Edited version of private ruling

Authorisation Number: 1011652327631

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Ruling

Subject: non-commercial losses

Will the Commissioner exercise his discretion under section 35-55 of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include any losses from your personal services activity in calculating your taxable income for the years ended 30 June 2009 and 30 June 2010?

No.

This ruling applies for the following period

1 July 2008 to 30 June 2009

1 July 2009 to 30 June 2010

The scheme commenced on

1 July 2008

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You commenced a personal services activity during the 2008-09 income year.

You have a business and strategic plan and have established a website.

You provided complimentary personal services which had a market value in excess of $15,000 in the 2008-09 income year.

You earned less than $20,000 of assessable income and made an overall loss from this activity in both the 2008-09 and 2009-10 income years.

You expect to satisfy the assessable income test in the 2010-11 income year and make a profit.

You did not meet the assessable income test, the profits test, the real property test or the other assets test in either the 2008-09 or 2009-10 income years.

You state the special circumstances that prevented you from meeting one of the four tests was that you are starting up a business which is not part of a franchise. You have spent a significant amount of time in establishing markets and building relationships with a view to building a sustainable business earning fees from personal service activities. Personal service businesses rely almost completely on word of mouth referral marketing.

You have not provided any evidence from independent sources regarding the number of years before your type of personal service activity would become commercially viable.

Your income for non-commercial loss purposes is less than $250,000 for the year ended 30 June 2010.

This ruling has been prepared on the basis that your personal service activity is being conducted as a business for tax purposes.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 35-10

Income Tax Assessment Act 1997 Section 35-55.

Summary

Based on the information you have provided, the Commissioner cannot exercise his discretion under section 35-55 of the ITAA 1997 in relation to your personal service activity for the 2008-09 and 2009-10 income as special circumstances did not apply. Also, your activity is not of a type (such as, a forestry plantation) which by its very nature, requires a lead time before any income is produced.

As no test was satisfied and the Commissioner's discretion has not been exercised, the loss generated from the activity should be deferred until the activity meets one of the tests set out in Division 35 of the ITAA 1997 or there is a profit from the activity.

Detailed reasoning

Division 35 of the ITAA 1997 will apply to defer a non-commercial business loss from a business activity carried on by a taxpayer who is an individual unless:

· their business activity satisfies one of the four tests listed in section 35-10 of the ITAA 1997 (for the 2009-10 and later income years these test are only available to taxpayers whose income for non-commercial loss purposes is less than $250,000)

· the Commissioner has exercised the discretion in section 35-55 of the ITAA 1997 the activity, or

· the individual comes within the exception to Division 35 which may apply to a primary production or professional arts business.

The discretion in section 35-55 of the ITAA 1997 may be exercised for the income year in question where the business activity is affected by special circumstances outside of the control of the operators of the business activity. Such circumstances are specifically defined to include, but are not limited to, drought, flood, bushfire or some other natural disaster.

The discretion in section 35-55 of the ITAA 1997 may also be exercised for a business activity that has started to be carried on, where, for the income year in question, because of its nature, it has not satisfied, or will not satisfy, any of the tests and there is an objective expectation, based on evidence from independent sources (if available) that, within a period that is commercially viable for the industry concerned, the activity will satisfy one of the tests or produce a tax profit.

This second 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. The example given in the taxation legislation is 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.

Taxation Ruling TR 2007/6 is about the Commissioner's discretion. It states the discretion is not intended to apply where a business activity makes a loss because of factors which can apply to any business and which do not affect the ability of the activity to satisfy one of the four tests. Rather, the discretion is intended to be available for a commercial business activity that has failed, or objectively is expected to fail for a period of time, to satisfy any of the tests for certain reasons outside the control of the operator. Paragraph 139 of Taxation Ruling TR 2007/6 provides the following example:

Andrew started a clock repair business in the 2001 income year. Andrew was new to the region and the industry and had yet to establish his clientele. Andrew had intended to operate his business full time but as his funding was very limited he chose to continue with his part time employment to support himself and only worked on his business activity in his spare time. Andrew's premises are in the back of a small arcade and he only opens for business on weekends while the other shops in the arcade are open every day of the week. The arcade is not in an area that attracts business on weekends. Andrew cannot afford advertising and has so few clients that he is unable to cover his expenses and has made losses each year. Andrew's business has yet to satisfy one of the four tests. Other businesses of this type are able to satisfy a test in the first year of operation.

The inability of Andrew's business activity to satisfy any of the four tests is due to his personal business choices as to hours of business, location and advertising, not any inherent characteristics that affect clock repair businesses. Accordingly the requirement of subparagraph 35-55(1)(b)(i) is not met and the Commissioner would not exercise the discretion.

In your case, you commenced a personal service activity in during the 2008-09 income year. You do not expect to meet the assessable income test until the 2010-11 income year.

The establishment of a business and clientele are factors related to any new business and are not considered to be special circumstances as described by the taxation legislation or TR 2007/6. Also, your business is not of a type (such as, a forestry plantation) which by its very nature, requires a lead time before any income is produced.

Additionally, the exception does not apply to you as your activity is not considered to fall within the definition of a primary production or professional arts business.

Based on the information provided by you, your situation is not of the kind for which section 35-55 of the ITAA 1997 was enacted.

To conclude, the tax legislation does not permit the Commissioner to exercise his discretion to allow you to claim your losses from your personal service activity against your other income. These losses will need to be deferred until a future income year where one of the four tests is met or there is a profit from the activity.