Edited version of private advice

Authorisation Number: 1052066699016

Date of advice: 19 December 2022

Ruling

Subject: Non-commercial business losses - lead time

Question

Will the Commissioner exercise his discretion under section 35-55(1)(c) of the Income Tax Assessment Act 1997 for lead time to offset the non-commercial business loss against other income?

Answer

No

This ruling applies for the following period:

30 June 20XX

The scheme commences on:

01 July 20XX

Relevant facts and circumstances

You commenced the business in late 20XX of mainly selling X prints, calendars, as well as running photography workshops and mentoring.

In late 20XX you commenced a new business activity involving the running of X tours centred on photography.

You had a mutual separation from your employer of X years which resulted in a final $X payout which was not redundancy payment.

You do not satisfy the income requirement set out in subsection 35-10(2E) of the Income Tax Assessment Act 1997 (ITAA 1997).

You invested in business assets namely a surveyed commercial XXXX for XXXX, commercial photography equipment and a XXXX vehicle registered as a tourism vehicle.

The above are available to be claimed under the Temporary Full Expensing deductions resulting in a one-off substantial loss in financial year ending 20XX.

You have applied for the Commissioner's Discretion due to lead time of your business activity because the substantial outlay of capital was necessary to get the business started. You expect with the capital equipment, permits and accreditations now in place and with the tourism industry in X growing your business to earn a profit in 20XX.

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)(a)

Income Tax Assessment Act 1997 Paragraph 35-55(1)(c)

Reasons for decision

Question

Will the Commissioner exercise his discretion under section 35-55(1)(c) of the Income Tax Assessment Act 1997 for lead time to offset the non-commercial business loss against other income?

Answer

No

Summary

Exercising the Commissioner's discretion for lead time requires the nature of the business to be taken into consideration. The 'nature of the business' considers the inherent characteristics of the type of business activity that are the reason why the activity did not meet any of the Div 35 tests. In your case, the loss was the result of business decisions you have made rather than the inherent characteristics of the business activity you are commencing.

Detailed reasoning

Division 35 of the ITAA 1997 prevents losses of individuals from non-commercial business activities being offset against other assessable income in the year the loss is incurred. The rule in subsection 35-10(2) of the ITAA 1997 will apply to defer a loss incurred by an individual from a business activity unless:

a) the exception in subsection 35-10(4) of the ITAA 1997 applies

b) you satisfy the income requirement in subsection 35-10(2E) of the ITAA 1997 and one of the following four tests:

i. the assessable test (section 35-30 ITAA 1997)

ii. the profits test (section 35-35 ITAA 1997)

iii. the real property test (section 35-40 ITAA 1997)

iv. the other assets test (section 35-45 ITAA 1997); or

c) the Commissioner exercises the discretion in section 35-55 of the ITAA 1997.

Exception

The exception in subsection 35-10(4) of the ITAA 1997 applies to primary production businesses or professional arts businesses when assessable income for the year (except any net capital gain) from other sources not related to the business activity is less than $40,000.

Commissioner's discretion

Under section 35-55 of the ITAA 1997, you can apply for Commissioner's discretion to be exercised where:

a) special circumstances outside your control have resulted in a loss; or

b) there is a lead time between the commencement of the activity and the production of any assessable income

Lead time

The relevant discretion may be exercised for the income year in question where:

a) you meet the income requirement, and the nature of the business activity means there will be a commercially viable period of time before assessable income greater than the deductions attributable can be produced; or

b) you do not meet the income requirement, and because of the nature of the business activity, there is an objective expectation that your business activity will make a tax profit within the commercially viable period for your industry.

The meaning of the phrase 'because of its nature' is expanded upon in paragraphs 77 to 79 of Taxation Ruling TR 2007/6:

77. Therefore, the phrase 'because of its nature' refers to inherent characteristics of the type of business activity being conducted by the taxpayer, which are common to any business activity of that type. These inherent characteristics must be the reason why the activity is unable to satisfy any of the tests. The discretion is not intended to be available where the failure to satisfy one of the tests is for other reasons.

78. The consequences of business choices made by an individual (for example, the hours of operation, the size or scale of the activity, and the level of debt funding) are not inherent characteristics of a business activity.

79. The inherent characteristics may be present for an initial period from the time the business activity commences. After that initial period has elapsed, which can be several years, the inherent characteristics may cease to be the cause of business activities of the type in question being unable to satisfy any of the statutory tests.

Application to your circumstances

In your case, you commenced your X tours in late 20XX. The loss you incurred in that business activity was the result of acquiring capital assets. The loss was not caused through the nature of the business activity resulting from the inherent characteristics of the activity. You have made a business decision to apply the government's Temporary Full Expensing initiative to your tax affairs in the 20XX-XX income tax return. This has resulted in you being entitled to claim a deduction on the taxable portion of the capital assets you have acquired. Because the loss was the result of the business decision you have made rather than because of the inherent characteristics of your business activity, you would not qualify to apply lead time to your circumstances.

Therefore, 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-XX income year. You must defer these losses to a future year where you meet a test or make a profit from your business activity.