Edited version of private advice

Authorisation Number: 1051964741869

Date of advice: 23 March 2022

Ruling

Subject: Non-commercial losses - 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 the calculation of your taxable income in the 20XX to 20XX income years?

Answer

Yes.

Having regard to your full circumstances, the Commissioner will exercise discretion in the 20XX to 20XX income years. It is accepted that it is the nature of your business activity that has prevented you from meeting one of the four tests or making a tax profit. It is also accepted that you will pass one of the four tests within the commercially viable period for your industry.

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

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Your income for non-commercial loss purposes is below the $250,000 threshold as outlined in subsection

35-10(2E) of the ITAA 1997.

You are engaged in a primary production business activity which has commenced.

You have provided independent evidence that attests to a lead time of four to five years for your business activity's industry.

Due to the nature of your business activity, you do not anticipate to meet one of the four tests or make a tax profit until the 20XX income year.

You have provided financial projections that show your intentions to meet the assessable income test in the 20XX income year.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 subsection 35-10(2E)

Income Tax Assessment Act 1997 subsection 35-10(4)

Reasons for decision

For the 2009-10 and later income 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 discretion

In your circumstances, you do satisfy the income requirements however you have not passed one of the four tests, and you do not come under any exceptions. Your business losses are therefore subject to the deferral rule unless the Commissioner exercises discretion.

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.

You have provided an informational timeline to attest that your business activity commenced in the relevant year. The information provided indicates that you commenced at a significant size and scale.

As per TR 2007/6, to be able to establish the failure to meet one of the four tests or produce a tax profit was 'because of its nature' the failure must be an inherent characteristic of the business activity which is common to other businesses in the industry. Due to the nature of your business activity, the final product is not available for sale for several years. You have provided independent evidence to support that the commercial viable period for your business activity is four to five years.

You have also provided financial projections which detail when your business will become commercially viable. The forecasts outline your expected yield and sales expectations, and your pricing appears to be in line with industry standards for a premium product. You have indicated that based on your anticipated sales in the 20XX income year you will meet the assessable income test.

It is therefore reasonable for the Commissioner to exercise discretion.