Private ruling: Commissioner's discretion - Non-commercial losses
Published: May 2014
Ruling period: Year ended 30 June 2013.

Ruling: Question and answer | Will the Commissioner exercise the discretion in paragraph 35-55(1)(a) of the Income Tax Assessment Act 1997 to allow you to include any losses from your primary production business activity in your calculation of taxable income for the income year? | No.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. The arrangement that is the subject of the private ruling is described below. This description is based on the following document. This document forms part of and is to be read with this description. The relevant document includes: • The application for private ruling was received. You did not satisfy the income requirement set out in subsection 35-10(2E) of the Income Tax Assessment Act 1997 and earned $250,000.00 or more for the financial year. You carry on a business activity which made a profit in the income year it commenced. Your business activity made a loss in the following income year. The business activity is primarily concerned with future/options markets. You have been in business for only a few years. The main inherent feature of investing in the future/options is risk and the variability of returns due to the fluctuations in the exchange and other market rates. You trade in products which are complex; it has taken time for you to learn about the market and gain experience to better understand the business' environment to develop models and systems/programs to ensure the profitability and sustainability of the business activity. You intend to return to profit in the coming income 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)(a)

Reasons for decision: Summary: For the 2009-10 and later income years, Division 35 of the Income Tax Assessment Act 1997 (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 his discretion. In your situation, you do not satisfy the income requirement (that is your taxable income, reportable fringe benefits and reportable superannuation contributions but excluding your business losses, exceeds $250,000) and you do not come under any of the exceptions. Your business 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 your business activity that there will be a period before a tax profit can be produced • there is an objective expectation your business activity will produce a tax profit within the 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 you from making a profit. Taxation Ruling TR 2007/6 states that the 'lead time' discretion provided for 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. The 'lead time' discretion is not available once a business activity has made a tax profit. This is because it is then clear that there is nothing inherent in the nature of the business activity that prevents a tax profit from being made. In your case it is apparent that your business did not have an initial period where a tax profit could not be made due to the nature of the business activity. The business made a profit in the year it commenced. Further, the nature of the business activity and its fluctuations, irrespective of how abnormal, are considered to be normal risks associated with the running of a business of this nature. Therefore, the Commissioner is unable to exercise the 'lead time' discretion in paragraph 35-55(1)(c) of the ITAA 1997 with respect to the 2012-13 income year.

Does Part IVA apply to this ruling?: Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable. | We have not considered the application of Part IVA to the arrangement you asked us to rule on.