Private ruling: Commissioner's discretion for non-commercial business losses
Published: June 2015
Ruling period: Year ended 30 June 20YY | Year ended 30 June 20ZZ
Date scheme commenced: 1 July 2014

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 the losses from your activity in the calculation of your taxable income for the years ended 30 June 20YY and 30 June 20ZZ? | A1: No.

Relevant facts and circumstances: You commenced development of an App and an associated website in the year ended 30 June 20XX. Since that time you have incurred expenses to engage the services of a developer to create the App and the services of a web page designer to create the website. You have also incurred home office expenses, as well as motor vehicle expenses travelling to and from meetings with the App developer and web page designer. The App and web page were launched in the year ended 30 June 20YY. You own the copyright of the App. You are trying to raise funds for a marketing program to generate awareness of the App.

Relevant legislative provisions: Income Tax Assessment Act 1997 paragraph 35-55(1)(b)

Reasons for decision: Summary: Business losses from activities that do not satisfy any of the four tests set out in Division 35 of the ITAA 1997, or come within the exception in subsection 35-10(4) of the ITAA 1997, will be subject to the loss deferral rule in subsection 35-10(2) of the ITAA 1997 unless the Commissioner considers that it would be unreasonable to apply the loss deferral rule and exercises a discretion in subsection 35-55(1) of the ITAA 1997. You have requested that the Commissioner exercise the discretion in paragraph 35-55(1)(b) of the ITAA 1997. The Commissioner may exercise this discretion where he considers that applying the loss deferral would be unreasonable because: • it is the nature of the business activity that it has not satisfied, or will not satisfy, one of the fours tests set out in Division 35 of the ITAA 1997, and • 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 satisfy one of the four tests or will produce a tax profit. The discretion in paragraph 35-55(1)(b) of the ITAA 1997 is intended to cover a business activity that has a lead 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 this discretion to be exercised 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 after. The discretion is not intended to apply where a business activity makes a loss because of factors which can apply to any business and which do not affect the ability of the activity to satisfy one of the four tests. For example, the discretion is not exercised for any start-up activity that is yet to satisfy, for example, the $20,000 assessable income test, simply because of the small scale on which it was started, or because a client base is still being established. You have not provided any objective evidence to show that there is an inherent or innate characteristic of your business that prevents you from satisfying any of the four tests set out in Division 35 of the ITAA 1997. On the contrary, some digital products may be successful soon after they are available for sale. As such, the Commissioner will not exercise the discretion in paragraph 35-55(1)(b) of the ITAA 1997 to allow you to include the losses from your business activity in the calculation of your taxable income for the years ended 30 June 20YY and 30 June 20ZZ.