Private ruling: Non-commercial losses
Published: August 2011
Ruling period: Year ended 30 June 2011

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 your calculation of taxable income for the 2010-11 income year? | A1: No.

Relevant facts and circumstances: You commenced your business X months ago. You run your business from home. You will continue to conduct the business from home until the business can afford to pay rent in commercial premises. You have forecast this to be in a number of years. You are the only person working in the business. The business is part time, you only work via appointments. You exhibit your goods at expos. You do not expect sales to flow through for sometime post expo. You attended your first expo in 2011. You hope to eventually operate the business fulltime. You currently work fulltime in paid employment. Your adjusted taxable income does not exceed $250,000.

Relevant legislative provisions: Income Tax Assessment Act 1997 Paragraph 35-55(1)(b).

Reasons for decision: Summary: There is nothing inherent in the nature of your business which would warrant the Commissioner to exercise his discretion under paragraph 35-55(1)(b) of the ITAA 1997 for the 2010-11 financial year. The discretion is not exercised for any start-up activity that is yet to satisfy the assessable income test simply because of the small scale on which it was started, or because a client base is being built up. | Detailed Reasoning - Detailed reasoning: For the 2009-10 and later income years, Division 35 of the ITAA 1997 will apply to defer a non-commercial loss from a business activity unless (relevant to this division): · you meet the income requirement and you pass one of the four tests · the exceptions apply · the Commissioner exercises his discretion. In your case, the income requirement is met but you do not pass any of the four tests. None of the exceptions apply in your situation. You have asked for the Commissioner to exercise a discretion as you contend that your business has not passed a test or made a tax profit due to the nature of your activity. Under paragraph 35-55(1)(b) of the ITAA 1997, the Commissioner's discretion can be exercised for an applicant who satisfies the income requirement, where the business activity satisfies the following conditions: the business activity has started to be carried on and, for that or those income years: (a) because of its nature, it has not satisfied, or will not satisfy, one of the tests set out in section 35-30, 35-35, 35-40 or 35-45; and (b) there is an objective expectation, based on evidence from independent sources (where available) that, within a period that is commercially viable for the industry concerned, the activity will either meet one of those tests or will produce assessable income for an income year greater than the deductions attributable to it for that year (apart from the operation of subsections 35-10(2) and (2C)). The note to this paragraph states that it 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. 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. The note and the passage do 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. Those sorts of constraints on being able to satisfy that test are far removed from the specific one referred to in the note and the Explanatory Memorandum. It was a business decision you made to start the business on a small scale operating from the back of your home. You chose not to open commercial premises or work the business fulltime. We consider that it would be possible for a business in your industry to meet the $20,000 assessable income test in its first year if it was operated on a sufficient scale. The fact that your business did not meet this test is not due to the inherent nature of the activity, but rather your choices in how to run the business, for example, with regards to the small scale and operating from home. Therefore, the Commissioner will not exercise his discretion under paragraph 35-55(1)(b) of the ITAA 1997 for the 2010-11 financial year. Consequently, you are required to defer the loss from your business until a future income year in which your business either meets one of the four tests (and you meet the income requirement) or makes a tax profit.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.