Private ruling: Non-commercial business losses
Published: February 2012
Ruling period: Year ended 30 June 2010
Date scheme commenced: 1 July 2009

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 vending machine activity in the calculation of your taxable income for the 2009-10 financial year? | A1: 

Relevant facts and circumstances: You commenced a business activity in the 2008-09 financial year. The activity was located in a well established and maintained office block and warehouse. You state that you expected that the activity would generate a profit within one year of the initial installation. You incurred losses in the 2008-09 and 2009-10 financial years. You state that the business did not achieve the expected returns due to the locations of the activity. The activity in the warehouse performed well, however, the activity in the office performed well below expectations. The under performing activity was never relocated. You state that you sold the business during the 2009-10 financial year and therefore you were not able to achieve the projected profit in that year. You have not satisfied any of the four tests for non-commercial losses. Your income for non-commercial loss purposes for the 2009-10 financial year is less than $250,000.

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

Reasons for decision: Detailed Reasoning - Detailed reasoning: Non-commercial losses For the 2009-10 and later income years, Division 35 of the Income Tax Assessment Act 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 year of income under consideration. Your losses are therefore subject to the deferral rule, unless the Commissioner exercises his discretion. Commissioner's 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, and § 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. The discretion is not intended to apply in cases where the failure to make a profit, or pass one of the four tests, is for reasons other than the nature of the business activity. These reasons may include, starting out on a small scale and needing to build up a client base, or, business choices made by an individual such as; hours of operation, location, or level of debt funding. In your case, you state that the business did not achieve the expected returns due to issues with the location. Further, as the business was sold during the 2009-10 financial year, you were unable to achieve the projected profit. Based on the information provided, we consider that loss from the business activity was due to you starting out your business on a small scale, and, the location. The loss was not due to any inherent characteristics that affect these business activities. In addition, the business financials indicate that the activity would also have been unlikely to pass one of the four tests, or make a tax profit, even if the activity had continued on for the full financial year. Therefore, 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, or a tax profit being made. As such, the Commissioner will not exercise his discretion, under paragraph 35-55(1)(b) of the ITAA 1997, to allow you to deduct the loss in the 2009-10 financial year. Accordingly, under Division 35 of the ITAA 1997, your loss must be deferred for 2009-10 financial year.

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