Private ruling: Non-commercial loss discretion - lead time - <250k
Date of advice: 5 December 2025
Published: 27 January 2026
Ruling period: Year ended 30 June 2025
Date scheme commenced: 1 July 2024

Ruling: Q1: Will the Commissioner exercise discretion under section 35-55(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow the business loss from your business in the 2025 financial year to be offset against your other income? | A1: No.

Relevant facts and circumstances: You satisfy the <$250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997. You commenced a business in December 2024 with one vending machine. In its first six months of operation (to 30 June 2025), the machine generated $xxx in turnover. The business plan for the next x years is to expand through acquisition of a number of machines across education and commercial sites. Projected turnover is expected to reach a minimum of $20,000 assessable income by the 20XX income year. You provided key milestones for your activity and the actual and projected financial information for your activity. Each machine is expected to deliver $xxx to $xxx annually. Expenses reflect stock purchases, servicing and operations with no further one-off setup costs anticipated. The business is projected to achieve profitability within x years and sustain steady growth. Independent evidence attests to a commercially viable period for the industry was provided.

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

Reasons for decision: Summary: Division 35 of the ITAA 1997 prevents losses from a non-commercial business activity carried out by an individual (alone or in partnership) from being offset against other assessable income in the year in which the loss incurred, unless: You have requested the Commissioner to exercise his discretion under paragraph 35-55(1)(b) of the ITAA 1997 in the 2025 financial year. Under paragraph 35-55(1)(b) of the ITAA 1997, the Commissioner's discretion can be exercised where: Taxation Ruling TR 2007/6 Income tax: non-commercial business losses: Commissioner's discretion 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 1 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 making a tax profit is inherent to the nature of the business and is not peculiar to your situation. TR 2007/6 explains that Example 1.6 of the EM provides an example of such an activity. In this example, the Commissioner exercises the discretion for an activity that was established as a commercially viable operation and is expected to be highly profitable. However, as it is an agricultural activity that requires time for growth and harvesting before becoming profitable it cannot satisfy any of the tests, (specifically, either the Assessable income test, or the Profits test) until such time as the impact of that inherent restriction passes. Therefore, the inherent characteristics may be present for an initial period from the time the business activity commences. After that initial period has elapsed, which can be several years, the inherent characteristics may cease to be the cause of business activities of the type in question being unable to satisfy any of the statutory tests. The consequences of business choices made by an individual (for example, the hours of operation, the size or scale of the activity, and the level of debt funding) are not inherent characteristics of a business activity and would not result in the requirements of subparagraphs 35-55(1)(b)(i) and (c)(i) being met. Example 9 in TR 2007/6 is about business choice states: Andrew started a clock repair business in the 2001 income year. Andrew was new to the region and the industry and had yet to establish his clientele. Andrew had intended to operate his business full time but as his funding was very limited, he chose to continue with his part time employment to support himself and only worked on his business activity in his spare time. Andrew's premises are in the back of a small arcade and he only opens for business on weekends while the other shops in the arcade are open every day of the week. The arcade is not in an area that attracts business on weekends. Andrew cannot afford advertising and has so few clients that he is unable to cover his expenses and has made losses each year. Andrew's business has yet to satisfy one of the four tests. Other businesses of this type are able to satisfy a test in the first year of operation. The inability of Andrew's business activity to satisfy any of the four tests is due to his personal business choices as to hours of business, location and advertising, not any inherent characteristics that affect clock repair businesses. Accordingly, the requirement of subparagraph 35-55(1)(b)(i) is not met and the Commissioner would not exercise the discretion. | Detailed Reasoning - Application to your circumstances: You commenced your vending machine business activity in the 2025 financial year. You currently have one machine but plan to expand to x or x over the next x years. The business had high expenses/start-up costs due to it being the first year of business. You expect to make a profit and meet the $20,000 assessable income test in the 20XX financial year. You are seeking the Commissioner's discretion to allow the losses from your business activity for the 2025 financial year. You have provided independent evidence in the form of an information document. In your case there is nothing outside of your business' control that would be considered inherent characteristics of a vending machine business. While we understand you have started on a small scale, one vending machine instead of multiple this is a business choice that has prevented you from making a profit. It is not accepted that the nature of your business would require lead time before the activity. It is not considered that the vending machine industry requires a taxpayer to wait a number of years to produce assessable income. Therefore, the Commissioner will not exercise their discretion under paragraph 35-55(1)(b) of the ITAA 1997 for the year in question. You will need to defer your losses for the 2025 income year.

the individual meets the income requirement (that is your taxable income, reportable fringe benefits, reportable superannuation contributions and total net investment losses, does not exceed $250,000), and the business activity satisfies one of the 4 stipulated tests (paragraph 35-10(1)(a) of the ITAA 1997), | an exception in subsection 35-10(4) of the ITAA 1997 applies (for example, the activity is a primary production or professional arts business and your assessable income from other sources 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. | 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 produce assessable income for an income year greater than the deductions attributable to it for that year.