Private ruling: Non-commercial losses - Commissioner's discretion - lead time
Published: June 2015
Ruling period: Year ended 30 June 2014 | Year ended 30 June 2015 | Year ended 30 June 2016 | Year ended 30 June 2017
Date scheme commenced: 1 July 2013

Ruling: Q1: Will the Commissioner exercise the discretion in paragraph 35-55(1)(c) of the ITAA 1997 to allow you to include any losses from your business activity in your calculation of taxable income? | 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)(c)

Reasons for decision: Summary: For the 2009-10 and later financial years, Division 35 of the ITAA 1997 will apply to defer a non-commercial loss from a business activity unless: • you meet the income requirement and you pass one of the four tests • the exceptions apply • the Commissioner exercises his discretion. In your situation, you do not satisfy the income requirement (that is, your taxable income, reportable fringe benefits and reportable superannuation contributions but excluding your business losses, exceeds $250,000) and do not come under any of the exceptions. Your business losses are therefore subject to the deferral rule unless the Commissioner exercises his discretion. The relevant discretion may be exercised for a business activity for the financial year in question where: • 'because of its nature', it has not, or will not produce a tax profit; and • there is an objective expectation, based on evidence from independent sources (if available) that, your business activity will produce a tax profit within the commercially viable period for your industry. Having regard to your full circumstances, it is not accepted that there is an inherent characteristic in the nature of your business activity that has prevented you from making a profit. 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 (Note to paragraph 35-55(1)(c) of ITAA 1997). The first factor in paragraph 35-55(1)(c) considers whether it is 'because of its nature' that the activity has not produced, or will not produce, a tax profit. The note under paragraph 35-55(1)(c ) states: Paragraphs (b) and (c ) are intended to cover a business activity that has a lead time between the commencement of the activity and the production of any 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. Stone J in Federal Commissioner of Taxation v. Eskandari (2004) 134 FCR 569; 2004 ATC 4042, confirmed this view when considering whether the Commissioner's discretion should be exercised in regard to losses incurred in a migration consultancy business. When looking at the type of activities referred to by the note and the EM, Stone J stated at FCA 31: Such activities have an inherent characteristic that cannot be overcome by conducting the business activity in a different way but only by changing the nature of the business. And further at FCA 32: In my view, the phrase 'because of its nature' in s 35-55 indicates that the failure must be a result of some inherent feature that the taxpayer's business activity has in common with activities of that type. For the discretion to be applied there needs to be an inherent or innate feature of the activity resulting in an inability to make a profit in the year of commencement and (in most cases) a number of years thereafter. You have provided a Profit and Loss Statement for year ending 30 June 2015 showing estimated gross sales for accommodation. This is indicative of a business activity that can generate substantial income from the time of commencement of the business when accommodation is available to the public. Therefore 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 make a profit. Your activity is of a type that is able to produce assessable income quite soon after its commencement. The Commissioner cannot exercise a discretion under paragraph 35-55(1)(c ) of the ITAA 1997 to include any losses from this business activity in the calculation of your taxable income for the 2013/14 to 2016/17 financial years.

Relevant facts: You do not satisfy the <$250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997. | You carry on a business of providing accommodation and associated services. | You expect to make a profit in a future year once you have built up your client base.