Private ruling: Commissioner's discretion - non-commercial losses
Date of advice: 27 October 2022
Published: 9 January 2023
Ruling period: year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Will the Commissioner exercise his discretion to allow you to include any losses from your catering business in the calculation of your taxable income for the 20XX income year? | A1: No. For Division 35 of the Income Tax Assessment Act 1997 (ITAA 1997) to apply, you must be carrying on a business.

Relevant facts and circumstances: You are seeking the Commissioner's discretion on the basis of special circumstances for the 20XX income year. Your business income for non-commercial loss purposes was less than $XXX. You did not pass any of the four tests for non-commercial losses. As per received lodgements reviewed in ATO systems, your business activity commenced in the 20XX income year and upon analysing ATO systems has never produced a profit. In early 20XX you were diagnosed with health issues, so you spent most of 20XX and 20XX undergoing treatment. You still managed to earn over $XX in 20XX despite being affected by your health issues. The business activity came to a halt in mid-20XX as your doctor advised your health was in a critical stage. Your plan was to recommence business activities but in early 20XX you were told your health issues had worsened. We requested profit and loss statements for the 20XX and 20XX income years. You provided a profit and loss statement for the 20XX income year, which shows total income of less than $XX and a net loss of almost $XXX. A profit and loss statement for the 20XX income year was not provided. The reasons for not completing and providing a profit and loss statement for the 20XX income year were: • Because your earnings were solely PAYG income. • If the losses from the 20XX income year were applied, your income would be below the threshold for any tax to be paid in the 20XX income year.

Relevant legislative provisions: Income Tax Assessment Act1997 Division 35

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. However, for this division to apply, your activity should be carried on as a business. Paragraph 55 in Taxation Ruling TR 2001/14 discusses "ceasing to carry on a *business activity and states: "In some cases an individual taxpayer's circumstances may change leaving issues about their ability to deduct the full extent of any loss made. Any amount deferred under subsection 35-10(2) will only be deductible in a subsequent year if the *business activity that gave rise to this amount, or one 'of a similar kind', is carried on in that subsequent year. If the activity, or one 'of a similar kind', is never carried on again, the entitlement to deduct the amount will be lost (see Example 3 at paragraphs 131 and 132 below)." | Detailed Reasoning - Example 3 - *business activity ceases: 131. Marie owns land on which she previously carried on a *business activity. Due to losses incurred in a prior income year, there is an amount of $11,000 that she could potentially deduct against assessable income earned from the *business activity, or a similar one, in a later income year under paragraph 35-10(2)(b). In the current year, however, she is not carrying on any *business activity, and it is unlikely that she will ever do so again. One fifth of the land is rented out in this year at a commercial rate to someone else. 132. Two consequences from these events should be noted: a) Marie will lose her entitlement to a potential deduction unless she carries on the same *business activity (or one 'of a similar kind') to which the amount of $11,000 relates in a later income year; and (b) Marie's rental income is unlikely, on well-established authority, to be income from the carrying on of a *business activity. Therefore, Division 35 will not apply to any loss made from the rental activity and she will not be required to defer it. However, as only part of the land is now being used for the purpose of producing assessable income, Marie will need to apportion expenses that relate to the land as a whole, e.g., interest, insurance, rates and taxes, etc. These outgoings will only be deductible to the extent to which they are incurred under section 8-1 in producing the rental income. In your case, we did not receive the requested profit and loss statement for the 20XX income year to confirm the business activity was still being carried on. You advised the business had come to a halt in mid-20XX. As such you were not carrying on a business for the 20XX financial year, and the non-commercial loss provisions will have no application.