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

Ruling: A1: 

Relevant facts and circumstances: In 2013, you set up an online business selling products sourced from a third party. You are required to undertake training and work to build up the retail side of and eventually build your own team of distributors. You are also employed in unrelated employment part time but your work load often results in your hours being more full time. As a result, the establishment phase of your business is very much part time; fitting in and around other employment commitments. Your business activity produced a loss in the 2012-13 financial year.

Relevant legislative provisions: Income Tax Assessment Act 1997 - Division 35 | Income Tax Assessment Act 1997 - Subsection 35-10(4) | Income Tax Assessment Act 1997 - Subsection 35-30 | Income Tax Assessment Act 1997 - Subsection 35-35 | Income Tax Assessment Act 1997 - Subsection 35-40 | Income Tax Assessment Act 1997 - Subsection 35-45 | Income Tax Assessment Act 1997 - Paragraph 35-55(1)(b)

Reasons for decision: Summary: Under Division 35 of the ITAA 1997, a loss made by an individual from a business activity will not be deductible in the financial year in which it arises unless certain conditions are met. Losses that cannot be taken into account in a particular year of income, because of subsection 35-10(2) of the ITAA 1997, can be applied to the extent of future profits from the business activity, or are deferred until one of the tests is passed, the discretion is exercised, or the exception applies. Under the rule in subsection 35-10(2) of the ITAA 1997 a loss made by an individual from a business activity will not be taken into account unless: · the exception in subsection 35-10(4) of the ITAA 1997 applies; or · you satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997 and one of the four tests is met; or · if you do not satisfy the income requirement or if one of the tests is not met, the Commissioner exercises the discretion in section 35-55 of the ITAA 1997. Your business activity is not a primary production activity or a professional arts business activity. Therefore, the exception contained in subsection 35-10(4) of the ITAA 1997 does not apply. Your income for non-commercial loss purposes is less than $250,000, therefore you satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997. However, your business activity has not satisfied any of the four non-commercial loss tests contained in sections 35-30 (assessable income test), 35-35 (profits test), 35-40 (real property test) and 35-45 (other assets test) of the ITAA 1997. | Detailed Reasoning - The Commissioner's discretion - lead time: Under paragraph 35-55(1)(b) of the ITAA 1997, the Commissioner's discretion can also be exercised where: · the business activity has started to be carried on but because of its nature it has not satisfied, or will not satisfy, one of the tests; and · there is an objective expectation that within a period that is commercially viable for the industry concerned the activity will meet one of the tests or produce a tax profit. For the Commissioner to exercise the discretion you must be able to show that the reason your business activity has not satisfied, or will not satisfy, one of the tests and is producing a loss is inherent to the nature of the business and is not peculiar to your situation. For example, the discretion will not 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 on a small scale, the hours worked or the need to build a client base. In your case, the reason the business activity has not passed one of the tests is due to starting out on a small scale, the hours worked or the need to build a client base and not because of anything inherent to the nature of the business activity. Therefore, the Commissioner is unable to exercise the discretion available in paragraph 35-55(1)(b) of the ITAA 1997 in relation to your business activity for the 2012-13 financial year.

Subject: Non-commercial losses - Commissioner's discretion: 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 2012-13 financial year?