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Edited version of your private ruling
Authorisation Number: 1012515874852
Ruling
Subject: Business losses
Question
Can you offset deferred business losses from an earlier income year against your salary and wage income in the year ended 30 June 2013?
Answer
No.
This ruling applies for the following period
Year ended 30 June 2013
The scheme commenced on
1 July 2012
Relevant facts and circumstances
You commenced a business during the year ended 30 June 2011.
You made a net business loss from this business in the years ended 30 June 2011 and 30 June 2012.
You deferred the net business loss as you did not meet any of the tests contained within the non-commercial loss provisions of the taxation legislation. Nor did you meet an exception or were granted the Commissioner's discretion to claim the losses.
You ceased the business during the year ended 30 June 2012.
You did not operate this business or a business of a similar kind in the year ended 30 June 2013.
You earned salary and wage income in the year ended 30 June 2013.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 35-10
Reasons for decision
Summary
You are not able to offset your deferred business losses against your salary and wage income in the year ended 30 June 2013. These losses cannot be utilised until the same or a similar business activity either passes a test or the Commissioner exercises his discretion in relation to that future year's business losses.
Detailed reasoning
Division 35 of the Income Tax Assessment Act 1997 (ITAA 1997) applies to losses from certain business activities for the year ended 30 June 2001 and subsequent years. The provisions only apply to individuals who conduct a business activity as:
· a partner in a partnership that made a loss, or their net partnership distribution after deducting any eligible expenses resulted in a loss, or
· a sole trader and made a loss.
An individual who is in business (for tax purposes) can only offset the loss from a business activity against their income from other sources if they pass one of four tests, an exception applies to them or the Commissioner exercises his discretion in their favour.
The Commissioner may exercise his discretion to allow an individual to claim a business loss, in the financial year the loss was incurred, where special circumstances outside of the control of the individual existed or the business activity is one where due to the nature of the activity there is an accepted period of time before a profit would be made.
Where the business activity fails to satisfy one of the four tests for a particular financial year and the Commissioner does not exercise the discretion, subsection 35-10(2) of the ITAA 1997 has the effect that:
· the loss for the business activity for the financial year will be deemed not to have been incurred in that year, and
· the losses are instead treated as an amount attributable to the business activity that can be deducted in the next financial year that the business activity is carried on.
Usually the loss will simply be attributable to the very next financial year. However, if the business activity ceases for a year or a number of years, the loss will be carried forward and become deductible in the financial year in which the activity is next conducted.
Losses that have been deferred under subsection 35-10(2) of the ITAA 1997 will be able to be offset against:
· any profits of the relevant business activity or a similar business activity in a future year, and
· the other income of the individual carrying on the relevant activity if the business activity meets at least one of the four objective tests or the Commissioner exercises the discretion to allow the loss.
In your case, you operated a business in the years ended 30 June 2011 and 30 June 2012 which resulted in losses in both years. You deferred the losses under subsection 35-10(2) of the ITAA 1997 as the business did not meet any of the tests and the Commissioner had not exercised his discretion to allow the losses. You ceased the business in the year ended 30 June 2012.
As your business losses were deferred under section 35-10(2) of the ITAA 1997 and you did not operate the business in the year ended 30 June 2013, you are unable to offset the losses against the salary and wage income earned in this year.
Your business losses will only be able to be claimed where you commence another business of a similar kind and that business activity meets one of the four tests or the Commissioner exercises the discretion to allow you to claim the losses for that business activity in the future year.