Edited version of private ruling

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Ruling

Subject: Non-commercial losses - Commissioner's discretion - special circumstances

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 in the calculation of your taxable income for the 2009-10 income year?

Yes.

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

1 July 2008

Relevant facts

You acquired a franchise for a business to provide services.

During the 2008-09 year you had a gross turnover of approximately $10,000.

In an onsite accident you suffered a long term injury. You have had continuing treatment for this injury and have been unable to work in the business.

You have provided several doctors reports that outline the extent of the injury and the impact on your ability to work.

You received an amount of income from Income Protection insurance during the income year. Your income for the purposes of subsection 35-10(2E) of the ITAA 1997 is less than $250,000.

You retained the franchise and equipment throughout the financial year expecting to return to full duties.

You were unable to pass any of the four tests for non-commercial losses purposes but have provided a forecast budget showing that you would have been able to earn in excess of $20,000 if you had been able to complete normal duties.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 35-1

Income Tax Assessment Act 1997 Section 35-10

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)

Reasons for decision

Summary

The Commissioner will exercise his discretion to allow the losses from your business activity to be offset against your other income. The impact of the injury you received on your business is considered to be special circumstances for non-commercial losses purposes. You have shown that you would have been able to pass the assessable income test had it not been for this injury.

Detailed reasoning

Division 35 of the ITAA 1997

Division 35 of the 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 (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

· you meet the income requirement and 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.

Generally, a 'loss' in this context is, for the income year in question, the excess of a taxpayer's allowable deductions attributable to the business activity over that taxpayer's assessable income from the business activity.

Losses that cannot be taken into account in a particular year of income, because of subsection 35-10(2) of the ITAA 1997, can be applied to the extent of future profits from the business activity, or are deferred until one of the tests is passed, the discretion is exercised, or the exception applies.

Are you carrying on a business?

You acquired a franchise, acquired the necessary equipment and stock to commence the business in the 2008-09 income year. You derived income of approximately $10,000 up until the time of your accident. You have been unable to return to full duties in the business activity and have been in receipt of income protection insurance. You retained ownership of the franchise and equipment in the expectation that you would be able to return to full duties. For the purpose of this ruling it is considered that you were carrying on a business in the 2009-10 income year.

The application of paragraph 35-55(1)(a) of the ITAA 1997 (Commissioners Discretion) to this arrangement.

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.

In Taxation Ruling TR 2001/14, the Commissioner provides guidance to taxpayers in what he considers to be special circumstances for the purposes of paragraph 35-55(1)(a) of the ITAA 1997. Apart from drought, flood and bushfire which are specifically mentioned in the legislation, it may also include:

· earthquakes

· diseases affecting livestock or crops

· pest plagues, or

· hailstorms.

In Taxation Ruling TR 2007/6, the Commissioner expands on his view of what would constitute 'special circumstances' in the context of paragraph 35-55(1)(a) of the ITAA 1997, to include:

· an oil spill

· a chemical spray drift

· a gas plant explosion

· a power plant shutdown

· a water authority malfunction

· government authority restriction imposed on land use, or

· other events (for example, illness of the operator or employee(s)) which have significantly affected the ability of the operator to carry on the business activity.

In your application, you have cited your injury which meant you would be unfit to conduct your business as special circumstances which prevented you from meeting the assessable income test in Division 35 of the ITAA 1997. It is accepted that these circumstances constitute 'special circumstances' in the way this term is used in the legislation as per Taxation Ruling TR 2007/6. The incident that led to these special circumstances would be considered to be out of your control.

You have provided a forecast budget of what you could have derived during the full year based on what you had derived in the previous year. It is accepted that except for the special circumstances you should have been able to pass the assessable income test in a full year. Therefore the Commissioner will exercise the discretion under paragraph 35-55(1)(a) of the ITAA 1997.

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