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

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 activity in the calculation of your taxable income for the 2013-14 and 2014-15 financial years? | A1: No.

Relevant facts and circumstances: You do not satisfy the income requirement set out in subsection 35-10(2E) of the ITAA 1997. You carry on a business which made a loss in the 2013-14 financial year. You commenced business operations in the 2013-14 financial year. You intend to return a tax profit in the 2015-16 financial year. You are currently building up your client base. The basis of your projected income and expenditure is determined by the time it will take new contracts to become available. You have advised of the following reasons for the delay in the business activity becoming profitable: • potential clients need to be educated regarding the benefits that the technology provides • existing contracts are generally long term, therefore you are unable to tender for contracts until they expire, and • the length of time is necessary to educate an industry which has a long established practice of using a different method instead of the technology your business utilises.

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), and | Income Tax Assessment Act 1997 Paragraph 35-55(1)(c).

Reasons for decision: Summary: For the 2009-10 and later income 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 the discretion. In your situation, you do not satisfy the income requirement and you do not come under any of the exceptions. 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, and • there is an objective expectation your business activity will produce a tax profit within the commercially viable period for your industry. 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 assessable income greater than the deductions attributable to it. For example: forestry, viticulture and certain horticultural activities. The note following paragraph 35-55(1)(c) of the ITAA 1997 does not support any view that the discretion should be exercised for any start-up activity that is yet to produce assessable income greater than the deductions attributable to it simply because of the small scale on which it was started, or because a client base is being built up. In your case you commenced your business operations in the relevant financial year and have since proceeded to build your client base. We do not consider that there is anything inherent or innate in the nature of your business activity that prevents it making a profit. Your activity is of a type that is able to produce assessable income soon after its commencement, as demonstrated by the take up of the discounted 'demonstration rate' for your services in the subsequent financial year. Whilst we appreciate the difficulties you have faced while starting a new businesses, the Commissioner cannot exercise the discretion to allow you to include any losses from your business in your calculation of taxable income for the relevant financial years.