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This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

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Edited version of your private ruling

Authorisation Number: 1012526557644

Ruling

Subject: Non-commercial losses

Question 1

Will the Commissioner exercise the discretion in paragraph 35-55(1)(a) 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 2012-13 financial year?

Answer

No.

Question 2

Will the Commissioner exercise the discretion in paragraph 35-55(1)(b) of the ITAA 1997 to allow you to include any losses from your business activity in the calculation of your taxable income for the 2012-13 financial year?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2013

The scheme commences on:

1 July 2012

Relevant facts and circumstances

The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:

You and your spouse satisfy the income requirement set out in subsection 35-10(2E) of the ITAA 1997.

You and your spouse operate a business in partnership.

You and your spouse commenced business operations in the relevant financial year.

In the relevant financial year the business generated income.

According to the business plan, the business expected to generate income of less than $20,000 in the relevant financial year.

During the relevant financial year, there was a number of issues with the business assets. This meant the business was unable to operate for some periods of the year.

The business did not meet any of the four non-commercial loss tests in the relevant financial year.

It is expected that the business will meet the assessable income test in the subsequent financial year.

Relevant legislative provisions

Income Tax Assessment Act 1997 - Section 35-1

Income Tax Assessment Act 1997 - Section 35-55

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

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

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

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

Reasons for decision

Question 1

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:

In your situation, none of the exceptions would apply and although you satisfy the income requirement, you do not meet any of the four tests in the year of income under consideration. Your losses are therefore subject to the deferral rule, unless the Commissioner exercises his discretion.

Special circumstances

The Commissioner's discretion in paragraph 35-55(1)(a) of the ITAA 1997 may be exercised for the financial year where the business activity is affected by special circumstances outside the control of the operators of the business activity.

Special circumstances are those circumstances which are sufficiently different to distinguish them from the circumstances that occur in the normal course of conducting a business activity. For those individuals who do not satisfy the income requirement, special circumstances are those which have materially affected the business activity, causing it to make a loss.

Taxation Ruling TR 2007/6 sets out the Commissioner's interpretation of the exercise of the Commissioner's discretion under paragraph 35-55(1)(a) of the ITAA 1997. The following has been extracted from paragraphs 47 to 53 of this ruling:

In this case, the business assets had a number of issues which resulted in them not being able to operate for some periods of the year. You have stated that as a result the business was not able to produce $20,000 of assessable income. However, the business plan for the relevant financial year projected income of less than $20,000.

It is expected that the issues would occur in the normal course of conducting your business. We do not consider the issues with the business assets to be special circumstances for the purposes of paragraph 35-55(1)(a) of the ITAA 1997.

Question 2

Lead time

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 one of the four tests being passed.

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 discretion should not 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 business was able to generate income in your first financial year in operation. We do not consider that there is anything inherent or innate in the nature of your business activity that it has not yet been able to satisfy one of the tests. Therefore, the Commissioner will not exercise the discretion in paragraph 35-55(1)(b) of the ITAA 1997.

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