Edited version of private ruling

Authorisation Number: 1011656646306

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Ruling

Subject: Non Commercial Losses- Commissioner's discretion - Lead time.

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 relevant income years?

No.

This ruling applies for the following periods

1 July 2008 to 30 June 2010

The scheme commenced on

1 July 2008

Relevant facts

You commenced a business activity as a sole trader in a prior year. You started the activity in a very small way and gradually expanded it. Due to the rapid growth of the activity you changed the direction of the activity.

You believe that the business will keep on growing and that it will be profitable. The plan is to expand the business over the next couple of years into a successful profitable family business.

You have stated the gross income you received in the first income year and the income received for the 12 month period from the commencement. You have also stated that you did not satisfy the assessable income test in section 35-30 of the ITAA 1997 and reasons for not receiving a profit in the relevant income years.

You have estimated that in a future income year the business should break even.

You have satisfied the income requirement in subsection 35-10(2E) of the ITAA 1997 for the relevant income years.

You have requested the Commissioner to exercise the discretion in paragraph 35-55(1)(b) of the ITAA 1997 to allow you to claim the losses from your business activity in your calculation of taxable income for the relevant years.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 paragraph 35-10(2).

Income Tax Assessment Act 1997 paragraph 35-10(3).

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

Reasons for decision

Division 35 of the ITAA 1997 applies to losses from certain business activities for the 2000-01 income year and subsequent years. Under the rule in subsection 35-10(2) of the ITAA 1997, a 'loss' made by an individual (including an individual in a general law partnership) from a business activity will not be taken into account in an income year unless:

· the 'exception' in subsection 35-10(4) of the ITAA 1997 applies, or

· you satisfy subsection 35-10(2E) of the ITAA 1997 for that year and one of four tests in sections 35-30, 35-35, 35-40 or 35-45 of the ITAA 1997 is met, or

· the Commissioner exercises the discretion in section 35-55 of the ITAA 1997.

Losses that cannot be taken into account in a particular year of income, because of subsection 35-10(2) of the ITAA 1997, can be applied to the extent of future profits from the business activity, or are deferred until one of the tests is passed, the discretion is exercised, or the exception applies.

Section 35-1 of the ITAA 1997 provides that an income requirement must be met (along with certain other tests), in order to include losses from a business activity in the calculation of taxable income. The 'income requirement' is set out in subsection 35-10(2E) of the ITAA 1997.

In your case you satisfy the income requirement in terms of subsection 35-10(2E) of the ITAA 1997.

In order to exercise the discretion, the Commissioner must be satisfied that there is an objective expectation, based on evidence from independent sources, that your business activity will either meet one of those tests or will produce assessable income for an income year greater than the deductions attributable to it for that year, within a commercially viable period (paragraph 35-55(1)(b) of the ITAA 1997) for that industry.

Your business activity will only be potentially subject to these provisions if it is carried on as a business. You have stated that the activity is carried on as a business and this ruling is made on the basis of accepting this claim.

The Commissioner's discretion in paragraph 35-55(1)(b) of the ITAA 1997 reads -

The Commissioner may, on application, decide that the rule in subsection 35-10(2) does not apply to a business activity for one or more income years (the excluded years) if the Commissioner is satisfied that it would be unreasonable to apply that rule because:

(b) for an applicant who carries on the business activity who satisfies subsection 35-10(2E) (income requirement) for the most recent income year ending before the application is made - the business activity has started to be carried on and, for the excluded years:

(i) because of its nature, it has not satisfied, or will not satisfy, one of the tests set out in section 35-30, 35-35, 35-40 or 35-45; and

(ii) there is an objective expectation, based on evidence from independent sources (where available) that, within a period that is commercially viable for the industry concerned, the activity will either meet one of those tests or will produce assessable income for an income year greater than the deductions attributable to it for that year (apart from the operation of 35-10(2) and (2C)).

The Note to paragraph 35-55(1)(b) of the ITAA 1997 states that the particular paragraph 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.

It has been accepted based on the information you have provided that you commenced the business activity. Initially you started the business in a very small way and gradually increased the scale of the activity.

During the relevant income years, you did not satisfy any of the tests in Division 35 of the ITAA 1997 or generate profits.

You have not provided independent evidence of the lead time for your industry. However, we do not consider that there is anything inherent or innate in the nature of your activity that results in a period of time between when the activity commences and when it first produces assessable income. In particular, we think an activity similar to yours is able to produce assessable income quite soon after its commencement as the income from your business activity has in fact demonstrated. We believe it is the small scale on which the activity started and building up the client base were the major reasons why your activity did not pass the assessable income test for the relevant income years.

In view of the above the discretion in paragraph 35-55(1)(b) of the ITAA 1997 has not been exercised for your business activity.

Summary of reasons for decision

The Commissioner will not exercise the discretion under paragraph 35-55(1)(b) of the ITAA 1997 because, on the facts provided the Commissioner is satisfied that your activity is an activity that can produce income soon after its commencement and therefore the activity does not have a lead time.

Therefore, the Commissioner's discretion in paragraph 35-55(1)(b) will not be applied to your activity.

As you do not satisfy any of the tests in Division 35 of the ITAA 1997 in the relevant income years, the rule in subsection 35-10(2) of the ITAA 1997 will apply to defer to a future income year any loss that arises from your business activity for those years. A deferred loss is not disallowed and will be deductible against any taxation profit from your business activity, or similar business activity, in future years.

If your business activity, or similar activity should satisfy an exception or satisfy the income requirement and one of the other tests in Division 35 of the ITAA 1997 in any given year, then the whole of the deferred loss will be deductible in that year.