Edited version of private ruling

Authorisation Number: 1011562986340

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Ruling

Subject: Non-commercial losses- Commissioner's discretion - lead time

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:

1 July 2009 to 30 June 2010

The scheme commences on:

1 July 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 the future income year.

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

Your main source of income is from your casual employment.

You commenced the business during the Year 1.

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

You give appointments to your clients and visit them.

You charge your clients on the basis of the services you provide.

You are studying a full time course.

You are seeking private ruling for the 2009-10 income year in order to claim your expenses.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 35-1.

Income Tax Assessment Act 1997 Subsection 35-55(1)

Income Tax Assessment Act 1997 Paragraph 35-55(1)(b).

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

Income Tax Assessment Act 1997 Subsection 35-10(2E).

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

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.

In your case, you meet the income requirement under subsection 35-10(2E) as your income for non commercial loss purposes is below $250,000.

You have requested that the Commissioner exercise the discretion under paragraph 35-55(1)(b) of the ITAA 1997.

Subsection 35-5(2) of the ITAA 1997 states that Division 35 of the ITAA 1997 is not intended to apply to activities that do not constitute carrying on a business.

For the Commissioner to exercise the discretion, 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.

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 any 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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