Edited version of private advice

Authorisation Number: 1051928697300

Date of advice: 3 December 2021

Ruling

Subject: Non-commercial losses - lead time

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

Yes. Having regard to your circumstances and the relevant factors the Commissioner has granted his discretion. It is accepted there is a 'lead time' in the nature of your business activity and you will pass a test or make a tax profit within your industry's commercially viable period.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 May 20XX

Relevant facts and circumstances

• You are engaged in the business activity of XXXX.
• Your business activity commenced on XXXX.
• Your income for non-commercial loss purposes is below $250,000.
• You have provided independent evidence to attest to a 3-5 year timeframe for the industry your business activity is in.
• Due to the nature of your business activity you are not anticipating to make a tax profit or meet one of the four tests until the XXXX financial year.
• You have provided your business plan and projected financials to indicate that you'll meet one of the tests from the XXXX financial year onwards.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 35-10

Income Tax Assessment Act 1997 paragraph 35-55(1)(b)

Reasons for decision

The rule in subsection 35-10(2) of ITAA 1997 defers losses from business activities unless they satisfy a test, are eligible for an exception or the Commissioner exercises the discretion in subsection 35-55(1) of ITAA 1997.

As outlined in paragraph 16A of Taxation Ruling 2007/6 Income Tax: non-commercial losses: Commissioner's discretion ('TR 2007/6'):

The Commissioner may, on application, for an individual who satisfies subsection 35-10(2E) exercise the discretion in paragraph 35-55(1)(b) for a business activity that has started to be carried on, where, for the income year(s) in question:

'because of its nature', it has not satisfied, or will not satisfy, any of the tests; and

there is an objective expectation, based on evidence from independent sources (if available) that, within a period that is commercially viable for the industry concerned, the activity will satisfy one of the tests or produce a tax profit.

Your assessable income for the relevant periods will not exceed the threshold amount.

You have provided a timeline of business operations which shows the business activity commenced in XXXX. The data provided indicated this commenced to a significant scale and was more than a mere preparatory activity.

In order to establish the failure was 'because of its nature' the failure must be some inherent characteristic of the business activity in common with other business activities of that type as seen in paragraph 17 of TR 2007/6.

Due to the nature of your industry, the product is not available for sale for several years. You have provided independent evidence which attests that a period of at least 3 years is industry standard. It is accepted that due to the nature of the activity you will be unable to satisfy any of the tests for the XXXX to XXXX income years.

In addition to the independent evidence supplied, you have also supplied your business plan and financial projections outlining the expected volume and pricing upon the point at which you are able to enter commercial sales. The pricing points outlined by you appear to be in line with industry standard, and you have shown that at the volume of anticipated sales, the business will meet the assessable income test within the commercially viable period.

It is reasonable to exercise the commissioner's lead time discretion in your circumstances.