Edited version of private ruling

Authorisation Number: 1011824734353

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Ruling

Subject: Non-commercial losses - Commissioner's discretion

Question

Will the Commissioner exercise his discretion to allow you to include any losses from your medical practice activities in calculating your taxable income for the year ended 30 June 2011?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 2011

Note:

The issue of this ruling of itself does not constitute a decision of the Commissioner under subsection 35-55(1) of the ITAA 1997 that the loss deferral rule in subsection 35-10(2) of the ITAA 1997 does not apply to you for the income year in question. That decision can only be made in issuing you your assessment, following lodgement of your income tax return for this income year, being that for the income year ended 30 June 2011. You can lodge this return on the basis that the Commissioner is bound to make this decision as set out in this ruling, where the facts set out in the ruling do not differ materially from the actual facts concerning your business activity.

Relevant facts and circumstances

You are a solo general practitioner.

You stopped seeing patients on medical grounds.

You received payments under a disability insurance policy.

The insurance policy protects you for loss of business income and is used to pay for business expenses.

You did not hire a locum as your insurer would reduce the payments under the policy.

You incurred various business expenses including rental, staff wage and superannuation, practice insurance, professional subscriptions, professional insurance, education and computing.

You have recently received medical clearance and intend to resume seeing patients and return to practise medicine in the current 2010-11 income year. However, as you will not be returning to work until near the end of the income year, you will not meet the $20,000 assessable income test.

Your adjusted taxable income for the purposes of subsection 35-10(2E) of the Income Tax Assessment Act 1997 (ITAA 1997) for the 2010-11 income year will be less than $250,000.

This ruling is given on the basis that you were operating a business for the 2010-11 income year.

Reasons for decision

Summary

The Commissioner has granted his discretion to allow you to claim the business losses incurred in operating your business in the 2010-11 income year on the basis of special circumstances. The Commissioner accepts that you would have passed the assessable income test had you not had a medical condition which prevented this.

Detailed reasoning

Non-commercial loss provisions

Division 35 of the ITAA 1997 prevents losses from non-commercial business activities (being conducted by an individual or a partner in a partnership) being offset against other assessable income in the year the loss is incurred. The loss is deferred unless:

· you satisfy the income requirement under section 35-10(2E) of the ITAA 1997 and pass one of the following four tests:

(a) at least $20,000 of assessable income in that year from the business activity (assessable income test)

(b) the business activity results in a taxation profit in three of the past five income years (profits test)

(c) at least $500,000 of real property, or an interest in real property, (excluding any private dwelling) is used on a continuing basis in carrying on the business activity in that year (real property test), or

(d) at least $100,000 of certain other assets (excluding cars, motor cycles and similar vehicles) are used on a continuing basis in carrying on the business activity in that year (other assets test), or

· · the Commissioner exercises his discretion (special circumstances or lead time), or

· · you meet the exception test (can only be met if the activity is a primary production or a professional arts business and your assessable income from that year from other sources that do not relate to that activity is less than $40,000).

The income requirement under section 35-10(2E) of the ITAA 1997 is met if the sum of the following is less than $250,000:

· your taxable income for that year

· your reportable fringe benefits total for that year

· your reportable superannuation contributions for that year

· your total net investment losses for that year.

The Commissioner may exercise his discretion to allow you to claim your business loss where special circumstances apply. Special circumstances in this context are those outside of the control of the business operator, including those such as drought, flood, bushfire or some other disaster, that have materially affected that activity.

It is intended that the Commissioner only exercise this arm of the discretion if one of the tests would have been satisfied but for the special circumstances.

Taxation Ruling TR 2007/6 provides guidelines on how the Commissioner exercises his discretion. The ruling states that whilst the legislation specifically refers to natural disasters as special circumstances it is not limited to these events.

TR 2007/6 provides the following example of when the discretion would be applied on the basis of special circumstances:

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 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 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.

Your situation is similar to the example described in TR 2007/6 (above). You are a medical practitioner operating on a solo basis and were unable to work during the 2008-09 and 2009-10 income years due to a medical condition. Your medical activities have produced assessable income in excess of $20,000 in previous income years. You will be returning to work in the 2010-2011 income year but as it is towards the end of the year you do not expect your business income to exceed $20,000. You will meet the less than $250,000 income requirement in the 2010-11 income year.

The Commissioner accepts that your business activity has been affected by your medical condition which was outside of your control and that in the absence of the medical condition it was probable that you would have passed the assessable income test in the 2010-11 income year.

The Commissioner will exercise his discretion for you to include your losses from your medical practice activity in calculating your assessable income for the 2010-11 income year.

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