Private ruling: Non-commercial losses - lead time
Date of advice: 29 October 2025
Published: 15 December 2025
Ruling period: Year Ending 30 June 20XX | Year Ending 30 June 20XX | Year Ending 30 June 20XX | Year Ending 30 June 20XX | Year Ending 30 June 20XX | Year Ending 30 June 20XX | Year Ending 30 June 20XX
Date scheme commenced: 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 activity in your calculation of taxable income for the 20XX-XX to 20XX-XX financial years? | A1: Yes.

Relevant facts and circumstances: You satisfy the less than $250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997 in the 20XX-XX to 20XX-XX financial years. You will be carrying on a xxx farming business at the Property beginning in the 20XX-XX financial year. You purchased the Property in 20XX. You initially used the Property for carrying on a xxx. The Property has now undergone redevelopment as of July 20XX for you to carry on a xxx farm. You have been required to remove the xxx and install a new irrigation infrastructure, which has required time. The size of the Property is Xm2, where Xm2 was used as a xxx area and Xm2 was used as a personal residence. Once the xxx farming activity commences, a similar square meterage respectively will be used as a xxx farming area and as a personal residence. You have ordered X xxx trees. You will commence business operations of a xxx farm in the 20XX-XX financial year and will plant the xxx trees in October 20XX after receiving the tree delivery from the supplier. You expect to see your first xxx after approximately X years. You expect to produce half a crop within approximately X years. You expect to produce a full crop within approximately X years. You have provided independent evidence that attests: You won't see your first xxx tree until about year five (5). It will take about 7 - 8 years before you receive a good yield of xxx You intend to produce at least $X assessable income and make a tax profit in the 20XX-XX financial year.

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: Having regard to your full circumstances, it is accepted that it is the nature of the business activity that has prevented one of the 4 tests being passed. It is also accepted that you will pass one of the 4 tests or make a tax profit within the commercially viable period for your industry. Consequently, the Commissioner will exercise their discretion in the 20XX-XX to 20XX-XX financial years. | Detailed Reasoning - Detailed reasoning: Division 35 of the ITAA 1997 prevents losses from a non-commercial business activity carried out by an individual taxpayer (alone or in partnership) from being offset against other assessable income in the year in which the loss is incurred, unless: • the individual meets the income requirement and the business activity satisfies one of the 4 stipulated tests (paragraph 35-10(1)(a) of the ITAA 1997): i. the assessable income test, ii. the profits test, iii. he real property test, or iv. other assets test. • an exception in subsection 35-10(4) of the ITAA 1997 applies: - the loss is from a primary production business and the assessable income from other sources that do not relate to that business activity is less than $40,000, or - the loss is from a professional arts business and the assessable income from other sources that do not relate to that business activity 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. In your situation, none of the exceptions would apply and although you satisfy the income requirement, you do not meet any of the 4 tests in the years under consideration. Your business losses are therefore subject to the deferral rule, unless the Commissioner exercises their discretion. You have requested the Commissioner to exercise their discretion under paragraph 35-55(1)(b) of the ITAA 1997 in the 20XX-XX to 20XX-XX financial years. Under paragraph 35-55(1)(b) of the ITAA 1997, the Commissioner's discretion can be exercised where: i. the business activity has started to be carried on but because of its nature, it has not satisfied or will not satisfy one of the 4 tests, and ii. there is an objective expectation that within a period that is commercially viable for the industry concerned, the activity will meet one of the tests or will produce assessable income for an income year greater than the deductions attributable to it for that year. This discretion is intended to cover a business activity that have a lead time between the commencement of the activity and the production of any assessable income. The Commissioner's approach to exercising the discretion under section 35-55 of the ITAA 1997 is outlined in Taxation Ruling TR 2007/6 Income tax: non-commercial losses: Commissioner's discretion (TR 2007/6). TR 2007/6 states that the lead time discretion provided by paragraph 35-55(1)(b) of the ITAA 1997 and paragraph 35-55(1)(c) of the ITAA 1997 is available for a business activity if there is an initial period from when the activity commenced where the nature of the activity prevents one of the 4 tests from being met (paragraph 35-55(1)(b) of the ITAA 1997) or a tax profit from being made (paragraph 35-55(1)(c) of the ITAA 1997). For the Commissioner to exercise the discretion you must be able to show that the reason your business activity is not satisfying the assessable income test (which is the test relied on in the ruling application) is inherent to the nature of the business and is not peculiar to your situation. The lead time discretion is not intended to be available where the failure to make a profit or to meet a test is for reasons other than the nature of the business, such as, a consequence of starting out small and needing to build up a client base or business choices made by an individual (for example, the size and scale of the activity, the hours of operation and/or the level of debt funding) that are not consistent with the ordinary or accepted practice in the industry concerned. In your situation, you will commence your xxx farming business activity in the 20XX-XX financial year. During the period of the 20XX-XX to 20XX-XX financial years, you expect to incur losses from your business activity. This period concludes in the X year of operation. You have provided independent evidence where it is stated: You won't see your first xxx tree until about year five (5). It will take about 7 - 8 years before you receive a good yield of xxx. You have therefore indicated you are unable to generate income from your xxx farming activity until at least after 7 years of production, once you have produced a reasonable yield for xxx to be sold. This is also indicated by your profit and loss forecast for the 20XX-XX to 20XX-XX financial years. It is accepted that it is within the nature of your business activity to require a lead time before the activity. There is also an objective expectation this lead time is within a period which is commercially viable for your industry. There is nothing to suggest the delay in making a profit or meeting one of the 4 tests was for reasons other than the nature of the business activity. Having regard to your full circumstances, it is accepted that it is in the nature of the business activity that has prevented you from passing the assessable income test. Therefore, the Commissioner will exercise their discretion under paragraph 35-55(1)(b) of the ITAA 1997 for the years in question.