Private ruling: Non-commercial business losses and the Commissioner's discretion
Published: December 2014
Ruling period: Year ended 30 June 2014 | Year ended 30 June 2015
Date scheme commenced: 1 December 2013

Ruling: Q1: Will the Commissioner exercise the discretion in paragraph 35-55(1)(b) of the ITAA 1997 to allow you to include any losses from your business activity in your calculation of taxable income for the 2013-14 to 2014-15 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. You carry on a business (the business). The business commenced in 20XX. You advised the following in respect to the business: • you work with an overseas manufacturer to develop products according to a particular specifications • developing products that meet your specifications takes a considerable time because of their overseas location and lengthy manufacturing process • considerable time has been taken for the marketing and promotion of the products to wholesalers, which could only be done after the manufacturing process was completed • you have made wholesale sales of one product through stores • you have advised that you expect to pass the $20,000 assessable income test by the 20XX-XX financial year.

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)(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. 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 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 any income. For the discretion to be applied there needs to be an inherent or innate feature of the activity resulting in an inability to produce any 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, simply because of the small scale on which it was started, or because a client base or reputation is being built up. We do not consider that there is a lead time between the commencement of your activity and the production of any assessable income. Further, there is nothing inherent or innate in the nature of your business activity that has prevented it from satisfying any of the tests. Your activity is of a type that is able to produce assessable income quite soon after its commencement, which is evidenced by the fact that you have made wholesale sales of one product through stores. Consequently the Commissioner is unable to exercise his discretion in the 2013-14 and 2014-15 financial years.