Private ruling: non-commercial losses
Published: November 2011
Ruling period: Year ended 30 June 2009 | Year ended 30 June 2010 | Year ended 30 June 2011
Date scheme commenced: 1 January 2009

Ruling: Q1: Will the Commissioner exercise the discretion in paragraph 35-55(1)(c) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include any losses from your business in your calculation of taxable income for the 2008-09 to 2010-11 financial years? | A1: 

Relevant facts and circumstances: In the 2008-09 financial year you commenced a business in private practice. You rely on referral work to obtain clients. You expect that your assessable income for the 2011-12 financial year will be over $20,000. You have presented evidence from an association that states it often takes at least two years to build a successful practice. Your income for non-commercial loss purposes is less than $250,000.

Relevant legislative provisions: Income Tax Assessment Act 1997 Paragraph 35-55(1)(a)

Reasons for decision: Summary: Division 35 of the ITAA 1997 will apply to defer a non-commercial business loss from a business activity unless: § You satisfy the income requirement for the 2009-10 and later financial years (that is, your taxable income, reportable fringe benefits and reportable superannuation contributions but excluding your business losses, exceeds $250,000) § Your business activity satisfies one of the four tests listed in section 35-10 of the ITAA 1997 § the Commissioner has exercised the relevant discretion in section 35-55 of the ITAA 1997 the activity, or § You come within the exception to Division 35 which may apply to a primary production or professional arts business. 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. Your losses are therefore subject to the deferral rule, unless the Commissioner exercises his discretion. 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. Having regard to your full circumstances, it is not accepted that it is in the nature of the business activity that has prevented one of the four tests being passed. The note to paragraph 35-55(1)(b) of the ITAA 1997 states: Note: This paragraph is 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. The type of feature contemplated by the phrase 'because of its nature', in the context in which it appears, is that referred to in the note quoted above. That 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. 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, simply because of the small scale on which it was started, or because a client base is being built up. You have provided evidence that it can take a number of years to build up a successful practice in your industry. However you have not provided any evidence to suggest 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 professional fees 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 professional fees from your business activity have demonstrated.

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