Edited version of private ruling

Authorisation Number: 1011558588147

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Ruling

Subject: Non commercial losses

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 2009-10 income year?

Answer

No

This ruling applies for the following period:

1 July 2009 to 30 June 2010

Relevant facts and circumstances

You are carrying on a business which commenced during the year ended 30 June 2010.

After spending thousands of dollars in setting up such as advertising and stock purchasing, including flyers, promotional stickers, pamphlet delivery, you found that you were unable to establish and maintain a client base.

You found that it was disappointing that your business had not taken off as the place chosen by you did not had the demand for these products.

With no scope for your products, and due to lack of demand and interest, you were unable to build your business as you had every intention to build your clientele.

During a conversation with your accountant it was revealed that from the commencement of your activity to date total assessable income your activity derived was minimal.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 35-10(2)

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

Income Tax Assessment Act 1997 Section 35-30

Income Tax Assessment Act 1997 Section 35-35

Income Tax Assessment Act 1997 Section 35-40

Income Tax Assessment Act 1997 Section 35-45

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

Reasons for decision

Division 35 of the Income Tax Assessment Act 1997 (ITAA 1997) applies to losses from certain business activities for the 2000-01 income year and subsequent years. Under the rule in subsection 35-10(2) of the ITAA 1997, a 'loss' made by an individual from a business activity will not be taken into account in an income year unless:

· the 'Exception' in subsection 35-10(4) of the ITAA 1997 applies

· one of four tests in sections 35-30, 35-35, 35-40 or 35-45 of the ITAA 1997 is met, as well as subsection 35-10(2E) where the taxpayer's assessable income is less than $250,000,

· if one of the tests is not satisfied, the Commissioner exercises the discretion in section 35-55 of the ITAA 1997.

As your activity has commenced in the 2009-10 income year and is carried on as a business, it is subject to the provisions in Division 35 of the Income Tax Assessment Act 1997 (ITAA 1997). Information provided with the application for this private ruling indicates that your activity is not able to satisfy one of the tests in 2010 or produce a taxation profit.

Losses from activities that do not meet any of the four tests under Division 35 of the ITAA 1997, or the exception in subsection 35-10(4) of the ITAA 1997, will be subject to the loss deferral rule in subsection 35-10(2) of the ITAA 1997, unless the Commissioner exercises a discretion under paragraph 35-55(1) (a) or 35-55(1)(b) of the ITAA 1997 that it would be unreasonable to defer the loss.

You have requested that the commissioner exercise the discretion under paragraph 35-55(1)(a) of the ITAA 1997, being 'special circumstances'. The Commissioner's view of the term 'special circumstances' is based on case law and is contained within Paragraph 47 of Taxation Ruling TR 2007/6.

In the context of Division 35 special circumstances are ordinarily those affecting the business activity such that it is unable to satisfy a test and it would be unreasonable for the loss deferral rule to apply.

Ordinary economic, weather or market fluctuations that might reasonably be predicted to affect the business activity would not be considered to be special circumstances. These fluctuations are expected to occur on a regular or recurrent basis when carrying on a business activity and affect all businesses within a particular industry.

An expression such as 'special circumstances' is by its very nature incapable of precise or exhaustive definition. The qualifying adjective looks to circumstances that are unusual, uncommon or exceptional. Whether circumstances correspond to any of these descriptions depend upon the context in which they occur.

Therefore, the difficulties experienced are not considered to be 'special circumstances' for the purposes of paragraph 35-55(1)(a) of the ITAA 1997 as the market downturn is an ordinary market fluctuation.

As the business activity was not affected by special circumstances in the sense required by paragraph 35-55(1)(a) of the ITAA 1997 in the 2009-10 income year, the Commissioner is therefore not satisfied that it would be unreasonable to apply the rule in section 35-10 of the ITAA 1997 in relation to the business activity for that year.

Therefore the Commissioner will not exercise the discretion under paragraph 35-55(1)(a) of the ITAA 1997. As no test was satisfied for the 2009-10 income year, the rule in subsection 35-10(2) of the ITAA 1997 will apply to defer to a future income year any loss that arises from your activity for that year. A deferred loss s not disallowed and will be deductible against any taxation profit from the activity, or similar business activity, in the future years.

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