Edited version of private advice

Authorisation Number: 1051615505948

Date of advice: 5 December 2019

Ruling

Subject: Non-commercial business losses and the Commissioner's 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 2018-19financial year?

Answer

No.

This ruling applies for the following period:

Financial year ended 30 June 2019

The scheme commences on:

1 July 2018

Relevant facts and circumstances

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

You operate an activity that provides services and shares information with to a certain group of people.

As you build your client base you will recruit business partners from which you will receive assessable income.

You state that your business will take a number of years before it will generate income.

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 commenced on 20 November 2018. This ruling has, therefore, been determined on the basis of accepting your statement that you were carrying on a business during the 2018-19 financial year.

Non-commercial business losses

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, or

·        the Commissioner exercises the 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 year 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 financial 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.

This provision 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. There is nothing preventing your business from generating income from your first financial year in operation. It is a business choice to not recruitbusiness partners to earn assessable income in the 2018-19 financial year.

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 where it is possible to produce assessable income quite soon after its commencement.

Therefore the Commissioner cannot exercise the discretion to allow you to include any losses from your business in your calculation of taxable income for the 2018-19 financial year.