Edited version of your written advice

Authorisation Number: 1012853486134

Date of advice: 4 August 2015

Ruling

Subject: The Commissioner's discretion and non-commercial business losses

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 activity in your calculation of taxable income for the 2014-15 and 2015-16 financial years?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 2015

Year ended 30 June 2016

The scheme commences on:

1 July 2014

Relevant facts and circumstances

You satisfy the <$250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997.

You carry on a commission based activity.

You have stated that you are building a business using a business method that is based on building a product slowly and methodically to generate long term income.

You have incurred start-up and ongoing expenses in relation to the development of the activity for the 2014-15 financial year.

You have not earned any income during the 2014-15 financial year and have therefore made a loss.

You have provided projected income and expenditure figures for the activity, which indicates that you will meet the income test and make a profit from the activity in the 2016-17 financial year.

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), and

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

Reasons for decision

If an activity is not carried on as a business, and cannot reasonably be expected to produce assessable income, for example, it is carried on as a hobby, then you cannot claim general deductions in relation to it, regardless of the operation of Division 35 of the ITAA 1997. 

Whether a business is being carried on depends on the large or general impression gained (Martin v. Federal Commissioner of Taxation (1953) 90 CLR 470; (1953) 10 ATD 226; (1953) 5 AITR 548) from looking at all the indicators of carrying on a business, and no one indicator will be decisive (Evans v. Federal Commissioner of Taxation 89 ATC 4540; (1989) 20 ATR 922). These indicators are described in Taxation Ruling TR 97/11.  

In your case, you have indicated in your application that your activity is carried on as a business. This ruling has, therefore, been determined on the basis of accepting your statement that you were carrying on a business from the 2014-15 financial year.

Overview of Division 35

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 satisfy the income requirement and you pass one of the four tests

• the exceptions apply

• the Commissioner exercises his discretion.

In your situation, none of the exceptions would apply and although you satisfy the income requirement, you do not meet any of the four tests in the years of income under consideration. Your losses are therefore subject to the deferral rule, unless the Commissioner exercises his discretion.

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

• it is in the nature of the business activity that there will be a period of time before it can be expected to pass one of the four tests

• there is an objective expectation your business activity will produce a tax profit or meet one of the four tests within a commercially viable period for your industry.

The note to section 35-55 of the ITAA 1997 which contains the discretion states this discretion is intended to cover a business activity where there is an inherent period of time between the commencement of the activity and the production of 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.

For the discretion to be applied there needs to be an inherent or innate feature of the activity resulting in an inability to produce income in the year of commencement and (in most cases) a number of years thereafter. Further examples that fall into this category are forestry, viticulture and certain horticultural activities.

The note above does not support any view that the discretion should be exercised for any start-up activity that is yet, for example, to satisfy the assessable income test in section 35-30 of the ITAA 1997, simply because of the small scale on which it was started, the result of business decisions (your decision to slowly and methodically build the business to generate long term income), or because a client base is being built up.

We do not consider that there is a lead time between the commencement of your activity and the production of any assessable income. Your business should be able to generate income from commissions in your first financial year in operation.

Therefore we do not consider that there is anything inherent or innate in the nature of your business activity that it has not yet been able to satisfy one of the tests. Your activity is of a type that is able to produce assessable income quite soon after its commencement.

Consequently the Commissioner will not exercise his discretion in the 2014-15 and 2015-16 financial years.