Private ruling: Non-commercial losses and the Commissioner’s discretion for lead time
Date of advice: 23 October 2018
Published: January 2019
Ruling period: Years ended 30 June 2016 and 30 June 2017
Date scheme commenced: 1 July 2015

Ruling: Q1: Will the Commissioner exercise the discretion in paragraph 35-55(1)(b) 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 2015-16 and 2016-17 financial years? | A1: No

Relevant facts and circumstances: You satisfy the <$250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997. You carry on a business as a sole trader. You commenced business operations on X April 20XX. You advise that your business relies establishing trust relations with your clients which takes time and it takes many years to establish and retain a core number of clients. You run the business part time while also working full time in another occupation. You advise that by the nature of your business, your business is small in revenue and client numbers. In the 20XX-XX financial year the business received income of $X. The business loss in this year was $X. In the 20XX-XX financial year the business received income of $X. The business loss in this year was $X. In the 20XX-XXfinancial year the business received income of $X and the business made a profit of $X. In order to progress in your business, you are required to travel internationally to study. You have provided a letter from A, who is qualified in your business industry. A advises that you undertook a number of study related travels in order to progress to become qualified. A also advises that you operate a successful part-time business, and the business ultimately made a loss due to the costs associated with the study trips.

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 (ITAA 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 his 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 years of income under consideration. Your losses are therefore subject to the deferral rule, unless the Commissioner exercises his 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. The note to section 35-55 of the ITAA 1997 which contains the discretion states 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. For the discretion to be applied there needs to be an inherent or innate feature of the activity resulting in an inability to produce income in the year of commencement and (in most cases) a number of years thereafter. Further examples that fall into this category are forestry, viticulture and certain horticultural activities. 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. 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 from 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 satisfy one of the tests. Your activity is of a type that is able to produce assessable income quite soon after its commencement, as the income received from your business activity has demonstrated.