. You expect that the X will reach profitability in the X year. Your forecast shows progressively decreasing losses over time, with early-stage losses funded by income from another business you operate. You have also supplied actual and projected income and expenses for a X-year period. You have applied for a state government X grant of a specified amount. While the process is competitive and the outcome is uncertain, the potential funding has not been factored into your financial projections. If awarded, the grant would significantly strengthen the X's financial position and support a faster path to profitability. You made the following contentions: • The region has strong spending capacity for X; however, due to its smaller market size, profitability takes longer to achieve. Your primary challenge is increasing foot traffic and audience reach, which is gradually improving as awareness of the X grows. • Factors such as the region's modest X market, delayed revenue streams associated with developing a X pipeline, reliance on X income, stagnation in the Australian X market over the past decade, and the sector's recovery following COVID-19 all contribute to a longer path to profitability for a new regional X business. In support of your application for the Commissioner's discretion, you provided: • A letter from an expert operating a similar business, who stated that X operations typically require substantial upfront investment and extended growth periods before achieving profitability. The expert also noted that, despite over X years of operation, their organisation cannot rely solely on exhibition, retail, and program income, and instead depends on government grants and alternative funding sources-an approach common across the Australian X. • Evidence from another industry expert indicating that newly established X enterprises comparable to your X require significant initial investment and X years of sustained community engagement before reaching consistent profitability.

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 subsection 35-10(4) | 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 | Income Tax Assessment Act 1997 section 35-55 | Income Tax Assessment Act 1997 paragraph 35-55(1)(c)

Reasons for decision: Summary: Division 35 operates to prevent losses from non-commercial business activities carried on by individuals operating alone or in partnership from being offset against other assessable income. Subsection 35-10(2) is an integrity measure that has the effect of deferring amounts attributable to the business activity that exceeds its assessable income for the relevant income year as deductions as though the excess amount: • was not incurred in that income year; and • was an amount attributable to the business activity that is an allowable deduction for the next income year in which the activity is carried on. Notwithstanding, subsection 35-10(2) will not be triggered if the business activity satisfies any of the conditions set out in subsection 35-10(1). That is: • the taxpayer's income for non-commercial loss purposes (as per subsection 35-10(2E)) is less than $X and one of the 4 tests in sections 35-30, 35-35, 35-40 and 35-45 is met ( assessable income test; profits test; real property test; and other assets test ); • the Commissioner has exercised the discretion under section 35-55 for the business activity for the year; or • the exception in subsection 35-10(4) applies for the year. | Detailed Reasoning - Lead time: In the context of taxpayers who do not satisfy the income requirement under subsection 35-10(2E) (that is, because their income for non-commercial loss purposes is $X or more) for the most recent income year ending before the application is made, pursuant to paragraph 35-55(1)(c) the Commissioner may, on application, decide that the deferral rule in subsection 35-10(2) does not apply to a business activity for one or more income years (the excluded years) if the Commissioner is satisfied that: • it is because of its nature that the business activity of the taxpayer has not produced, or will not produce, assessable income greater than the deductions attributable to it; and • there is an objective expectation that within a period that is commercially viable for the industry concerned, the activity will produce assessable income for an income year greater than the deductions attributable to it for that year (apart from the operation of subsection 35-10(2)). Paragraph 35-55(1)(c) is intended to cover a business activity that has a lead time between the commencement of the activity and the production of any assessable income. Taxation Ruling TR 2007/6 Income tax: non-commercial business losses: Commissioner's discretion (TR 2007/6) provides guidelines on how the discretion contained in subsection 35-55(1) of may be exercised to determine that it would be unreasonable for the loss deferral rule in subsection 35-10(2) to apply to a loss attributable to an individual taxpayer's business activity. Para 17 of TR 2007/6 states the meaning of 'because of its nature', For the failure to satisfy one of the four tests (subparagraph 35-55(1)(b)(i)) or produce a tax profit (subparagraph 35-55(1)(c)(i)) 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 (Eskandari )). Para 20 and 21 further states, 20. The Commissioner must be satisfied that an objective expectation exists, for each of the year(s) in question, that the business activity will satisfy a test or produce a tax profit within a period that is commercially viable for the industry concerned. The objective expectation must be based on independent information, where such information is available. 21. The period that is commercially viable for the industry concerned is the period in which it is expected that any business activity of that type, which is carried on in a commercially viable manner, would be expected to satisfy one of the tests or produce a tax profit. It is not determined having regard to best practice in the industry concerned. | Detailed Reasoning - Application to your circumstances: For the Commissioner to exercise the discretion you must be able to show that the reason your business activity is not making a profit is inherent to the nature of the business and is not peculiar to your situation. For example, the discretion will not be available where the failure to make a profit is for reasons other than the nature of the business such as, a consequence of starting out on a small scale, the hours worked or the need to build a client base. You commenced your business activity in the relevant year and while the X derives income from a range of sources, including X, the activity has resulted in losses in the X year of operation. You expect to make a small profit in the 20YY-YY financial year. The Commissioner accepts that the X is conducted in a business-like manner and that you have extensive experience in both the X sector and in running a profitable business. However, the mere existence of business-like conduct and industry experience is not sufficient, of itself, to warrant the exercise of the discretion under paragraph 35-55(1)(c). The Commissioner does not accept that the X activity has a lead time between the commencement and the production of any assessable income. Your activity is of a type that is able to produce assessable income soon after commencement, as reflected in your profit and loss statement for the 20YY-YY income year. X and X mainly contributed to the large deductions that resulted in losses in that year. You expect to make a small profit in the 20YY-YY financial year. You stated that lagging revenue streams from building a collector base and X pipeline and the use of commission-based revenue, stagnation of the Australian X market over the past decade, and the X sector's recovery post-COVID all lengthen the amount of time to profitability for a new X operation. These are not considered inherent nature of the business activity, rather the economic conditions affecting the commercial viability of your business activity. Your profitability relies, in part, on continued growth in audience reach, increased foot traffic, and further development of revenue streams. Starting small and growing the business is not an inherent feature because it results from choices made by the person undertaking the activity rather than from any structural or unavoidable characteristic of the activity itself. Although you have referred to broader industry conditions and provided general industry commentary indicating that X may take several years to become profitable, this observation is largely general in nature. The evidence provided indicates that the X industries generally rely on government grants and alternative sources. The type of feature contemplated by the phrase 'because of its nature' is that there is an inherent or innate nature of the activity resulting in an inability to produce income. As previously discussed, this does not support any view that the discretion should be exercised for any start-up activities simply because of the small scale in which it was started or because a client base or reputation is being built up or due to the economic conditions. | Detailed Reasoning - Conclusion: Having considered all the facts and circumstances, the Commissioner is not satisfied that it is in the nature of the business activity that has prevented you from making a profit. It is not accepted that there is any inherent characteristic in the X business that would require lead time to be become commercially viable. Accordingly, the Commissioner will not exercise the discretion under paragraph 35-55(1)(c). The losses from the operation of X must be deferred to a future income year to be applied when the activity next produces assessable income.