Private ruling: Non-commercial business losses and the Commissioner's discretion
Date of advice: 14 October 2017
Published: March 2018
Ruling period: Year ended 30 June 2017
Date scheme commenced: DDMMYY

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 business activity in your calculation of taxable income for the 2016-17 financial year? | A1: No.

Relevant facts and circumstances: You satisfy the income requirement set out in subsection 35-10(2E) of the ITAA 1997. You state that you commenced business operations in the 2016-17 financial year and made some assessable income soon after. You carry on a business which made a loss in the 2016-17 financial year. The business is primarily concerned with the sale of pet products. Some products have not been previously available in Australia, and you have now been given an exclusive distributor approved license from a manufacturer to sell the products in Australia. Given this product is a creating a new niche market it will take time to gain traction and build sales. However a marketing strategy is in place to grow the business. Had you traded for the full 12 months from the date the business commenced, you would not have made more than $20,000. You intend to pass one of the tests in Division 35 of the ITAA 1997 in the 2017-18 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)(b).

Reasons for decision: Summary: For the 2009-10 and later income years, Division 35 of the ITAA 1997 will apply to defer a non-commercial loss from a business activity unless: ● you satisfy the income requirement and you pass one of the four tests, ● the exceptions apply, or ● the Commissioner exercises the discretion. 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 of income under consideration. The relevant discretion may be exercised for the income year in question where: ● it is in the nature of the business activity that there will be a period of time before it can be expected to pass one of the four tests ● there is an objective expectation your business activity will produce a tax profit or meet one of the four tests within a commercially viable period for your industry. 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. 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. For the discretion to be applied there needs to be an inherent or innate feature of the activity resulting in an inability to produce income in the year of commencement and (in most cases) a number of years thereafter. Further examples that fall into this category are forestry, viticulture and certain horticultural activities. The note above does not support any view that the discretion should be exercised for any start-up activity that is yet, for example, to satisfy the assessable income test in section 35-30 of the ITAA 1997, because of the small scale on which it was started, or because a client base is being built up. We do not consider that there is a lead time between the commencement of your activity and the production of any assessable income. Your business was able to generate income from product sales in your first financial year in operation. 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 satisfy one of the tests. Your activity is of a type that is able to produce assessable income quite soon after its commencement, as the sales from your business activity to date have demonstrated. Therefore the Commissioner will not exercise the discretion to allow you to include any losses from your business in your calculation of taxable income for the 2016-17 financial year.

The advice in the Register has been edited and may not contain all the factual details relevant to each decision. Do not use the Register to predict ATO policy or decisions.