Edited version of your written advice

Authorisation Number: 1013135330296

Date of advice: 1 December 2016

Ruling

Subject: Commissioners 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 business activity in your calculation of taxable income for the 20XX-YY financial year?

Answer

No

This ruling applies for the following period

Year ended 30 June 20YY

The scheme commences on

1 July 20XX

Relevant facts and circumstances

You are carrying on a business which commenced in 20XX.

The business is a series of discussions and conversations on various topics, which is planned to be an annual event.

The first iteration of this event was effectively a 'proof of concept” version a limited scale with the intention to test the market's appetite for a unique idea.

The potential numbers of paid attendees were limited by the scale of the venue at which it was held rather than stage a larger event with greater risk.

Paying attendees numbered approximately xx at $xx per ticket and even with the inclusion of other income streams you do not satisfy the $20,000 assessable income test.

Having proved that it is a viable and marketable event, you can move to a venue in 20ZZ which offers a commercial capacity and you would therefore expect to meet this test in 20ZZ.

Since you have no other comparison you are planning on duplicating the initial growth, which is possible since you are starting from a small scale.

You have surveyed attendees from the 20YY event, 100% stated would attend the event again and a large percentage of those indicated they would encourage others.

Additionally, numerous people within your industries now know of the event and have stated they expect to attend.

Therefore you have confidence that you should expect relatively small losses in 20ZZ and potentially a profit, or if not, definitely in 20AA.

Your income for non-commercial loss purposes for the 20XX-YY financial year is less than $250,000.

Assumption(s)

None

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)(b)

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; or

● the Commissioner exercises his discretion.

In your situation, none of the exceptions would apply. 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; and

● 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 states that the 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 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.

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, 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 was able to generate income from ticket sales 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 is unable to exercise his discretion for the 20XX-YY financial year.