Private ruling: Non-commercial losses
Date of advice: 23 November 2017
Published: April 2018
Ruling period: Year ended 30 June 2017
Date scheme commenced: 1 July 2016

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 activity in your calculation of taxable income for the 2016-17 financial year? | A1: No

Relevant facts and circumstances: Your income for non-commercial loss purposes for the 2016-17 financial year is less than $250,000. You are carrying on a business which commenced in mid-2016. Having obtained an ABN, you set up a social media page, created a logo, registered a domain name, created a website and organised professional indemnity and public liability insurance. You charge $xx per appointment. You have completed alignments on a number of different clients and have completed many complimentary sessions to clients in order to spread word of mouth and encourage good will. There were four months in 2017 that you were not working as you were preparing for a trip. You are expanding into the ‘cold’ market, by approaching local health food stores, natural therapy businesses and centres that offered health services to spread awareness. You have provided your business plan and projected cash flow statement for the 2015-16 to 2017-18 financial years. You predict that you will make a profit in the 2017-18 financial year and expect to make at least $20,000 in assessable income from the 2018-19 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 meet 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. 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. The note to section 35-55 of the ITAA 1997 states that the 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. For the discretion to be applied there needs to be an inherent or innate feature of the activity resulting in an inability to produce 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 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. Your business was able to generate income from professional fees in your first financial year in operation. Therefore we do not consider that there is anything inherent or innate in the nature of your business activity that it has not yet been able to satisfy one of the tests. Your activity is of a type that is able to produce assessable income quite soon after its commencement, as the professional fees from your business activity have demonstrated. Consequently the Commissioner will not exercise his discretion for the 2016-17 financial year.