Private ruling: Income tax - tax losses - non-commercial losses - Commissioner's discretion - lead time
Date of advice: 3 March 2026
Published: 20 April 2026
Ruling period: Year ended 30 June 20XX
Date scheme commenced: July 20XX

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 non-primary production business activity in your calculation of taxable income for the 20XX-XX financial year? | A1: No.

Relevant facts and circumstances: You satisfy the less than $250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997. You carry on a community support program business. You commenced business operations in the 20XX-XX financial year. You operated your business activity as a sole trader upon commencement. You operated your business activity under a prototype phase whilst under a sole tradership. You operated your business activity on a modest scale during the prototype phase. You operated your business activity with part-time delivery, limited group sizes and controlled operating hours. You tested and refined programs, pricing, venues and safeguarding processes. You were required to establish trust between yourself and the community. You could not establish this trust immediately and were required to develop this progressively through repeated delivery, positive outcomes and referrals. Whilst creating positive outcomes, you were also required to convey a demonstration for safety, before you could carry out your business activity at a regular scale. You were required to implement gradual, relationship-based engagement during this time. You were to observe limited participation numbers. You could not accelerate the process without compromising service quality and safety. You generated income through participant fees. Despite this, you encountered significant establishment and operating expenses. You encountered expenses in relation to venue hire, insurance, compliance embedment, safeguarding, materials, equipment and the setup of sensory activations. You encountered greater expenses than income. You are viable to observe increased participation numbers once trust and community recognition increase through repeated engagement and referrals. Your business activity accumulated established demand and improved operational capacity over time. You are now operating your business activity through a company upon completion of the prototype phase. You transferred your business activity from the control of a sole tradership to a company in July 20XX. You began operating your business activity through the company at an increased scale. Your business activity began to generate more consistent income. You expect there to be less establishment expenses. You expect the business activity, which is now operated under a company, to make $XX,000 in assessable income in the 20XX-XX financial year.

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: Having regard to your full circumstances, it is not accepted that there is anything inherent in the nature of your business activity that prevents it from meeting the assessable income test within the commercially viable period for the industry. Therefore, the Commissioner will not exercise the discretion in paragraph 35-55(1)(b) of the ITAA 1997 for the 20XX-XX financial year. | Detailed Reasoning - Detailed reasoning: Division 35 of the ITAA 1997 prevents losses from a non-commercial business activity carried out by an individual taxpayer (alone or in partnership) from being offset against other assessable income in the year in which the loss is incurred, unless: • the individual meets the income requirement and the business activity satisfies one of the 4 stipulated tests (paragraph 35-10(1)(a) of the ITAA 1997), i. the assessable income test, ii. the profits test, iii. the real property test, or iv. the other assets test, • an exception in subsection 35-10(4) of the ITAA 1997 applies: ­ the loss is from a primary production business and the assessable income from other sources that do not relate to that business activity is less than $40,000, or ­ the loss is from a professional arts business and the assessable income from other sources that do not relate to that business activity is less than $40,000, or • the Commissioner exercises the discretion in subsection 35-55(1) of the ITAA 1997 for the business activity for 1 or more income years. 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 under consideration. Your business losses are therefore subject to the deferral rule, unless the Commissioner exercises their discretion. You have requested the Commissioner to exercise their discretion under paragraph 35-55(1)(b) of the ITAA 1997 in the 20XX-XX financial year. Under paragraph 35-55(1)(b) of the ITAA 1997, the Commissioner's discretion can 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 4 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 will produce assessable income for an income year greater than the deductions attributable to it for that year. This discretion 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. The Commissioner's approach to exercising the discretion under section 35-55 of the ITAA 1997 is outlined in Taxation Ruling TR 2007/6 Income Tax: non-commercial losses: Commissioner's discretion (TR 2007/6). TR 2007/6 states that the lead time discretion provided by paragraph 35-55(1)(b) of the ITAA 1997 and paragraph 35-55(1)(c) of the ITAA 1997 is available for a business activity if there is an initial period from when the activity commenced where the nature of the activity prevents one of the 4 tests from being met (paragraph 35-55(1)(b) of the ITAA 1997, or a tax profit from being made (paragraph 35-55(1)(c) of the ITAA 1997). For the Commissioner to exercise the discretion you must be able to show that the reason your business activity is not satisfying the assessable income test (which is the test relied on in the ruling application) is inherent to the nature of the business and is not peculiar to your situation. The lead time discretion is not intended to be available where the failure to make a profit or to meet a test 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 (for example, the size and scale of the activity, the hours of operation, and/or the level of debt funding) that are not consistent with the ordinary or accepted practice in the industry concerned. You commenced your community support program business activity in the 20XX-XX financial year. You were required to establish demand for your business activity before you could operate at full capacity. As a result, you commenced operating your business activity under a prototype phase, as a sole trader. During this phase, your business activity made losses. Upon completion of this phase, you were able to operate your business activity at full capacity under a company. Your business activity, which is now operated under a company, is generating more sufficient income. Your decision to commence your business activity at a reduced scale would have impacted on the length of time required before your business activity will make a profit. This is an individual circumstance affecting your activity rather than an inherent characteristic of the activity. Starting small and expanding is considered a business choice Out of precaution, you have made a business choice to start small and expand. Although you have grounds for making such a business choice, this business choice is not an inherent feature of your community support program business activity. Starting small and growing is not an inherent feature of an activity because it results from choices made by the person undertaking the activity, rather than from any structural or unavoidable characteristic of the activity itself. When an activity can be carried out at full scale from the offset, but the individual elects to begin at a reduced capacity (for example to test demand, refine operations or minimise risk), the resulting delays in income generation stem from personal decisions. This is rather than from the intrinsic nature of the activity. As such, commencing on a limited scale reflects circumstances unique to the operator, not features inherent in the type of activity being conducted. Furthermore, the asserted need to build trust with the community is not accepted as a characteristic arising from the nature of the activity. A feature is inherent only where it is ordinarily and unavoidably encountered by participants in the industry when conducting the activity in a conventional manner. Relationship-building of the kind described is an elective engagement method that reflects your chosen way of operating, rather than a universal precondition to commencing at commercial capacity. Operators undertaking comparable activities may begin immediately without a preliminary rapport-building phase. Any delay attributable to prioritising community relationships therefore stems from your individual operational choices and not from attributes intrinsic to the activity. Having regard to your full circumstances, it is not accepted that it is in the nature of the business activity that has prevented you from passing the assessable income test. Therefore, the Commissioner will not exercise their discretion under paragraph 35-55(1)(b) of the ITAA 1997 for the years in question.