Edited version of private ruling

Authorisation Number: 1011539361959

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Ruling

Subject: Non-commercial losses- Commissioner's discretion

Question

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 in your calculation of taxable income for the 2009-10 income year?

Answer: No

This ruling applies for the following periods:

2009-10 income year

The scheme commences on:

15 October 2009.

Relevant facts and circumstances

You incurred expenses in starting up your business activity during Year 1.

In your application form, you have indicated that you need time to build up your client base

Your income for non commercial loss purposes for the relevant income year was below $250,000.

You expect your business activity to make a tax profit in the subsequent income year.

The information provided in the private ruling application form confirms that you expect to satisfy the profits test in Year 3.

During the telephone conversation with you, you advised the following facts:

Your main source of income is from your full time employment.

You commenced the business during the Year 1.

Your expenses included legal cost, cost of website designing and home office expenses.

Reasons for decision

Division 35 of the ITAA 1997 is an integrity measure to prevent losses from non-commercial activities that are carried on as businesses by individuals being offset against other assessable income in the income year the loss is incurred.

Section 35-1 of the ITAA 1997 provides that an income requirement must be met (along with certain other tests) in order to include losses from a business activity in your taxable income calculation. If the income requirement is not met, the Commissioner may exercise discretion to allow the inclusion of the losses.

You satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997 if your income for non-commercial loss purposes is less than $250,000.

For the Commissioner to exercise the discretion, under the under the paragraph 35-55(1)(b) of ITAA 1997, you must be able to show that the reason your business activity is not making a profit or satisfy one of the test is inherent to the nature of the business and is not peculiar to your situation.

In your case, your activity will only be subject to the non-commercial losses provisions if it is carried on as a business. If your activity is not carried on as a business (or has not yet started to trade), and cannot reasonably be expected to produce income, then you cannot claim general deductions in relation to it, regardless of the operation of Division 35 of the ITAA 1997.

You have indicated that you need time to build up your client base. The note to paragraphs (b) and (c) of subsection 35-55(1) of the ITAA 1997 does not support the view that the discretion should be exercised for any start-up activity that is unable to produce a profit because of the small scale on which it was started, or because a client base is being built up but rather for those business activities that have a lead time between the commencement of the activity and the production of assessable income.

The process of building a client base is not considered as an inherent feature for lead time. Furthermore the activity is in its start-up stage is not a consideration either.

Rather, lead time normally applies to agricultural activities where for example, a fruit tree takes time between the planting of the tree and the production of any fruit, such that there will be no assessable income for a number of years.

Your activity has generated assessable income in the first year of operation. This suggests that your activity has already passed the lead time.

We do not consider that there is anything inherent or innate in the nature of your business activity which means that it has not yet been able to satisfy one of the tests. In particular, we think your activity is of a type that is able to produce assessable income quite soon after its commencement. We believe it is the small scale on which your business activity is being operated, that is the major reason why it did not pass the assessable income test, and not its inherent nature.

Therefore, the Commissioner is unable exercise the discretion under paragraph 35-55(1)(b) of the ITAA 1997.

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