Edited version of private ruling

Authorisation Number: 1011558427058

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Ruling

Subject: Non-commercial loss - Commissioner's discretion

Question

Will the Commissioner exercise the discretion in paragraph 35-55(1)(a) 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 year ended 30 June 2010?

Answer: Yes

This ruling applies for the following periods:

Year ended 30 June 2010

The scheme commences on:

1 July 2009.

Relevant facts and circumstances

You are carrying on a business activity.

During the telephone conversation with your accountant the following facts were obtained:

You commenced the business several years ago and you always met the assessable income test since you commenced your business activity.

Your partner was paid from the earnings of this business. Your partner paid a major role in the business.

Your business consists of only two people (you and your partner)

In the beginning of this year, your partner suffered a serious medical condition and was unable to continue in the business.

As a result, you could not operate the current business and your main source of income is from working as a full time employee.

You provided the following information:

· profit and loss statements for previous income years.

· a copy of a medical certificate confirming your partner's medical condition.

· Copy of a letter from your partner's employer.

· Copy of your e-mail to your accountant.

You are seeking private ruling for the 2009-10 income year under the special circumstances.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 35-55.

Income Tax Assessment Act 1997 Paragraph 35-30(b).

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

Income Tax Assessment Act 1997 Section 6-5.

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decisions

Division 35 of the ITAA 1997 is an integrity measure to prevent losses from non-commercial activities that are carried on as businesses by individuals being offset against other assessable income in the income year the loss is incurred.

You have requested that the Commissioner exercise the discretion under paragraph 35-55(1)(a) of the ITAA 1997.

For special circumstances to be considered, it will not only be necessary that an event or situation has occurred which is of itself unusual, but that it has resulted in the business activity failing to pass a test. Clearly, if the business activity would not have passed a test even if the event or situation had not arisen, we cannot say that the business activity was affected by special circumstances in the sense in which this term is used in paragraph 35-55(1)(a) of the ITAA 1997.

Paragraph 54 of the Taxation Ruling (TR) 2007/6 includes illnesses of key personnel as an example of the type of circumstances to which the special circumstances limb of the Commissioner's discretion can be applied.

Based on the information provided, your activity has been carried on in a commercial scale with a commercial purpose. The scale of operation of your activity suggests that your activity had a prospect of profit making. The facts also indicate that the activity has been operated in a business like manner. Accordingly your activity is accepted to have been carried on as a business.

Therefore non-commercial loss provisions in Division 35 of the ITAA 1997 are applicable for this period.

The information you have provided demonstrates that your business activity would have passed the assessable income test and would have made a profit in the relevant income year, if your partner had not been injured. This expectation is accepted as being reasonable based on past performance of your business activity.

The information you have provided demonstrates that there is an objective expectation that your business activity will pass the assessable income test in a future income year.

Therefore, the Commissioner's discretion under paragraph 35-55(1)(a) of the ITAA 1997 has been granted for the 2009-10 income year. Accordingly, you will be able to offset any of your business losses for the 2009-10 year against your other assessable income.

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