Private ruling: non-commercial losses
Published: June 2012
Ruling period: Year ended 30 June 2011
Date scheme commenced: During 2010-2011 income year

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 in your calculation of taxable income for the 2010-11 financial year? | A1: 

Relevant facts and circumstances: In the 2010-11 financial year you commenced a business. You incur operational expenses such as rent, printing, stationary and advertising. Your income is generated from fees from students. You intend to build up your student base primarily through recommendations. You do not have any other businesses or employment. In the 2010-11 financial year you received less than $2,000 in professional fees and made an overall loss of more than $6,000. In the 2011-12 financial year you estimate professional fees of more than $4,000 and an overall loss of more than $3,000. In the 2012-13 financial year you estimate more than $10,000 in professional fees and an overall profit of less than $2,000. 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 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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