Edited version of private ruling

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Ruling

Subject: 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 consulting business activities in the calculation of your taxable income for 2010-11 financial year?

Answer: No.

This ruling applies for the following period

Year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts

You have stated that your consulting business commenced in April 2011.

Due to regulations governing the industry, you could not start performing or marketing your services until you were registered. You received registration in April 2011.

Upon registration, you set up your website as your key marketing tool. The website was established in June 2011 and you started targeting potential clients.

You also registered your business name, registered for GST and secured insurance.

At the date of your application, you had not yet secured any work but you expect to meet the assessable income test or produce a tax profit in the 2011-12 financial year.

You incurred approximately $1,400 in expenses in the 2010-11 financial year.

Relevant legislative provisions

Income Tax Assessment Act 1997 - Section 35-1.
Income Tax Assessment Act 1997 - Section 35-30
Income Tax Assessment Act 1997 - Section 35-35
Income Tax Assessment Act 1997 - Section 35-40
Income Tax Assessment Act 1997 - Section 35-45
Income Tax Assessment Act 1997 - Paragraph 35-55(1)(b).

Reasons for decision

You have requested that the Commissioner exercise the discretion under paragraph 35-55(1)(b) of the ITAA 1997 for lead time. 

Under paragraph 35-55(1)(b) of the ITAA 1997, 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 satisfied, or will not satisfy, one of the non-commercial loss tests set out in sections 35-30, 35-35, 35-40 or 35-45 of the ITAA 1997; 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.  

Taxation Ruling TR 2007/6 sets out guidelines on how the Commissioner's discretion under paragraph 35-55(1)(b) of the ITAA 1997 may be exercised. The following has been extracted from paragraphs 70 to 104 of this ruling. 

The discretion is provided to ensure that certain individuals who carry on genuine commercial businesses are not disadvantaged due to particular circumstances which prevent them from satisfying one of the tests. 

This arm of the safeguard discretion will ensure that the loss deferral rule in section 35-10 of the ITAA 1997 does not adversely impact on taxpayers who have commenced to carry on activities which by their nature require a number of years to produce assessable income. The 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. Such activities have an inherent characteristic that cannot be overcome by conducting the business activity in a different way but only by changing the nature of the business. 

For example, the discretion will not be available where the failure to make a profit is for reasons other than the nature of the business such as, a consequence of starting out on a small scale, the hours worked or the need to build a client base.

In your case, you have not provided any independent evidence to show the lead time for your type of consulting business. However, it is accepted that the nature of the consulting industry generally does not prevent it from producing assessable income in the first year it is commenced.

The inability of your business activity to satisfy one of the four non-commercial loss tests was due to you not securing any clients in the 2010-11 financial year and was not due to lead time, as set out in paragraph 35-55(1)(b) of the ITAA 1997.

Therefore, the Commissioner will not exercise the discretion in section 35-55 of the ITAA 1997 to allow you to offset the losses made from your consulting business activities against your other assessable income for purposes of calculating your taxable income for the 2010-11 financial year.