Private ruling: Commissioner's discretion - non-commercial losses
Date of advice: 14 November 2025
Published: 5 January 2026
Ruling period: Year Ended 30 June 20XX
Date scheme commenced: July 20XX

Ruling: Q1: Will the Commissioner exercise the discretion in section 35-55 of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include any losses from trading activity in the calculation of your taxable income for the 20XX-XX income year? | A1: No.

Relevant facts and circumstances: You satisfy the less than $250,000 income test set out in subsection 35-10(2E) of the ITAA 1997. You undertake trading activities. You are required to undertake and pass an evaluation phase before you qualify for a funded account and can begin earning income or profits from the activity. The evaluation phase uses simulated/demo funds. During the evaluation phase you receive no income or profits. You have made X attempts to pass the evaluation phase in the 20XX-XX income year. Evidence provided from a report states xx attempts before success. You have spent $X on evaluation phase attempts. You have not successfully passed any of the evaluation phase attempts since you began the activity in July 20XX. Undertaking the evaluation phase assists you with skill-building and business trials. You spend X-X hours daily trading. You have provided a business plan. Your business plan is a self-developed strategy. In the 20XX-XX financial year there were market fluctuations and volatility which affected your trading activities. Your trading activities growth is dependent on operational capacity and human/system capital available. You subscribed to a platform for currency exchange signals to aid in passing the evaluation phase. Your intention is to pass the evaluation phase in the 20XX-XX financial year and secure a $X funded account. You project your annual profit to be $X if this occurs.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 35-10 | Income Tax Assessment Act 1997 section 35-55 | Income Tax Assessment Act 1997 section 995-1

Reasons for decision: Summary: You are not considered to have commenced your trading business activity in the 20XX-XX income year. You have not qualified for any funded accounts or generated any income. All trading has been limited to an evaluation phase using simulated accounts, which are preparatory steps rather than seen as carrying on business operations. There are limited commercial assets in use and the activity is focused on qualifying for a funded account rather than conducting trading as a business. In weighing up all the relevant facts surrounding your case and considering the relevant business indicators, it is considered your trading business had not commenced in the 20XX-XX income year. The Commissioner would not be able to exercise the discretion in section 35-55 of the ITAA 1997 for the 20XX-XX income year because it is considered your trading business had not actually commenced in the relevant income year. | Detailed Reasoning - Detailed reasoning: Division 35 of the ITAA 1997 prevents losses from a non-commercial business activity carried out by an individual (alone or in partnership) from being offset against other assessable income in the year in which the loss incurred, unless: • the individual meets the income requirement (that is your taxable income, reportable fringe benefits, reportable superannuation contributions and total net investment losses, does not exceed $250,000), and the business activity satisfies one of the 4 stipulated tests (paragraph 35-10(1)(a) of the ITAA 1997), • an exception in subsection 35-10(4) of the ITAA 1997 applies (for example, the activity is a primary production or professional arts business and your assessable income from other sources is less than $40,000), or • the Commissioner exercises the discretion in subsection 35-55(1) of the ITAA 1997 for the business activity for 1 or more income years. Division 35 of the ITAA 1997 applies only to activities that are conducted as a business. It does not apply to activities that do not meet the definition of carrying on a business. Subsection 35-5(2) of the ITAA 1997 clarifies this by stating: This Division is not intended to apply to activities that do not constitute carrying on a business (for example, the receipt of income from passive investments). | Detailed Reasoning - Whether a business activity has started to be carried on for the purposes of the Commissioner's discretion in section 35-55 of the ITAA 1997: Section 995-1 of the ITAA 1997 defines a business to include any profession, trade, employment, vocation or calling but does not include occupation as an employee. Although the term business is defined, the ITAA 1997 does not contain a specific definition of when a business activity is being carried on or what a business activity is. Paragraph 37 of Taxation Ruling TR 2001/14 Income Tax: Division 35 - non-commercial business losses (TR 2001/14)states: The composite term 'business activity' is otherwise undefined in the ITAA 1997. The inclusion of the extended definition of 'business' in the composite term does not, however, alter the ordinary meaning of the composite term in any significant way. That ordinary meaning is an activity forming part or all of the taxpayer's activities 'engaged in for the purpose of profit on a continuous and repetitive basis ( Hope v . The Council of the City of Bathurst 80 ATC 4386 at 4382; (1980) 12 ATR 231 at 236), or an activity that is one of the activities that makes up the 'course of conduct' ( FC of T v . Murry 98 ATC 4585 at 4596; (1998) 39 ATR 129 at 145) that is the taxpayer's business. This means a business is a commercial enterprise carried on for the purpose of profit, involving a series of activities conducted in a systematic and organised way. A business activity refers to an individual activity or component within a broader business. It can be a single profit-driven activity that is part of the taxpayer's overall course of conduct. TR 2001/14provides the Commissioners view on when a business activity has commenced. Specifically, paragraph 69A of TR 2001/14 broadly requires you to have: • made a decision to commence the business activity, • acquired the minimum level of business assets to allow that business activity to be carried on, and • actually, commenced business operations. A mere intention to start carrying on a business activity will not be sufficient. | Detailed Reasoning - Decision to commence an activity: The commencement of a business activity typically begins with an intention to