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Ruling

Subject: Non-commercial losses - Commissioner's discretion

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 2010-11 and 2011-12 financial years?

Answer:

No.

This ruling applies for the following periods

Year ended 30 June 2011

Year ended 30 June 2012

The scheme commenced on

1 July 2010

Relevant facts

You commenced your sole trader business activities providing professional services over 20 years ago.

Approximately eight years ago, your spouse was diagnosed with a life threatening illness and over the following years, underwent many medical procedures both in Australia and overseas.

During this time you took time off from your business to assist your spouse. You did not employ anyone to run your business in your absence.

The continued absences adversely affected your business with some long time clients going elsewhere.

Your spouse passed away in early 2010 and later that year you suffered a mild stroke due to the stress.

Your actual profit and loss figures for the past few years show your business activity produced an overall profit in the 2008-09 and 2009-10 financial years. Your income level between the 2008-09 and 2010-11 financial years remained fairly constant. However, your expenditure in the 2010-11 financial year increased by almost 30%, resulting in an overall loss.

Although you have not provided exact figures, you have stated that your business activity produced similar income in the 2011-12 financial year as the previous year, but your expenditure was not as high. However, your activities still produced an overall loss.

Your increased expenditure in the 2010-11 financial year was due, in part, to the payment of a business expense in arrears relating to the two previous years. It was confirmed that if the expense relating to the 2009-10 financial year had been paid in that year, your business would have produced an overall loss. A small profit would still have been produced in the 2008-09 financial year.

Your tax records show that your business activity also produced a profit in the 2001-02 and 2004-05 financial years.

Your income for non-commercial loss purposes in the 2010-11 and 2011-12 financial years was above $250,000.

Relevant legislative provisions

Income Tax Assessment Act 1997 - Section 35-1.

Income Tax Assessment Act 1997 - Subsection 35-10(2E).

Income Tax Assessment Act 1997 - Subsection 35-55(1)

Income Tax Assessment Act 1997 - Paragraph 35-55(1)(a).

Reasons for decision

Section 35-1 of the ITAA 1997 provides that an income requirement must be met (along with certain other tests), in order to include losses from a business activity in your taxable income calculation. If the income requirement is not met, the Commissioner may exercise discretion to allow the inclusion of the losses.

You satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997 if your income for non-commercial loss purposes is less than $250,000.

In your case, you do not satisfy the income requirement as your income for non-commercial loss purposes was above $250,000 in the 2010-11 and 2011-12 financial years.

The Commissioner's discretion in paragraph 35-55(1)(a) of the ITAA 1997 may be exercised for the financial year where the business activity is affected by special circumstances outside the control of the operators of the business activity.

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. For those individuals who do not satisfy the income requirement, special circumstances are those which have materially affected the business activity, causing it to make a loss.

Taxation Ruling TR 2007/6 sets out the Commissioner's interpretation on the exercise of the discretion under paragraph 35-55(1)(a) of the ITAA 1997. The following has been extracted from paragraphs 47 to 53 of this ruling:

· Although not limited to natural disasters, paragraph 35-55(1)(a) of the ITAA 1997 refers to special circumstances outside the control of the business activity, including drought, flood, bushfire or some other natural disaster. Cyclones, hailstorms and tsunamis are examples of other natural disasters that would come within the scope of the paragraph. These events are taken to be special circumstances outside the control of the operators of the business activity. The special circumstances must have affected the business activity. 

· However, the use of the word 'including' indicates that 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.

In your case, your spouse was diagnosed with a life threatening illness approximately eight years ago and you were unable to work in your business for extended periods while your spouse was undergoing medical procedures both in Australia and overseas. Your spouse passed away in early 2010.

It is accepted that these conditions were outside your control and are 'special circumstances' for the purposes of paragraph 35-55(1)(a) of the ITAA 1997. However, before the Commissioner can exercise the discretion you must be able to show that it was the special circumstances that caused your activities to make a loss.

Your income from the business activity has remained around the same level since the 2008-09 financial year, when the activity produced a profit. In recent years, your business has produced losses, not due to reduced income but due to increased expenses. There is no evidence to show that it was the special circumstances that caused your expenses to increase in the 2010-11 and 2011-12 financial years.

Therefore, the Commissioner is unable to exercise the discretion available in accordance with subsection 35-55(1) and paragraph 35-55(1)(a) of the ITAA 1997 in relation to your activities for the 2010-11 and 2011-12 financial years.

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