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Edited version of private ruling
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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 activity in the calculation of your taxable income for the 2010-11 financial year?
Answer
No.
This ruling applies for the following period
Year ended 30 June 2011
The scheme commenced on
1 July 2010
Relevant facts
You commenced business in the 20XX-XXfinancial year and have incurred a loss. The bulk of your expenses have been for rent as it has taken time to build a client base.
You satisfy subsection 35-10(2E) of the ITAA 1997 as your adjusted taxable income was less than $250,000 in the 20XX-XXfinancial year.
You do not satisfy any of the four tests set out in Division 35 of the ITAA 1997.
Relevant legislative provisions
Income Tax Assessment Act 1997 - Section 35-1.
Income Tax Assessment Act 1997 - Subsection 35-10(2E).
Income Tax Assessment Act 1997 - Subsection 35-55(1)
Income Tax Assessment Act 1997 - Paragraph 35-55(1)(b.
Reasons for decision
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
· 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 paragraph 35-55(1)(b) states that it is:
…intended to cover a business activity that has a lead time between the commencement of the activity and the production of any 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.
The type of feature contemplated by the phrase 'because of its nature', in the context in which it appears, is that referred to in the note quoted above. That is, that there is 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. This is borne out further by paragraph 1.51 of the Explanatory Memorandum for the New Business Tax System (Integrity Measures) Act 2000, which states:
This arm [paragraph 35-55(1)(b)] of the safeguard discretion will ensure that the loss deferral rule in section 35-10 does not adversely impact on taxpayers who have commenced to carry on activities which by their nature require a number of years to produce assessable income. Examples of activities which would fall into this category are forestry, viticulture and certain horticultural activities.
The note and the passage cited above do 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. Those sorts of constraints on being able to satisfy that test are far removed from the specific one referred to in the note and the Explanatory Memorandum.
You satisfied the income requirement, however you were unable to satisfy any of the four tests under Division 35 of the ITAA 1997 in the 20XX-XXfinancial year. You commenced your business in the 20XX-XXfinancial year and you are building up a client base. These sorts of constraints are normal for all businesses which are starting out and there is nothing inherent in the nature of the business which would warrant the Commissioner to exercise his discretion under paragraph 35-55(1)(b) of the ITAA 1997.
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