start a business, though intention alone is not enough to establish that a business has commenced. There must be activity (paragraph 101 of TR 2001/14). Esso Australia Resources Ltd v. FC of T 97 ATC 4371 at 4382; (1997) 36 ATR 65 (Esso case) at 77-78 stated: While the taxpayer may have had the intention ultimately to engage in production, that is not sufficient in itself to constitute a business In the Esso case, the taxpayer claimed deductions for costs incurred while reviewing and evaluating potential mineral and petroleum opportunities. They argued these activities were part of its business operations because they intended to eventually engage in production. The Commissioner disagreed, stating these were preliminary steps and not part of the cost of trading operations. The court clarified that intention alone does not create a business activity. This was on the basis a taxpayer may plan or hope to engage in production, but unless they have transitioned from planning to active trading, they are not carrying on a business. Whitfords Beach Pty Ltd v. FC of T 83 ATC 4277; (1983) 14 ATR 247, emphasised that determining when a business has commenced requires examining both the taxpayer's purpose and their activities. Some actions may be merely preparatory and not part of the business itself. Therefore, the commencement of a business is marked not just by intention, but by tangible actions that reflect a commitment to carrying out the business. | Detailed Reasoning - Acquisition of a minimum level of business assets to allow that business to be carried on: A business must have a structure or profit-yielding subject in place. This typically involves capital assets, which may vary depending on the nature of the business. In Calkin v CIR [1984] 1 NZLR 440 (Calkin case) at 446-447, Richardson J stated: Clearly it is not sufficient that the taxpayer has made a commitment to engage in business: he must first establish a profit-making structure and begin ordinary business operations. For a business activity to commence, an appropriate business structure should be in place and ordinary business operations should have begun. Ordinary business operations are systematic, organised and commercially oriented activities carried out with continuity and a genuine profit-making purpose. They are carried out in a manner typical of businesses in that industry. As to what the business structure will consist of and its size, will be a question of fact and degree and will depend on the nature of the business activity. | Detailed Reasoning - Commencement of Business Operations: The actual date of commencement of a business is a question of fact ( Goodman Fielder Wattie Ltd v FC of T 91 ATC 4438 at 4446; (1991) 22 ATR 26 at 35). As noted by Brennan J in Inglis v Federal Commissioner of Taxation (1979) 10 ATR 493; 80 ATC 4001, the level of activity is important in deciding whether a business is being carried on. Brennan J stated at ATC 4004-4005; ATR 496-497 that: The carrying on of a business is not a matter merely of intention. It is a matter of activity. Yet the degree of activity which is requisite to the carrying on of a business varies according to the circumstances in which the supposed business is being conducted. Brennan J further stated: At the end of the day, the extent of activity determines whether the business is being carried on. That is a question of fact and degree.' (emphasis added) Based on the decision in the Calkin case, 2 different types of activity are relevant: acquisition of the minimum level of business assets and the commencement of business operations. Both are necessary to be able to conclude that a business has commenced. For the purpose of determining whether an activity is the carrying on of a business the facts of each case must be examined having regard to relevant indicators that have been established through case law. Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production (TR 97/11) lists the general indicators of carrying on a business and although the ruling is in respect of primary productions the general indicators can be applied to any industry. These general indicators are: • whether the activity has a significant commercial purpose or character, • whether the taxpayer has more than just an intention to engage in business, • whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity, • whether there is repetition and regularity of the activity, • whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade, • whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit, • the size or scale or permanency of the activity, and • whether the activity is better described as a hobby, a form of recreation or a sporting activity Of these indicators, paragraph 16 of TR 97/11 says when considering whether a person is carrying on a business, all of the indicators must be weighed up. However, in doing so, equal weighting may not be given to each indicator. Whether a business is carried on depends on the general impression gained and whether it has a commercial flavour or character. In most cases, the greatest weighting is given to the repetition and regularity of the activities followed by organisation in a business-like manner as a supportive indicator. Whether the activity has a significant commercial purpose or character This indicator requires that you be able to show that the activity is carried on for commercial reasons and in a commercially viable manner. You need to be able to show that the interaction between the size and scale of the activity, the repetition and regularity and the intention and prospect of profit are sufficient to conclude that the activity has a significant commercial purpose. Whether the taxpayer has more than an intention to engage in business Relevantly, this indicator is particularly related to whether the activity is preparatory or preliminary to the ultimate activity and whether there is an intention to make a profit. TR 97/11outlines that expenses may be incurred before commencing a particular business. For example, expenses associated with experimental or pilot activities which do not amount to a business and do not result in any assessable income being produced are not deductible (paragraph 41 of TR 97/11). Paragraph 45 of TR 97/11 and paragraph 46 of TR 97/11 provides an example of preparatory activities where between 1980 and 1985, Lindsay and Loretta were not carrying on a business, as their activities were considered preparatory rather than indicative of an active business. Although they had a clear