Private ruling: Non-commercial losses
Date of advice: 29 September 2015
Published: September 2015
Ruling period: Year ended 30 June 2014 | Year ended 30 June 2015 | Year ending 30 June 2016
Date scheme commenced: 1 July 20ZZ

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 20XX to 20YY financial years? | A1: No.


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 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 $20,000 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. In your case you commenced your business operations in the 20XX income year and proceeded to undergo extensive development of your business and to build your client base. We do not consider that there is anything inherent or innate in the nature of your activity that has prevented it from being 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 such, the Commissioner will not exercise the discretion to allow you to include any losses from your business in your calculation of taxable income for the 20XX to 20YY income years.

Relevant facts: You satisfy the <$250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997. | You commenced business operations in the 20XX financial year. | You have not yet made a profit or met the $20,000 assessable income test as the business has been undergoing extensive development and you are building up a client base. | You intend to make $20,000 in assessable income in the 20YY financial year.