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Ruling

Subject: Non-commercial losses

Question

Will the Commissioner exercise the discretion in subsection 35-55(1) of the ITAA 1997 to allow you to include any losses from your business activity in your calculation of taxable income?

Answer

No

Relevant facts

You carry on a business.

Due to factors unique to your situation you will not make a profit within the lead time for your industry.

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)(b)
Income Tax Assessment Act 1997 paragraph 35-55(1)(c)

Reasons for decision

For the 2009-10 and later financial years, Division 35 of the ITAA 1997 will apply to defer a non-commercial loss from a business activity unless:

Your losses are therefore subject to the deferral rule, unless the Commissioner exercises his discretion.

The relevant discretion may be exercised for the income year in question where:

Having regard to your full circumstances, it is not accepted that it is in the nature of the business activity that has prevented you from making a tax profit or passing one of the four tests.

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. 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.

For the discretion to be applied there needs to be 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. Further examples that fall into this category are forestry, viticulture and certain horticultural activities.

The note above does 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.

We do not consider that there is a lead time between the commencement of your activity and the production of any assessable income. Your type of business is able to generate income quite soon after commencement. Your decision to stagger the start up of your business is unique to your situation rather than an inherent feature of your industry.

Having regard to your full circumstances, it is not accepted that it is in the nature of the business activity that has prevented a tax profit from being made or one of the four tests being passed. Consequently the Commissioner will not exercise his discretion for the years requested.

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