Edited version of private advice

Authorisation Number: 1052117321474

Date of advice: 15 May 2023

Ruling

Subject: Commissioner's discretion - lead time - photography

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 photography business in your calculation of taxable income for the 20XX-XX and 20XX-XX income years?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The business commenced in the 20XX-XX financial year. It has incurred a loss due to purchase of material and upskill requirements.

The target market is small to medium-sized businesses and individuals who require professional photography, and your other services.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 35-10(1)

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

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

Summary

Exercising the Commissioner's discretion for lead time requires the nature of the business to be taken into consideration. The 'nature of the business' considers the inherent characteristics of the type of business activity that are the reason why the activity did not meet any of the four tests in the non-commercial loss legislation. In your case, the loss was the result of business decisions you have made rather than the inherent characteristics of the business activity you are commencing.

Reasons for decision

The Commissioner's discretion can be exercised where:

•         the business activity has started to be carried on but because of its nature it has not produced, or will not produce, assessable income greater than the deduction attributable to it; and

•         there is an objective expectation that within a period that is commercially viable for the industry concerned the activity will meet one of the tests or produce assessable income for an income year greater than the deductions attributable to it for that year.

The lead time discretion 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. Lead time normally applies to activities similar to agricultural activities where for example, a commercial orchard of fruit trees will take time between the planting of the trees and the production of any fruit, such that there will be no assessable income for a number of years.

Your photography business activity will only be subject to the non-commercial losses provisions if it is carried on as a business. If your activity is not carried on as a business (or has not yet started to trade), and cannot reasonably be expected to produce income, then you cannot claim general deductions in relation to it, regardless of the operation of the non-commercial loss legislation (Division 35 of the ITAA 1997).

In the case of a professional photography business, there is nothing inherent in the activity that requires a lead time. The consequences of business choices made by an individual such as the size or scale of the activity are not inherent characteristics of a business activity (paragraph 77 of Taxation Ruling TR 2007/6).

In your case, the Commissioner will not exercise the discretion for the relevant income years. The losses from the activity may be deferred and claimed in later years when the business passes one of the four tests that allow for claiming of the losses. To meet the profits test you would need to make a profit from the activity for at least 3 of the past 5 income years including the current year.

For a better understanding of the deferral process you can look online at ato.gov.au and search the QC 33768.

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