Private ruling: Non-commercial losses
Date of advice: 15 April 2016
Published: June 2016
Ruling period: Year ending 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Q1: Will the Commissioner exercise the discretion in paragraph 33-55(1)(c) of the Income Tax Assessment Act 1997 to allow you to include any losses from your business in your calculation of taxable income for the income tax year ending 30 June 2016? | A1: No.

Relevant facts and circumstances: You operate a primary production business which commenced in 20XX. You have provided details of your activity including the commencement date, location and scale of operations. You do not satisfy the income requirement in subsection 35-10(2E) of the Income Tax Assessment Act 1997 (ITAA 1997). You do not expect to make a tax profit in the relevant financial year. You expect to make a tax profit in the subsequent financial year.

Relevant legislative provisions: Income Tax Assessment Act 1997 - Section 35-10 | Income Tax Assessment Act 1997 - Section 35-55

Reasons for decision: Summary: Division 35 of the Income Tax Assessment Act 1997 (ITAA 1997) applies to losses from certain business activities. As your activity has commenced, and you state that it is carried on as a business, it is subject to the provisions in Division 35 of the ITAA 1997. Under the rules in subsection 35-10(2) of the ITAA 1997, a loss made by an individual from a business activity will not be taken into account in an income year unless: • you satisfy the income requirement and you pass one of the four tests • the exceptions apply, or • the Commissioner exercises his discretion. In your situation, you do not satisfy the income requirement and you do not come under any of the exceptions. Your business losses are therefore subject to the deferral rule unless the Commissioner exercises his discretion. Under subsection 35-55(1) of the ITAA 1997, the Commissioner may, on application, decide that the deferral rule in subsection 35-10(2) does not apply to a business activity for one or more income years (the excluded years) if the Commissioner is satisfied that it would be unreasonable to apply that rule where the activity has started to be carried on and, for the excluded years: (i) because of its nature, it has not produced, or will not produce, assessable income greater than the deductions attributable to it; 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 produce assessable income for an income year greater than the deductions attributable to it for that year (apart from the operation of subsections 35-10(2) and (2C). The type of feature contemplated by the phrase 'because of its nature', is that there is 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. This is further clarified in paragraph 78 of Taxation Ruling TR 2007/6 Income tax: non-commercial business losses: Commissioner's discretion, where it states: The consequences of business choices made by an individual (for example, the hours of operation, the size or scale of the activity, and the level of debt funding) are not inherent characteristics of a business activity and would not result in the requirements of subparagraphs 35-55(1)(b)(i) and (c)(i) being met. The passage cited above indicates that the discretion should not be exercised for any activity that is yet to make a tax profit simply because of the small scale on which it was started. The 'commercially viable period' is therefore determined on an industry basis. Based on the information available to the ATO, the Commissioner accepts that the commercially viable period for your primary production activity is between one to three years. Consequently, the Commissioner is satisfied that the commercially viable period for your activity has lapsed. Therefore, the Commissioner is unable to exercise the discretion in paragraph 35-55(1)(c) of the ITAA 1997 for the relevant income year.