Edited version of private ruling

Authorisation Number: 1011541871931

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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:

1 July 2009

Relevant facts and circumstances

You are carrying on a business in partnership with another entity under a registered trading name.

You commenced this business in Year 1.

Marketing of your business has now begun and will escalate in accordance with the business plan and available resources.

During the telephone conversation with your accountant, he advised the following facts:

Your business will be profitable in the future income year.

During the relevant income year, you produced assessable income and incurred some expenses in relation to commencement of your business.

Your business will be subject to small business entity concession.

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

You are seeking Commissioner's discretion for the 2009-10 income year in order to claim your expenses.

Reasons for decisions

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 in that your income for non-commercial loss purposes is less than $250,000.

For the Commissioner to exercise the discretion you must be able to show that the reason your business activity is not making a profit is inherent to the nature of the business and is not peculiar to your situation.

In your case, your business 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.

Based on the information provided, it is clear that you are carrying on a business in partnership with another entity under a registered trading name.

You have indicated that you need time to build up your business. 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 any assessable income.

The process of setting up of the building and implementing your business structure and plan is not considered an inherent feature for lead time. Furthermore the fact that 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 does not have a 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 for the relevant income year, and not its inherent nature.

Therefore, the Commissioner is unable exercise the discretion under paragraph 35-55(1)(b) of the ITAA 1997 for the year ended 30 June 2010.

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