Private ruling: non-commercial losses
Published: April 2012
Ruling period: Year ended 30 June 2011
Date scheme commenced: 6 May 2010

Ruling: Q1: Will the Commissioner exercise the discretion in paragraph 35-55(1)(c) 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 2010-11 financial year? | A1: No

Relevant facts and circumstances: You are a professional and set up a professional practise part way through the 2010-11 financial year. You did not make a profit in the 2010-11 financial year but expect to in the 2011-12 financial year. Your income for non-commercial loss purposes is over $250,000.


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 · the Commissioner exercises his discretion. In your situation, you do not satisfy the income requirement (that is, your taxable income, reportable fringe benefits and reportable superannuation contributions but excluding your business losses, exceeds $250,000) and do not come under any of the exceptions. Your business 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 your business activity that there will be a period before a tax profit can be produced · there is an objective expectation your business activity will produce a tax profit within the 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 you from making a tax profit. The note to paragraph 35-55(1)(b) of the ITAA 1997 states: Note: This paragraph 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. The type of feature contemplated by the phrase 'because of its nature', in the context in which it appears, is that referred to in the note quoted above. That is, that there is 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 make a tax profit 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. You have not provided any evidence to suggest that there is a lead time between the commencement of your activity and the production of a tax profit. Your business was able to generate income from 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 prevented you from making a tax profit in your first year of operation. Your activity is of a type that is able to produce assessable income quite soon after its commencement, as the fees from your business activity have demonstrated.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.