Edited version of private advice

Authorisation Number: 1051911878271

Date of advice: 25 October 2021

Ruling

Subject: Commissioner's discretion for 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 activities in the calculation of your taxable income for the 20XX to 20XX income years?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The business activity commenced in XXXXX. The business activity is a fashion brand which sells clothes to a target demographic.

The business has incurred losses in the XXXX, XXXX, XXXX and XXXX financial years, whilst reporting a small profit in the XXXX financial year.

You do not meet the <$250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997.

Your business plan provides that you will incur initial significant expenditure however you have advised you expect to earn a profit in the XXXX financial year.

The business figures provided by you indicate that as at 30 June 20XX the business had outstanding carried forward losses of $XXXXX.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 35-10

Income Tax Assessment Act 1997 section 35-55

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

•         the Commissioner exercises his discretion.

In your situation, you do not satisfy the income requirement (that is your taxable income, reportable fringe benefits and reportable superannuation contributions but excluding your business losses, exceeds $250,000) and you do not come under any of the exceptions.

Your business losses are therefore subject to the deferral rule unless the Commissioner exercises his discretion.

It is only in certain circumstances that the Commissioner has discretion to determine that it would be unreasonable for the loss deferral rule to apply.

Relevant to your application, the lead time Commissioner's discretion in paragraph 35-55(1)(c) of the ITAA 1997 may be exercised for a financial year where:

•         you do not satisfy the income requirement; and

•         because of its nature, the activity has not produced, or will not produce, assessable income greater than the deductions attributable to it; and

•         there is an objective expectation, based on evidence from independent sources (where available) that, within a period that is commercially viable for the industry concerned, the activity will produce assessable income for an income year greater than the deductions attributable to it for that year (apart from the operation of subsections 35-10(2) and (2C)).

For the Commissioner to exercise the discretion you must be able to show that the reason your business activity is producing a loss is inherent to the nature of the business and is not peculiar to your situation. Taxation Ruling TR 2007/6 Income tax: non-commercial business losses: Commissioner's discretion (TR 2007/6) provides at paragraph 78, that the consequences of business choices made by an individual (for example, the size and scale of the activity) are not inherent characteristics of a business activity.

In this case, the business has incurred significant capital expenditure which has attributed to the ongoing losses. The scale of the expenditure is considered a business choice rather than an inherent characteristic that affects all businesses in the industry. It is not accepted by the Commissioner that the losses incurred were inherent to the nature of the business.

Paragraph 84 of TR 2007/6 provides that the Commissioner needs to be satisfied that there is an objective expectation that the business activity will satisfy a test or produce a tax profit in some future income year falling within a period that is commercially viable for the industry concerned. For taxpayers who do not pass the income test, if the business activity is not expected to produce a tax profit within this period, then the discretion will not be exercised.

The Commissioner considers the various business choices made by the individual as the relevant factors as to why the business activity did not produce a tax profit, not its inherent nature.

As such, the Commissioner will not exercise the discretion under paragraph 35-55(1)(c) of the ITAA 1997 and you cannot claim a deduction for your losses against other income in the 20XX and 20XX income years.