Private ruling: Commissioner's discretion
Date of advice: 16 February 2026
Published: 7 April 2026
Ruling period: Year ended 30 June 20XX | Year ending 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 to 20XX-XX financial years? | 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 will carry on a networking community business in X. You began to prepare for business operations in the 20XX-XX financial year. You are creating the infrastructure required to support the needs of your ideal networking community member. This infrastructure includes an application build-out, software, processes, systems, compliance embedment, office space, event space and other features. You will encounter total costs of $X to create this infrastructure. The infrastructure must be able to accommodate a large volume of members. This is because there is to be a notable variety of professionals and entrepreneurs. Therefore, value can be provided to the members. You must also endeavour to create demand for your key offering. Therefore, you will encounter total costs from $X to $X for marketing. Your service offering is still under development. You have yet to generate revenue. Once your service is ready for offering, as well as satisfying key deliverables by coordinating your own team members, you must also satisfy these deliverables by collaborating in partnerships. You will encounter total costs from $X to $X in relation to these partnerships. In summating the abovementioned costs, you will encounter total costs of $X to $X before realising a tax profit. Of which, you have already spent approximately $X. You expect the business activity to make $X 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: You are not considered to have commenced your networking community business activity in the 20XX-XX to 20XX-XX financial years. Your service is not ready for offering and you have not generated any income. The necessity for you to develop an infrastructure and market to create demand is a preparatory step rather than seen as carrying on business operations. There are limited commercial assets in use and the activity is focused on developing the service offering rather than carrying out as a business. In weighing up all the relevant facts surrounding your case, it is considered your networking community business has not commenced in the 20XX-XX to 20XX-XX financial years. 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. Therefore, the Commissioner will not exercise the discretion in paragraph 35-55(1)(b) of the ITAA 1997 for the 20XX-XX to 20XX-XX financial years. | 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): ­ the assessable income test, ­ the profits test, ­ the real property test, or ­ 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) for the business activity for 1 or more financial years. 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. In your situation, none of the exceptions would apply and although you satisfy the income requirement, you do not meet any of the 4 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 to 20XX-XX financial years. 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 have 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. Moreover, the Commissioner's discretion is not intended to be available in cases where the relevant business activity has not commenced. | Detailed Reasoning - Commencement: Taxation Ruling TR 2001/14 Income tax: Division 35 - non-commercial business losses (TR 2001/14) provides the Commissioner's view on when a business activity has commenced. Specifically, paragraph 69A of TR 2001/14 broadly requires you to have: • decided to start the business activity, • acquired the minimum level of business assets to allow that business activity to be carried on, and • in fact, start business operations. A mere intention to start carrying on a business activity will not be sufficient. | Detailed Reasoning - Decision to start: The commencement of a business activity typically begins with an intention to start a business. Your intention and purpose in engaging in the activity are relevant, but intention alone is not enough to establish that a business has commenced. There must be activity (paragraph 101 of TR 2001/14). Esso Australia Resources Ltd v . FC of T 97 ATC 4371 at 4382; (1997) 36 ATR 65 at 77-78 confirmed: While the taxpayer may have had the intention ultimately to engage in production, that is not sufficient in itself to constitute a business activity Whitfords Beach Pty Ltd v. FC of T 83 ATC 4277; (1983) 14 ATR 247 emphasised that determining when a business has commenced requires examining both the taxpayer's purpose and their activities. Some actions may be merely preparatory and not part of the business itself. Therefore, the commencement of a business is marked not just by intention, but by tangible actions that reflect a commitment to carrying out the business. Acquisition of a minimum level of business assets to allow that business to be carried on A business must have a structure or profit-yielding subject in place. This typically involves capital assets, which may vary depending on the nature of the business. In Calkin v CIR [1984] 1 NZLR 440 ( Calkin ) at 446-447, Justice Richardson stated: Clearly it is not sufficient that the taxpayer has made a commitment to engage in business: he must first establish a profit-making structure and begin ordinary business