Private ruling: Non-Commercial Losses - Lead time
Date of advice: 25 March 2026
Published: 18 May 2026
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

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 20XX-XX financial year? | A1: No.

Relevant facts and circumstances: You operate a business which provides retail products. From XX 20XX, you undertook steps to establish and commence the business. These steps included: • product development • sourcing suppliers • packaging research • branding • building an online presence • setting up operational systems The initial business setup phase spanned several months, during which you undertook a number of activities including: • testing and refining multiple products and sampling a broad range of packaging options. • liaising with suppliers who imposed strict minimum order quantities and had long production times. • designing and refining your branding and overall product presentation. • coordinating mass-production timelines and overseas shipping. • establishing your website, fulfilment workflows and compliance processes. • ensuring that all components met sustainability requirements which significantly extended the research, sourcing, and sampling timelines. You experienced delays in obtaining suitable packaging that met both functional and sustainability requirements. Additional delays arose due to rising material costs, the challenge of securing sustainable, cost-effective supply options and long shipping times.

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)(c)

Reasons for decision: Summary: The information provided does not show that the delay in producing assessable income occurred "because of the nature" of the activity but rather due to choices made in establishing and operating it. As these factors are specific to how the activity was carried on and not inherent to the business activity itself the requirement in paragraph 35-55(1)(c) is not met. The Commissioner therefore will not exercise the discretion and the loss must be deferred to a future income year. | Detailed Reasoning - Detailed reasoning: The general rule in subsection 35-10(2) of the ITAA 1997 prevents losses from a non-commercial business activity carried on by an individual taxpayer from being offset against other assessable income in the year 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)); or • an exception in subsection 35-10(4) applies; or • the Commissioner exercises the discretion in subsection 35-55(1) for the business activity for one or more income years. You have applied for the Commissioner to exercise the discretion in paragraph 35-55(1)(c) of the ITAA 1997 to allow your business loss to be offset against your other income for the 2024-25 financial year. | Detailed Reasoning - Lead Time: Under paragraph 35-55(1)(c) of the ITAA 1997, the Commissioner's discretion can be exercised where: • the business activity has started to be carried on but because of its nature it has not produced, or will not produce, assessable income greater than the deduction attributable to it; and • 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 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 where there is an inherent period of time between the commencement of the activity and the production of assessable income greater than the deductions attributable to it, for example: forestry, viticulture and certain horticultural activities. The note following paragraph 35-55(1)(c) of the ITAA 1997 does not support any view that the discretion should be exercised for any start-up activity that is yet to produce assessable income greater than the deductions attributable to it simply because a client base is being built up. The Commissioner's approach to exercising the discretion under section 35-55 of the ITAA 1997 is outlined in TR 2007/6 Income Tax: non-commercial losses: Commissioner's discretion . TR 2007/6 states that the lead time discretion provided by 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 a tax profit from being made. For the Commissioner to exercise the discretion you must be able to show that the reason your business activity is not making a tax profit is inherent to the nature of the business and is not peculiar to an individual's circumstances. The ruling TR 2007/6 states that 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 Federal Commissioner of Taxation v Eskandari (2004) 54 ATR 695 , the Federal Court considered whether early losses arose from the nature of the activity or from the taxpayer's own choices. The Court held that only delays caused by an inherent characteristic shared by activities of that kind can be said to occur "because of its nature." Where the absence of profit stems from taxpayer-specific decisions, such as the scale or manner in which the activity is carried on, the requirement is not met. | Detailed Reasoning - Application to your circumstances: While the activity is treated as having commenced, the information does not show that the lack of an income is "because of its nature" as required under paragraph 35-55(1)(c) of the ITAA 1997. TR 2007/6 explains that this requirement is only met where the inability to produce a profit arises from "some inherent characteristic that the taxpayer's business activity has in common with other business activities of that type" rather than from circumstances peculiar to the operator. In this case, the steps taken of product development, sourcing materials, branding, packaging research, establishing systems and coordinating production are all reflective of the choices made in establishing and preparing the activity, they do not indicate the existence of any inherent characteristic that would prevent such an activity from producing assessable income during the relevant period. Consistent with TR 2007/6, where the delay in generating income is attributable to factors specific to how the activity has been carried on and not to the nature of the business activity itself, the requirement in paragraph 35-55(1)(c) of the ITAA 1997 is not satisfied. | Detailed Reasoning - Conclusion: After considering all relevant factors, it is the Commissioner's view that the failure of the activity to meet a test is not the result of any lead-time inherent to the nature of the business activity. We do not consider that there is anything inherent or innate in the nature of your activity that results in a period of time between when the activity commences and when it first produces assessable income. In particular, we think retail activity is an activity that is able to produce assessable income quite soon after its commencement. The material shows that the delay in generating assessable income arose from decisions you made in the establishment and operation of the activity, rather than from an inherent characteristic common to activities of this type. As the requirement in paragraph 35-55(1)(c) of the ITAA 1997 is not satisfied, the Commissioner will not exercise the discretion. Accordingly, you are not entitled to offset the loss against your other income, and the loss must be deferred to a future income year to be applied when the activity next produces assessable income.