Private ruling: Non-commercial losses - Commissioner's discretion - author
Published: October 2014
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Can the Commissioner exercise his discretion in paragraph 35-55(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include losses from your author activity in the calculation of your taxable income for 2013-14 financial year? | A1: No

Relevant facts and circumstances: You recently resigned from your fulltime employment to pursue a business as a writer. You have already written some books, for which you have signed agreements with publishers in various countries. Your assessable income from other activities is greater than $40,000.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 35-55

Reasons for decision: Summary: Paragraph 35-55(1)(b) of the ITAA 1997 provides the Commissioner may, on application, decide that the loss deferral rule in subsection 35-10(2) does not apply to a business activity for one or more income years if the Commissioner is satisfied that it would be unreasonable to apply that rule: (i) because of its nature, it has not satisfied, or will not satisfy, one of the tests set out in section 35-30, 35-35, 35-40 or 35-45; and (ii) there is an objective expectation, based on evidence from independent sources (where available) that, within a period that is commercially viable for the industry concerned, the activity will either meet one of those tests or will produce assessable income for an income year greater than the deductions attributable to it for that year… A note in the section 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. As was explained in the Explanatory Memorandum to the New Business Tax System (Integrity Measures) Bill 2000 (the EM): This arm of the safeguard discretion [i.e., that in paragraph 35-55(1)(b)] will ensure that the loss deferral rule in section 35-10 does not adversely impact on taxpayers who have commenced to carry on activities which by their nature require a number of years to produce assessable income. Examples of activities which could fall into this category are forestry, viticulture and certain horticultural activities. Paragraph 17 of Taxation TR 2007/6 Income tax: non-commercial business losses: Commissioner's discretion explains for the failure to satisfy one of the four tests or produce a tax profit to be 'because of its nature', the failure must be because of some inherent characteristic that the taxpayer's business activity has in common with other business activities of that type. For example, in the Federal Court of Australia case of Commissioner of Taxation v. Eskandari (2004) 54 ATR 695; (2004) 2004 ATC 4042, the court ruled that the discretion could not apply to a migration agency business because there was not some inherent feature that the taxpayer's business activity had in common with business activities of that type to cause it to fail the relevant tests. Importantly, in reflecting the intent of the note in the section 35-55 and the explanation in the EM (as quoted above) paragraph 19 of TR 2007/6 states Where this initial period has passed, any continuing failure to satisfy a test or produce a tax profit will be for reasons outside of subparagraphs 35-55(1)(b)(i)…and the discretion will not be exercised... In your case, there is not any objective evidence to show there is an inherent characteristic preventing a business of writing and publishing books from producing assessable income for any period of time. On the contrary, some titles are successful soon after they are available for sale. Also, while the Commissioner's view is a lead time period does not exist for an author, if a lead time period did exist, because your business activity commenced a number of years ago, any applicable initial lead time period has now surely passed. In other words, as stated in paragraph 19 of TR 2007/6, where this initial period has passed, the discretion will not be exercised. It follows the Commissioner will not exercise the discretion in paragraph 35-55(1)(b) of the ITAA 1997 to allow you to offset the losses made from your activities of writing and publishing books against your other assessable income. You must defer the losses to a future year where the loss can be claimed against a profit from your business activity.