Private ruling: Non-commercial losses
Published: September 2012
Ruling period: Year ended 30 June 2011 | Year ended 30 June 2012
Date scheme commenced: 1 July 2010

Ruling: Q1: Will the Commissioner exercise the discretion in section 35-55 of the ITAA 1997 to allow you to include any losses from your business activity in your calculation of taxable income for the 2010-11 to 2011-12 financial years? | A1: No

Relevant facts and circumstances: You satisfy the <$250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997. In 200X you undertook the establishment of a business. You undertook research into the enterprise by consulting with manufacturers in terms of costing, setup etcetera. You incurred initial expenditure on purchases. You have also incurred expenditure on radio and newspaper advertising, t-shirts and business cards. You made an overall loss in the 2010-11 financial year. You did not make $20,000 in assessable income. You had expected to derive a profit within twelve months of commencing business. This has not occurred. There is now an objective expectation that profits will be generated in two to three years.

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) | 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, or · 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 financial year(s) 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; 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. 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. 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. 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. We do not consider that there is a lead time between the commencement of your activity and the production of any assessable income. | Detailed Reasoning - Special circumstances: The relevant discretion may also be exercised for the financial year in question where your business activity is affected by special circumstances outside your control. 'Special circumstances' are those circumstances which are sufficiently different to distinguish them from the circumstances that occur in the normal course of conducting a business activity, including drought, flood, bushfire or some other natural disaster. For individuals who satisfy the income requirement, special circumstances are those which have materially affected their business activity, causing it not to meet any of the four tests. In this context, the Commissioner may exercise this discretion for the financial year(s) in question where, but for the special circumstances the activity would have passed at least one of the tests. The question that must be addressed is whether the situation you have described is considered special circumstances. It is not accepted that these circumstances constitute special circumstances in the way this term is used in the legislation. We believe these occurrences to be standard risks of carrying out a business in your industry and not unusual or out of the ordinary. As neither or the relevant discretions apply to your enterprise the Commissioner will not exercise his discretion under section 35-55 of the ITAA 1997 for the years in question.

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.