Private ruling: Commissioner’s discretion for non-commercial losses from a home maintenance project.
Published: February 2018
Ruling period: 1 July 2015 to 30 June 2016
Date scheme commenced: 2016

Ruling: Q1: Will the Commissioner exercise the discretion in paragraph 35-55(1)(a) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow the Taxpayer to include any losses from their business activity in their calculation of taxable income for the 2015-16 financial year? | A1: No | Q2: Will the Commissioner exercise the discretion in paragraph 35-55(1)(c) of the ITAA 1997 to allow the Taxpayer to include any losses from their business activity in their calculation of taxable income for the 2015-16 financial year? | A2: No

Relevant facts and circumstances: The Taxpayer does not satisfy the less than $250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997. The Taxpayer will provide business services focusing on home maintenance for projects up to $10,000. The commencement of the business required several start-up expenses including the purchase of a commercial vehicle, multiple tools and other equipment. Due to the tax concessions for small businesses, an immediate deduction was available as these expenses were less than $20,000. However, excluding these deductions, the business would have made a profit. The gross turnover for the period from February to 30 June 2016 was almost $27,000. The business has been strong in the current financial year with significant profit expected. Depending upon the success of the business, expansion to a franchise model is proposed.

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)©

Reasons for decision: Summary: The Commissioner’s discretion will not be exercised under subsection 35-55(1)(a) of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Special circumstances limb 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; or ● the exceptions apply; or ● the Commissioner exercises his discretion. In the Taxpayer’s situation, they do not satisfy the less than $250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997 in the year of income under consideration. However, they do meet one of the four tests being the assessable income test. As they do not meet this income requirement they cannot access any of the four tests. Further, none of the exceptions in subsection 35-10(4) of the ITAA 1997 apply. The losses are therefore subject to the deferral rule, unless the Commissioner exercises his discretion. The Commissioner’s discretion in paragraph 35-55(1)(a) of the ITAA 1997 may be exercised for a financial year where the business activity is affected by special circumstances outside the control of the operators of the business activity and the Commissioner considers that it would be unreasonable to require the loss to be deferred. ‘Special circumstances’ are those circumstances which are sufficiently different to distinguish them from the circumstances that occur in the ordinary course of conducting a business activity. Such an expression is not capable of precise or exhaustive definition, however, the Commissioner seeks to look for circumstances surrounding the activity which may be considered unusual, uncommon or exceptional; See, Re Beadle and Director General of Social Security (1984) 6 ALD 1. Paragraph 14 of the Taxation Ruling TR 2007/6 (TR 2007/6) states the special circumstances must be outside the control of the operator of the business. In the case of other events, failure for no adequate reason to adopt practices commonly used in industry to prevent or reduce the effects of special circumstances may point to the special circumstances not being outside the control of the operator. Paragraph 42 of TR 2007/6 states that: “for the exercise of the Commissioner's discretion in regard to the special circumstances limb, the business activity must be affected by special circumstances.” The Taxpayer stated that due to the nature of the business they were required to purchase a commercial vehicle, multiple tools and other equipment costing less than $20,000, which are not considered to be circumstances outside the control of the operators of the business activity or unusual, uncommon or exceptional. They stated that they were eligible for the small business tax concessions and claimed for those items and other start-up business expenses. Without the immediate claim for those items the business would have made a profit. The question that must be addressed is whether these situations listed are considered special circumstances. It is not accepted that these circumstances constitute special circumstances in the way this term is used in the legislation. Business start-up expenses are considered to be normal expenses associated with the starting up of any business. One of the most common things to expect when you are starting a business is the cost associated with the business activity. Different businesses will have different set-up costs depending on the nature of the business. The Taxpayer had expected expenses to set-up their business in addition to being eligible to access the immediate deduction for the business portion of each asset (new or second hand) costing less than $20,000. Therefore, the Commissioner considers the loss incurred due to the set-up of the business is not a special circumstance and consequently the discretion in subsection 35-55(1)(a) of the ITAA 1997 will not be exercised. They must defer the losses from this activity for the 2015-16 financial year. | Summary: The Commissioner will not exercise his discretion under subsection 35-55(1© of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Lead time limb The Commissioner’s discretion in paragraph 35-55(1)(c) of the ITAA 1997 may be exercised for a financial year where: ● you do not satisfy the income requirement; and ● because of its nature, the activity has not produced, or will not produce, assessable income greater than the deductions attributable to it; and ● there is an objective expectation, based on evidence from independent sources (where available) that, within a period that is commercially viable for the industry concerned, the activity will produce assessable income for an income year greater than the deductions attributable to it for that year (apart from the operation of subsections 35-10(2) and (2C)). The note to this paragraph states that it is: … intended to cover a business activity that has a lead 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 income. In considering the application of their circumstances under paragraph 35-55(1)(c) of the ITAA 1997 in the 2015-16 income year, they stated that they would have made a profit if it wasn’t for the immediate deduction available for the purchase of the commercial vehicle, multiple tools and other equipment costing less than $20,000. The explanatory memorandum to the legislation explains that individuals: ….must demonstrate that the reason they do not or will not make a profit is because of the nature of the business and not for some other reason which is peculiar to that individual's particular business. The individual is required to establish objectively the commercially viable period for the industry concerned. They also stated that the gross turnover in the period February to 30 June 2016 was almost $27,000 and that the business has been strong in the current financial year with significant profit expected. We do not consider that there is a lead time between the commencement of the business activity and the production of any assessable income. There was no period of time from starting the activity to when it could start producing assessable income. There is nothing inherent in the industry that will prevent you from producing assessable income or producing assessable income in excess of the deductions attributable to that business activity in a year. The activities covered in paragraph 35-55(1)(c) of the ITAA 1997 are activities that are impossible to produce assessable income because they take a period of time (lead time) to produce the outcome that is going to be sold or traded. Therefore, the Commissioner will not exercise his discretion under subsection 35-55(1)(c) of the ITAA 1997. The Taxpayer must defer the losses from this activity for the 2015-16 financial year.