Private ruling: Non-commercial losses
Published: September 2014
Ruling period: Year ended 30 June 2013 | Year ended 30 June 2014 | Year ending 30 June 2015
Date scheme commenced: 1 July 2012

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 2012-13 financial year to the 2014-15 financial year? | A1: No.

Relevant facts and circumstances: The exceptions of Division 35 of the ITAA 1997 do not apply however you meet the income requirement of that Division. You commenced business in 200X and independent industry sources show the commercially viable period for your industry to be three to five years. A previous private ruling issued to you exercised the discretion for four years. Your projected profit and loss statement shows you will pass the assessable income test of Division 35 of the ITAA 1997 in year seven since commencement of your business.

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. You received a private ruling in earlier years exercising the discretion for four years. Your current financial projections show that you expect to pass the assessable income test in the seventh year from the commencement of your activity. In the current application you have provided industry information that shows the assessable income test of Division 35 of the ITAA 1997 would be met in year three. From your previous ruling application and ATO records, independent industry sources show the commercially viable period for your industry to be three to five years. It is accepted that there is a lead time in your industry however as you will not pass a test or make a profit in the commercially viable period for your industry the Commissioner will not exercise the discretion under paragraph 35-55(1)(b) of the ITAA 1997 for the 2012-13 to the 2014-15 financial years.