Private ruling: Non-commercial losses
Published: October 2013
Ruling period: Year ended 30 June 2012 | Year ended 30 June 2013
Date scheme commenced: 1 July 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 the calculation of your taxable income for the relevant financial years? | A1: No.

Relevant facts and circumstances: You satisfy the income requirement set out in subsection 35-10(2E) of the ITAA 1997. You income from employment exceeds $40,000. You operate a business as a sole trader. You commenced operations in the 20XX financial year. You had no income or expenses in the 20XX financial year. You work in a particular field, and you produce articles and books. You forward the articles to magazines with the hope of selling them. You estimate that you sell approximately X% of the articles you send out. You anticipate that as you build up a reputation, you will be able to sell Y%. In the 20ZZ financial year, you had several articles published. You also self published a book which is currently available for sale. In the 20YY financial year you made a small number of sales. In the 20ZZ financial year you made sales of less than $5,000. In the 20VV financial year you anticipate sales of approximately $10,000. The business did not meet any of the four non-commercial loss tests in the relevant years. You expect to meet the assessable income test in the 20WW financial year.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 35-1 | Income Tax Assessment Act 1997 section 35-55 | Income Tax Assessment Act 1997 paragraph 35-55(1)(b) | Income Tax Assessment Act 1997 subsection 35-10(2) | Income Tax Assessment Act 1997 subsection 35-10(2E)

Reasons for decision: Summary: 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: · 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. Having regard to your full circumstances, it is not accepted that it is in the nature of the business activity that has prevented one of the four tests being passed. 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 discretion should not 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. | Detailed Reasoning - Application to your circumstances: 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 in your first full financial year in operation. 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. Therefore, the Commissioner will not exercise the discretion in paragraph 35-55(1)(b) of the ITAA 1997.