Edited version of your written advice

Authorisation Number: 1051179938621

Date of advice: 12 January 2017

Subject: Non-commercial 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 business activity in your calculation of taxable income for the 20VV-WW, 20WW-XX, 20XX-YY and 20YY-ZZ financial years?

Answer

No

This ruling applies for the following period(s)

Year ended 30 June 20WW

Year ended 30 June 20XX

Year ending 30 June 20YY

Year ending 30 June 20ZZ

The scheme commences on

1 July 20VV

Relevant facts and circumstances

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

You have been developing a business activity since early 20VV which went live in early 20XX.

To date you have spent $xx of your own money and you have engaged a team of people to build a website to the level it is now.

From early 20VV until mid 20XX you worked fulltime as a contractor and managed to build the website after hours and on weekends.

You quit your fulltime job in mid 20XX because you could not keep doing both in parallel due to the extreme workload and stress.

Knowing the business did not have any real income (current advertising makes about $x per day).

You put your house on a website for an income stream and moved back into your family home to give you time and money to work on the business.

You plan on developing new features over the coming 24 months to attract more users and to offer functionality to enable subscription based services.

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

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 during the 20VV-WW, 20WW-XX, 20XX-YY and 20YY-ZZ financial years.

Application to your circumstances

For the 2009-10 and later income years, Division 35 of the Income Tax Assessment Act 1997 (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, or because a client base is being built up.

We do not consider that there is anything inherent or innate in the nature of your business activity which means that it has not yet been able to satisfy one of the tests. In particular, we think your activity is of a type that is able to produce assessable income quite soon after its commencement. We believe it is the small scale on which your business activity is being operated, that is the major reason why it did not pass the assessable income test for the 20VV-WW, 20WW-XX, 20XX-YY and 20YY-ZZ financial years, and nothing inherent in its nature.

Therefore, the Commissioner is unable to exercise the discretion in section 35-55 of the ITAA 1997 to allow you to offset the losses made from your online business against your other assessable income for purposes of calculating your taxable income for the 20VV-WW, 20WW-XX, 20XX-YY and 20YY-ZZ financial years.