Private ruling: Non-commercial losses - Commissioner's discretion
Published: April 2015
Ruling period: Year ended 30 June 2013 | Year ended 30 June 2014
Date scheme commenced: 1 July 2012

Ruling: Q1: Will the Commissioner exercise the discretion in paragraph 35-55(1)(b) of the ITAA 1997 to allow you to include any losses from your business activity in your calculation of taxable income for the 2012-13 to 2013-14 financial years? | A1: No.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are: • The application for private ruling. • Further information received. 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 made profits from your business activities for many years. You did not make a profit or past a test in the 2012-13 and 2013-14 financial year as your client base has been shrinking as you work towards retirement. You state that special circumstances in the context of paragraph 35-55(1)(a) of the ITAA 1997 do not apply to your business activity.

Relevant legislative provisions: 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; or • 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 Commissioner's discretion in paragraph 35-55(1)(b) of the ITAA 1997 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; and • 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. The legislation does not support any view that the discretion should 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 small and needing to build up a client base, or business choices made by an individual that are not consistent with the ordinary or accepted practice in the industry concerned - such as the hours of operation, location, or the level of debt funding. It appears that a significant contributor to the losses of your business is the fact that you are winding down your business in preparation to retirement. Having regard to your circumstances, it is not accepted that it is in the nature of the business activity that has prevented you from making a tax profit or from passing one of the four tests. It follows the Commissioner cannot exercise his discretion in your case.