Private ruling: Non-commercial losses
Published: August 2014
Ruling period: Year ended 30 June 2014 | Year ending 30 June 2015 | Year ending 30 June 2016 | Year ending 30 June 2017 | Year ending 30 June 2018 | Year ending 30 June 2019 | Year ending 30 June 2020 | Year ending 30 June 2021
Date scheme commenced: 1 July 2013

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 business in your calculation of taxable income for the 2013-14 to 2020-21 financial years? | A1: No

Relevant facts and circumstances: You acquired a business. The property that the business is operated from was acquired in a run-down state. You satisfy the income requirement set out in subsection 35-10(2E) of the ITAA 1997. Your projected income and expenditure shows that you expect the business to produce assessable income of more than $20,000 by the 2020-21 income year and to produce a tax profit by the 2024-25 income 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; or • the Commissioner exercises his discretion. In your situation, none of the exceptions would apply and although you satisfy the income requirement, based on your projected profits you will not meet any of the four tests until the 2020-21 income year. The relevant discretion may be exercised for the income years 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. For the Commissioner to exercise the discretion you must be able to show that the reason your business activity failed to meet any of the tests or is producing a loss is inherent to the nature of the business and is not peculiar to your situation. For example, the discretion will not be available where the failure to make a profit or pass a test is for reasons other than the nature of the business such as, a consequence of starting out on a small scale, the hours worked or the need to build a client base. In your case, you acquired the property in a run-down state. You anticipate that the business will produce assessable income of more than $20,000 in the 2020-21 income year and a tax profit in the 2024-25 income year. We consider that the reason your business will not pass any of the business tests until the 2020-21 income year is due, in part, to your decision to acquire the property in a run-down state and is not solely due to the factors inherent to the nature of the business. Therefore, the Commissioner will not exercise the discretion in paragraph 35-55(1)(b) of the ITAA 1997 to allow you to include any losses from your business in your calculation of taxable income for the 2013-14 to 2020-21 financial years.