Private ruling: Non-commercial losses
Date of advice: 27 September 2016
Published: November 2016
Ruling period: Year ended 30 June 20XX | Year ending 30 June 20XX | Year ending 30 June 20XX | Year ending 30 June 20XX | Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

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 advisory and consulting activities in the calculation of your taxable income for the relevant income 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 an activity of providing advisory and consulting services. You commenced these activities in the relevant income year. You are currently building up your client base. You predict you will receive zero or minimal income from this business for the next three to five years. You do not know when your activity will be in a tax profit position in the future.

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)(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, • 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 activities in the relevant income year and you are hoping to build a client base. You have not yet received any income from your business and you do not know when you may do so. We do not consider that there is anything inherent or innate in the nature of your activity that prevents it making a profit. Your activity is of a type that is able to produce assessable income quite soon after its commencement. Therefore the Commissioner will not exercise the discretion to allow you to include any losses from your advisory and consulting activities in your calculation of taxable income for the relevant income years.