Private ruling: The Commissioner's discretion and non-commercial business losses.
Date of advice: 3 August 2015
Published: August 2015
Ruling period: Year ended 30 June 2015
Date scheme commenced: 1 July 2014

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 2014-15 financial year? | A1: No.

Relevant facts and circumstances: You satisfy the <$250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997. You carry on a business of manufacturing a product (the business) in your spare time. You have been working at the activity for some time. You had to develop and design the product, several drafts, the specification sheets, and other necessary guidelines for the manufacturers. This all had to be done after work hours. Several samples were received from your manufacturer, which you were not happy with. You contend that you commenced the business during the 2015 income year when the final design and first order of a number of your product was delivered. You are about to embark on a marketing campaign. You have drafted a letter, printed fliers and envelopes and will be sent to retailers in the local area. If you have not received a response from the retailers in a week, you will call them to arrange meetings to discuss and present your product. You have a business online account, a business social media account, and a website which will be finished shortly. You plan on selling your product through all of these avenues, as well as the retailers. You have sold a small number of your product on your online account. You believe that you have not sold more as the online account is new and you do not have many sales (and therefore positive feedback). Further your website is incomplete, and therefore you cannot add the link to the site on your social media account. To entice more sales from online account, you are offering customers discounted stock and cheaper items to boost your positive sales feedback. Once interest from customers and orders from retailers total at least 1000, you will place an order with your manufacturer. You will wait for a total of 1000 before ordering as that number is economical to manufacture. You have formal tertiary education in your field. Your also have a formal trade in the field. You also did your apprenticeship in the field. You do not have a business plan. You have a ABN. You have made a loss during the 2014-15 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 satisfy the income requirement and you pass one of the four tests • the exceptions apply • the Commissioner exercises his discretion. In your situation, none of the exceptions would apply and although you satisfy the income requirement, you do not meet any of the four tests in the years of income under consideration. 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 • 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 which contains the discretion states 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. 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 should be able to generate income from sales 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 evidenced by the sales on your online account. Consequently the Commissioner will not exercise his discretion in the 2014-15 financial year.