1011755096997 | Legal database

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Edited version of private ruling

Authorisation Number: 1011755096997

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Ruling

Subject: Non-commercial losses - Commissioner's discretion - 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 houseboat business activity in your calculation of taxable income for the 2009-10 year of income?

Answer

Yes.

This ruling applies for the following period

For year ended 30 June 2010

The scheme commenced on

1 June 2006

Relevant facts

You commenced your business activity in the particular financial year with the purchase of a houseboat to be hired out to the public.

You developed a business plan covering all aspects of the activity.

Based on your research you developed a forecast financial plan taking into account all running expenses, interest and depreciation expenses. The forecast was to make a running profit in the particular financial year and a net profit in a recentt financial year.

Due to the worsening and current state of the river levels caused by a prolonged drought, the houseboat industry has suffered an unforeseeable downturn that was outside your control.

Your taxable income for non-commercial losses purposes is in excess of $250,000 in the recent financial year.

Your business activity would pass the other assets test in the recent financial year.

Reasons for decision

For the 2009-10 and later years of income, Division 35 of the ITAA 1997 will apply to defer a non-commercial loss from a business activity unless:

· you meet the income requirement - section 35-10(2E) - and you pass one of the four tests - sections 35-30, 35-35, 35-40, 35-45 of the ITAA 1997

· the exceptions contained in section 35-10 of the ITAA 1997 apply; or

· the Commissioner exercises his discretion under section 35-55 of the ITAA 1997.

In your situation you do not meet the income requirement, therefore you do not get access to any of the four tests in the year of income and none of the exceptions would apply. Your losses are therefore subject to the deferral rule, unless the Commissioner decides that it would be unreasonable for this to occur and exercises his discretion.

The relevant discretion contained in paragraph 35-55(1)(a) of the ITAA 1997 may be exercised for the income year in question where your business activity is affected by special circumstances outside your control.

'Special circumstances' are those circumstances which are sufficiently different to distinguish them from the circumstances that occur in the normal course of conducting a business activity, including drought, flood, bushfire or some other natural disaster.

For the Commissioner to grant a discretion, you have to be able to show that the impact on your business of the special circumstance was to the extent that it stopped you from making a profit in that year.

It is accepted that the duration and extent of the drought causing reduced water levels in the river was special circumstances. The impact on your business was that there was a reduction in income compared to the forecast figures that you had developed through your research based on industry figures.

Having regard to your full circumstances, it is accepted that your business activity was affected by special circumstances outside your control and that these prevented you from making a profit.

Consequently the Commissioner will exercise his discretion in the 2009-10 year of income.

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