Private ruling: Business losses
Date of advice: 21 November 2016
Published: March 2017
Ruling period: Year ended 30 June 20YY
Date scheme commenced: 1 July 20XX

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 the calculation of your taxable income for the 20XX-YY financial year? | A1: No.

Relevant facts and circumstances: You run a business. You started to set up the business. You purchased equipment and started advertising in the 20XX-YY financial year. You started the income earning activities of the business in the 20YY-ZZ financial year. You estimate an overall profit for the 20YY-ZZ financial year. Your income for non-commercial loss purposes is less than $250,000. You did not pass any of the four tests under Division 35 of the ITAA 1997.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 35-10(1) | Income Tax Assessment Act 1997 subsection 35-10(2) | Income Tax Assessment Act 1997 subsection 35-10(2E) | Income Tax Assessment Act 1997 paragraph 35-55(1)(b)

Reasons for decision: Summary: For the 2009-10 and later income years, Division 35 of the ITAA 1997 will apply to defer a non-commercial loss from a business activity unless: ● you satisfy the income requirement and you pass one of the four tests, ● the exceptions apply, or ● the Commissioner exercises the discretion In your situation, you satisfy the income requirement however you did not pass one of the four tests and you do not come under any of the exceptions. The relevant discretion is contained in paragraph 35-55(1)(b) of the ITAA 1997. This discretion may be exercised where: (a) the business activity has started to be carried on, and for the relevant years: (i) because of its nature it has not satisfied, or will not satisfy, one of the tests set out in Division 35 of the ITAA 1997, and (ii) there is an objective expectation that the business activity will either meet one of the tests or produce a taxation profit within a period that is commercially viable for the industry concerned. The note to this paragraph states that it 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. This is borne out further by paragraph 1.51 of the Explanatory Memorandum for the New Business Tax System (Integrity Measures) Act 2000 , which states: This arm [paragraph 35-55(1)(b)] of the safeguard discretion will ensure that the loss deferral rule in section 35-10 does not adversely impact on taxpayers who have commenced to carry on activities which by their nature require a number of years to produce assessable income. Examples of activities which would fall into this category are forestry, viticulture and certain horticultural activities. The note and the passage cited above do 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. Those sorts of constraints on being able to satisfy that test are far removed from the specific ones referred to in the note and the Explanatory Memorandum. In your case you did not satisfy any of the four tests under Division 35 of the ITAA 1997 in 20XX-YY financial year. You did not actually start your business activities until the 20YY-ZZ financial year. That is during the 20XX-YY financial year you did not receive any income from your business. We do not consider that there is anything inherent or innate in the nature of your activity that prevents it making a profit or satisfying one of the tests. Your activity is of a type that is able to produce assessable income quite soon after its commencement. The fact that you were still setting up and not actually providing services in the 20XX-YY financial year prevented you from meeting the assessable income test. Such a situation is different to the examples referred to in the note and the Explanatory Memorandum. In conclusion, the requirements of paragraph 35-55(1)(b) of the ITAA 1997 have not been met. Consequently, you are not eligible for the Commissioner's discretion under paragraph 35-55(1)(b) of the ITAA 1997 for the 20XX-YY financial year. Therefore the Commissioner will not exercise the discretion to allow you to include any losses from your business activities in your calculation of taxable income for the 20XX-YY financial years.