Private ruling: Non-commercial business losses and the Commissioner’s discretion
Date of advice: 8 October 2018
Published: November 2018
Ruling period: Financial year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Will the Commissioner exercise the discretion to allow you to include any losses from your business activity in the calculation of your taxable income for the 20XX-XX financial year? | A1: Yes. Having regard to your full circumstances, the Commissioner has granted his discretion as it is accepted that your business activity was affected by special circumstances outside your control which prevented you from passing a test. Further information on non-commercial losses can be found by searching 'QC 33774' on ato.gov.au

Relevant facts and circumstances: You satisfy the less than $250,000 income requirement set out in subsection 35-10(2E) of the Income Tax Assessment Act 1997 (ITAA 1997). The Commissioner exercised the discretion at paragraph 35-55(1)(b) of the ITAA 1997 to allow you to include a losses from your business activity in your calculation of taxable income for the 20XX-XX and 20XX-XX financial years. The business activity (the activity) is primary concerned with manufacture of a product. You commenced the activity operations on in the 20XX-XX financial year when you successfully developed a product. You were unable to distribute the product due to the absence of licencing approval. The nature of the licencing approval process required the processing plant to be established and operating for inspection by the local council and relevant licencing authorities before the licence is granted. A condition of obtaining trading approval is to obtain a development approval (DA) from the local council authority for any proposed changes made to the premises. You undertook all prerequisite steps to seek and obtain the DA, including excise registration and other compulsory compliance activities which took several months to complete. You submit that the following circumstances were out of your control, and have impacted on the ability of the activity to pass one of the tests: ● during a required DA inspection a fault was observed in the building structure that was inconsistent with the original construction plans lodged by the developer and approved by the council a number of years before your occupation of the premises ● the council required you to obtain a structural engineering report of the premises, which is outside the normal DA processes for your proposed changes to the premises ● the structural engineers report found the structure to be inconsistent with the minimum building standards and therefore unsuitable for occupation, and ● as a result of the findings you have sought legal advice to ascertain your position, however you have been advised that a change of premises is the most appropriate action. The above circumstances have delayed your ability to legally manufacture your product and therefore earn assessable income. You have since found a suitable premises which will be going to auction soon. You are confident on your chances of success at the auction. In the meantime you are arranging to manufacture the product at another established and licenced premise. This process will allow you to manufacture a legally marketable product using their equipment, which will enable you to utilise your already established distribution channels and capitalise on the market demand for your product earlier. Had the circumstances surrounding the fault in the premises not arisen, it was expected that final and full licencing approval would have been granted, and you would have satisfied the assessable income test for the 20XX-XX financial year. Further you are confident that the activity will satisfy the assessable income test for 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), and | Income Tax Assessment Act 1997 paragraph 35-55(1)(a).