operations. For a business activity to commence, an appropriate business structure should be in place and begin ordinary business operations. As to what the business structure will consist of, and its size, will be a question of fact and degree, and will depend on the nature of the business activity. | Detailed Reasoning - Start of business operations: As noted in Inglis v . FC of T 80 ATC 4001 the level of activity is important. The extent of activity will also determine whether a business activity has commenced and is in its start-up phase. Activity will support claims to have commenced a business activity. Based on the decision in Calkin the level of activity required will vary from case to case, however there are 2 different types of activities that are relevant: • acquisition of the minimum level of business assets, and • the start of business operations. Both are necessary to be able to conclude that a business has commenced. | Detailed Reasoning - Preparatory activities: Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production (TR 97/11) outlines that expenses may be incurred before commencing a particular business. For example, expenses associated with experimental or pilot activities which do not amount to a business and do not result in any assessable income being produced are not deductible (paragraph 41 of TR 97/11). Paragraph 45 of 97/11 and paragraph 46 of TR 97/11 discuss an example of preparatory activities: Example 5: Between 1980 and 1985, Lindsay and Loretta were not carrying on a business, as their activities were considered preparatory rather than indicative of an active business. Although they had a clear intention to engage in cattle farming, they acknowledged that significant groundwork-such as land clearing, infrastructure development, and building construction-was necessary before stocking cattle. Crucially, there was no income, no livestock, and no regular or cattle-related activity during this period. The business only commenced in 1986, when the property was stocked with 100 cattle, marking the start of actual business operations. In Kevin Lee v Commissioner of Taxation [2005] AATA 865 , Lee incurred significant expenses attending 2 financial training courses and purchasing related software, with the intention of improving their investment knowledge and future income potential. The Tribunal found the expenditure on the courses and software was preparatory in nature-comparable to a student investing in education to equip themselves for future employment. As such, these costs were considered capital expenses, incurred to prepare Lee for a potential future income-generating activity. | Detailed Reasoning - Application to your circumstances: The setup phase of your networking community business activity involves developing an infrastructure and marketing to create demand. You are unable to begin earning revenue until your service is ready for offering. The expenditure incurred while setting up your networking community is preparatory in nature and is incurred to prepare you and improve your knowledge for potential future income generating activity. It is the Commissioner's view that in your circumstances, you have not yet commenced business operations for the purposes of the non-commercial loss provisions in Division 35 of the ITAA 1997. This is because you are not generating any income from your business activity, which is still in the preparatory phase. The non-commercial loss rules apply only where a business activity has commenced and is being carried on. This is a threshold requirement. If the activity has not genuinely commenced or is not being carried on as a business, the non-commercial loss provisions do not apply, and any losses are not deductible under general principles. The preparatory phase of a business activity is not treated as lead time because it occurs before the activity has commenced. Therefore, the preparatory phase cannot reflect the type of industry-based delay which arises from inherent features of the industry. Preliminary activities such as training, market research, infrastructure development, branding or assembling the profit-making structure merely place the activity in a position to begin operating. Therefore, they cannot be characterised as lead time. This is contrary to the requirement that the activity must already be operating before the Commissioner can consider whether it will satisfy a test within a commercially viable timeframe. Due to the nature of some business activities, they will not produce assessable income in the early years and therefore will not be able to produce a profit. Lead time can only arise once the business activity is being carried on and the delay in generating assessable income results from inherent features of the industry. This includes production cycles in agriculture, maturation periods for vineyards or regulatory approval processes for licenced activities. These delays stem from the nature of the activity, not from efforts for the activity to be established. The nature of your networking community activity is that it is possible to derive assessable income from the first day, one you have commenced business and are no longer in the preparatory phase. We do not consider there is anything inherent or innate in your business activity that it has not yet been able to make a tax profit. 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.