Edited version of your written advice

Authorisation Number: 1051483459128

Date of advice: 26 February 2019

Ruling

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 20XX-XX financial year?

Answer

No

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

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

You are carrying on a business (the activity) which commenced in in the 20XX-XX financial year

The business was created to manage the process of bringing product to market. It is your intention to continue in the industry with quality content.

At this stage you are the sole operator in this business.

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 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. There is no lead time for your activity as they are able to earn income from commencement of the activity.

Therefore, the Commissioner will not 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 20XX-XX financial year.