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Edited version of private ruling
Authorisation Number: 1011607100966
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Ruling
Subject: Commissioner's discretion
Question:
Will the Commissioner exercise his discretion under section 35-55 of the Income Tax Assessment Act 1997 (ITAA 1997) in relation to the non-commercial loss incurred in your business?
Answer:
Yes.
Relevant facts and circumstances
This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.
You conducted a business in a particular year,. You lost your home and worldly belongings in bushfires. You did not anticipate the effect the aftermath of the fires would have upon you and your wife, both physically and emotionally. You have struggled to both find and feel comfortable with available accommodation, you have been required to build a new home and you have suffered from post traumatic stress. Despite your best efforts, you were only able to undertake spasmodic work. It followed you assessable income did not meet the assessable income test under section 35-30 of the ITAA 1997.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 35-55
Reasons for decision
While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.
Division 35 of the ITAA 1997 is about the deferral of losses from non-commercial business activities and prevents losses of individuals from non-commercial business activities being offset against other assessable income in the year the loss is incurred.
Section 35-55 of the ITAA 1997 states the Commissioner may decide to allow otherwise deferred losses to be offset against other income if the Commissioner is satisfied that it would be unreasonable to defer the loss where 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.
The use of the word 'including' indicates the type of circumstances to which the special circumstances limb of the discretion can potentially apply is broader than those which are natural disasters.
For example, circumstances such as oil spills, chemical spray drifts, explosions, disturbances to energy supplies, government restrictions and illnesses affecting key personnel might, depending on the facts, constitute special circumstances of the type in question.
Taxation Ruling TR 2007/6, which is about Commissioner's discretion, provides the following example:
Allison runs a dance instruction business which satisfied the assessable income test in the 2004 income year and was expected to satisfy this test again in the 2005 income year. However in the 2005 income year Allison broke her leg and was unable to dance for 6 months. Allison had to cancel all her bookings for 6 months and as a result incurred a loss for the 2005 income year.
Allison's business did not satisfy any of the tests in Division 35 in the 2005 income year. If the Commissioner does not exercise the discretion in the 2005 income year the losses from the dancing instruction business activity will be deferred.
In this case the Commissioner would exercise the discretion in paragraph 35-55(1)(a) for special circumstances. Allison is a key person in the dancing instruction business. Her broken leg and inability to teach for 6 months would be special circumstances which were outside her control. The business activity was expected to have satisfied a test if not for these special circumstances and consequently the Commissioner would be satisfied that it would be unreasonable for the loss deferral rule in section 35-10 to apply. As a result, Allison is able to offset her business losses against her other assessable income in the 2005 income year.
In your case, you suffered from post traumatic stress as a result of the effects of the bushfires, which are special circumstances outside of your control. It follows the Commissioner will exercise his discretion in your case and allow you to deduct your relevant business losses.
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