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Edited version of private ruling
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Ruling
Subject: non - commercial losses - special circumstances
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 2008-09 income year?
Answer
Yes
This ruling applies for the following period:
Year ended 30 June 2009
The scheme commences on:
1 July 2008
Relevant facts and circumstances
You are conducting a business activity on a rented property.
Your trading activity involves buying and selling stock.
The activity commenced as a business a number of years ago.
You provided a chart showing the trend of your business activity for all the above years. It shows the sales trend preceding the 2009 year was on the rise but dropped down to a low level in the 2009 year. The overall result was fewer sales during the year and higher stock on hand as at 30 June 2009 as your business activity was disrupted due to the unforeseen circumstances described in your application.
Your activity could not pass the income test for the 2009 income year. Your estimate for the 2010 income year is that the sales will exceed the minimum $20,000 threshold.
You have requested the Commissioner to exercise the discretion under special circumstances outside your control.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 35-55.
Income Tax Assessment Act 1997 Paragraph 35-55(1)(a).
Reasons for decision
These reasons for decision accompany the Notice of private ruling for the applicant.
While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.
Summary
You made losses in the 2009 from your business activities. You have requested the Commissioner to exercise the discretion under special circumstances outside your control and allow the losses to be claimed in the 2009 income year.
Detailed reasoning
Division 35 of the Income Tax Assessment Act 1997 (ITAA 1997) applies to losses from certain business activities for the 2001 income year and subsequent years. Under the rule in subsection 35-10(2) of the ITAA 1997, a 'loss' made by an individual (including an individual in a general law partnership) 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, or
if one of the tests is not satisfied, the Commissioner exercises the discretion in section 35-55 of the ITAA 1997.
You state that your activity is carried on as a business and this ruling is made on the basis of accepting this claim.
As you did not meet one of the four tests, you have requested for the Commissioners discretion to be applied in terms of paragraph 35-55(1)(a) of the ITAA 1997.
Paragraph 35-55(1)(a) of the ITAA 1997 sets out the first arm of the Commissioner's discretion as follows:
The Commissioner may decide that the rule in section 35-10 does not apply to a business activity for one or more income years if the Commissioner is satisfied that it would be unreasonable to apply that rule because:
(a) the business activity was or will be affected in that or those income years by special circumstances outside the control of the operators of the business activity, including drought, flood, bushfire or some other natural disaster; or
Note: This paragraph is intended to provide for a case where a business activity would have satisfied one of the tests if it were not for the special circumstances.
Paragraph 35-55(1)(a) of the ITAA 1997 refers to 'special circumstances' outside of the control of the operators of the business activity. No exhaustive definition is given of 'special circumstances' but the paragraph does include drought, bushfire and other natural disasters.
It is clear that 'special circumstances' will be something out of the ordinary or unusual. 'Special circumstances' in paragraph 35-55(1)(a) of the ITAA 1997 is used in the context of a situation occurring such that it would be unreasonable for the Commissioner to apply the loss deferral rule for a particular year or years. For this to be the case, 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), as the Note to the paragraph indicates.
You advised that you did not satisfy any of the tests in Division 35 of the ITAA 1997 in the 2008-09 income year. Your business activity would have passed the assessable income test had it not been for the special circumstances.
The chart you provided also shows the sales trend preceding the 2009 was on the rise but dropped down to a low level in the 2009 due to the unforeseen circumstances described in your application.
Based on the information provided in your application, we accept that due to the special circumstances, you endured additional costs to maintain your business activities.
Therefore, we accept that had it not been for the special circumstance beyond your control, your activity would have passed the assessable income test in the 2009 financial year.
As your business activity was affected by special circumstances in the sense required by paragraph 35-55(1)(a) of the ITAA 1997 in the 2008-09 income year, the Commissioner will therefore exercise the discretion and as a consequence the losses incurred can be offset against your other income.
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