intention to engage in cattle farming, they acknowledged that significant groundwork such as land clearing, infrastructure development and building construction was necessary before stocking cattle. Crucially, there was no income, no livestock, and no regular or cattle-related activity during this period. The business only commenced in 1986, when the property was stocked with 100 cattle, marking the start of actual business operations. In Kevin Lee v Commissioner of Taxation [2005]AATA 865 (Lee case), Lee incurred significant expenses attending 2 financial training courses and purchasing related software, with the intention of improving their investment knowledge and future income potential. The Tribunal found that the expenditure on the courses and software was preparatory in nature. Lee compared themselves to a student investing in education to equip themselves for future employment. As such the tribunal agreed the comparison was appropriate. These costs were considered capital expenses and incurred to prepare Lee for a potential future income-generating activity. The cost to an employee of obtaining employment does not form an outgoing incurred in the course of earning the wages payable in the employment. The expenditure was incurred in getting, not in doing, work as an employee. FC of T v. Maddelena 71 ATC 4161 applied ( Case F71 , 74 ATC 424). Whether there is a purpose of profit as well as a prospect of profit from the activity The carrying on of a business is usually such that the activities are engaged in for the purpose of profit on a continuous and repetitive basis. The taxpayer must be able to show how the activity can make a profit. Whether there is repetition and regularity of the activity One of the key factors to consider whether a business is being carried on is the repetition and regularity of the activities. The size, scale and permanency of the activity As stated earlier, 2 different types of activity are relevant: acquisition of the minimum level of business assets and the commencement of business operations. Whether the business is of the same kind that is being carried on in a similar manner to that of the ordinary trade in that line of business Activities are more likely to be carrying on a business where they are carried on in a similar manner to other businesses in the industry. A trader would typically be required to complete an evaluation phase, using stimulated funds before granting access to funded accounts. This process involves strict risk management rules, repeated attempts if necessary and often significant time and financial investment. Eventually, the trader would pass the evaluation phase and begin trading with funded accounts, generating income and profits Whether the activity is planned, organised and carried out in a business-like manner such that it is directed at making a profit A business plan normally, involves, setting profit targets, establishing a budget, maintaining operations on a consistent basis, retaining and pursuing profitable activities, discontinuing unprofitable activities and keeping appropriate business records. Whether the activity would be better described as a hobby, recreational or sporting activity When an activity amounts to no more than a hobby, recreational or sporting activity, it is less likely to be considered a business activity. This indicator is not relevant to your circumstances. | Detailed Reasoning - Application to your circumstances: In assessing whether your activity constitutes carrying on a business, we have applied the indicators set out in TR 97/11 and TR 2001/14 and case law below. Although you provided a business plan and intended to make a profit, you have not demonstrated a clear strategy to pass the evaluation phase. Previous attempts since July 20XX have been unsuccessful and no income has been earned. The activity cannot generate assessable income until a funded account is secured and you are not trading with your own capital. Therefore, your activity lacks a significant commercial purpose. Similar to the Lee case, the evaluation phase is improving your trading knowledge and skill to increase your future income potential. The evaluation phase expenditure is incurred to be able to commence gaining assessable income from the activity rather than from doing/carrying on the activity to gain assessable income. This situation can also be likened to the cost to an employee of obtaining employment where the expenditure is incurred in getting, not doing the work. The evaluation phase is preparatory and does not produce assessable income. While we accept that you undertook multiple evaluation phase attempts and simulated transactions with regularity and committed time daily, these activities were preparatory and did not result in income. While you maintained records and future projections, the activity lacked commercial character. No income-producing assets exist and the activity remains preliminary. There is no clear plan for achieving profitability. The activity was minimal in size and scale. You have not secured a funded account and you are not trading with real capital. After weighing up the indicators of carrying on a business outlined in TR 97/11 and objective facts surrounding your case, although you intended to engage in business, it is considered that you were not carrying on a business in the 20XX-XX income year, because during the relevant period, your activities did not have a significant commercial purpose or character, no prospect of profit and minimal size and scale and your activities were not carried on in a businesslike manner. While you made a decision to engage in business and provided a business plan, you have not acquired any income-producing assets or capital necessary to carry on the activity. Further, you have not commenced operations capable of generating assessable income, as the evaluation phase is preparatory and does not constitute the commencement of business. Based on these factors, your activity has not commenced as a business under TR 2001/14. Division 35 of the ITAA 1997 is not intended to apply to activities that do not constitute carrying on a business. As your activities did not amount to carrying on a business in the 20XX-XX income year, the Commissioner will not exercise their discretion under paragraph 35-55(1)(a) of the ITAA 1997 or paragraph 35-55(1)(b) of the ITAA 1997 to allow you to offset any losses from your business activity against your other income in the calculation of your taxable income for the relevant income year.