Edited version of your written advice

Authorisation Number: 1012823253910

Date of advice: 12 June 2015

Ruling

Subject: Non Commercial Losses

Question

Will the Commissioner exercise the discretion in paragraph 35-55(1)(c) 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 2014 financial year?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2014

The scheme commenced on

1 July 2013

Relevant facts

You do not satisfy the $250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997.

You operate a business which is open X days a week.

You intend to make a tax profit in the XXXX financial year.

The style and the plant and equipment of the original business did not fit the new business and therefore you removed everything from the original purchase and built up the whole business from scratch.

You purchased plant and equipment for the business worth X.

You had initial set up costs of $X which are not expected to incur in later financial years.

You pass the assessable income test.

Relevant legislative provisions

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

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

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

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

Reasons for decision

For the 2009-10 and later financial years, Division 35 of the ITAA 1997 will apply to defer a non-commercial loss from a business activity unless:

• you meet the income requirement and you pass one of the four tests

• the exceptions apply

• the Commissioner exercises his discretion.

In your situation, you do not satisfy the income requirement (that is, your taxable income, reportable fringe benefits and reportable superannuation contributions but excluding your business losses, exceeds $250,000) and do not come under any of the exceptions. Your business losses are therefore subject to the deferral rule unless the Commissioner exercises his discretion.

The relevant discretion may be exercised for the financial year in question where:

• it is in the nature of your business activity that there will be a period before a tax profit can be produced and

• there is an objective expectation your business activity will produce a tax profit within the commercially viable period for your industry.

The 'Note' to paragraph 35-55(1)(c) states:

This 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. For example, 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.'

TR 2007/6 states that the 'lead time' discretion provided for by paragraph 35-55(1)(c) of the ITAA 1997 is available for a business activity if there is an initial period from when the activity commenced where the nature of the activity prevents a tax profit from being made.

TR 2007/6 does not support any view that the discretion should 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 small and needing to build up a client base, or business choices made by an individual that are not consistent with the ordinary or accepted practice in the industry concerned - such as the hours of operation, location, climate or soil conditions, or the level of debt funding.

We do not consider that it is in the nature of your business activity that there will be a period before a tax profit can be produced. We believe the main reasons you do not make a profit are as a result of business choices made by you and because a client base is being built up.

Therefore, the Commissioner will not exercise the discretion in paragraph 35-55(1)(c) of the ITAA 1997 to allow you to include any losses from your business activity in your calculation of taxable income for the 2014 financial year.