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Edited version of your written advice

Authorisation Number: 1012721168154

Ruling

Subject: Non-commercial loss - 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 your calculation of taxable income for the 2013-14 to 2015-16 financial years?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 2014

Year ended 30 June 2015

Year ended 30 June 2016

The scheme commences on:

The scheme has commenced

Relevant facts and circumstances

You satisfy the <$250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997.

You carry on a business of manufacturing clothing (the business).

You contend that you commenced the business in the relevant financial year.

In this year you ceased employment to commence drafting and sampling of patterns and designs for the business.

You applied to Trademark for a label and received a notice of acceptance in the relevant financial year.

You advised that initial start-up costs for the business are high as you are required to pay for production costs upfront, before sales can be made.

As the business gains a trustworthy reputation it will generally progress to a 30, 60 and then 90 day invoice payment period. This should happen over several 'seasons'.

You provided income projections for the business projections, which indicated that you will earn assessable income from the business in the 20XX financial year.

You created a business plan based on your own experience in the industry, and advice from a retail forecasting planner and a fashion retail agent.

The business plan indicates that there is generally a three year 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)

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:

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 years of income under consideration. 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:

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.

Consequently the Commissioner will not exercise his discretion for the relevant financial years.


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