Private ruling: non-commercial losses
Published: February 2012
Ruling period: Year ended 30 June 2011
Date scheme commenced: 1 January 2009

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 2010-11 financial years? | A1: 

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. On 1 January 20XX you commenced business as a share and options trader. You made over $XX,000 in assessable income in the 2009-10 financial year. Your assessable income for the 2010-11 financial year was less than $XX,000. In the 2010-11 financial year you decreased your trading activities and spent time developing your skills and building a money management plan. In respect of this, you stated in your application that 'I took a bit of a back seat on the trading front, which is why I was just shy of the min $XX,000.' Your income for non-commercial loss purposes is less than $XX0,000.

Relevant legislative provisions: Income Tax Assessment Act 1997 Paragraph 35-55(1)(b)

Reasons for decision: Summary: For the 2009-10 and later financial 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 · the Commissioner exercises his discretion. In your situation, none of the exceptions would apply and although you satisfy the income requirement, you do not meet any of the four tests in the years of income under consideration. Your 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 the business activity that there will be a period of time before it can be expected to pass one of the four tests · there is an objective expectation your business activity will produce a tax profit or meet one of the four tests within a 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 one of the four tests being passed. The note to paragraph 35-55(1)(b) of the ITAA 1997 states: Note: This paragraph 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. Further examples that fall into this category are forestry, viticulture and certain horticultural activities. The note above does 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, because of the small scale on which it was started, because a client base is being built up or because of the particular way in which you chose to operate your business. You have not provided any evidence to suggest that there is a lead time between the commencement of your activity and the production of any assessable income. Your business was able to generate income in excess of $20,000 in your first financial year in operation. Therefore we do not consider that there is anything inherent or innate in the nature of your business activity that it has not yet been able to satisfy one of the tests. Your activity is of a type that is able to produce assessable income quite soon after its commencement, as the income in your first year of trading demonstrates. The reason for your failure to meet the assessable income test was due to the scaling back of your trading activities. Therefore, the Commissioner is unable to exercise the 'lead time' discretion in paragraph 35-55(1)(b) of the ITAA 1997 with respect to the 2010-11 financial year.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.