Edited version of your private ruling

Authorisation Number: 1012469515460

Ruling

Subject: Non-commercial losses-Commissioner's discretion

Question 1

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 first activity in your calculation of taxable income for the 2010-11 financial year?

Answer

No.

Question 2

Will the Commissioner exercise the discretion in paragraph 35-55(1)(c) of the ITAA 1997 to allow you to include any losses from your second activity in your calculation of taxable income for the 2010-11 financial year?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts and circumstances

You did satisfy the income requirement set out in subsection 35-10(2E) of the ITAA 1997 for the year prior to the 2010-11 financial year and in future years you will also satisfy that requirement. You did not satisfy the income requirement for the 2010-11 financial year.

It is accepted that you are in business. You commenced your first activity in the 1999-2000 financial year and your second activity in the 2008-09 financial year.

First activity

In 2008 the global financial crisis (GFC) became a major factor for many businesses collapsing.

Recovery has been slow. This meant that some businesses at the time of the collapse were holding significant stock that was suddenly worth much less than what was paid for them.

You decided to wait until the market recovered before moving this stock as you knew from your experience that if the companies did not fold, the market for this stock would recover and you would be able to minimise your losses or even make a profit.

In the meantime you kept buying stock that you saw as good value and sold what you could realising some losses and making some profits. This meant that you did not always turn over the stock that you had bought earlier as part of your business and which had formed part of your purchases and closing stock at the time the GFC occurred.

Due to market conditions that have occurred since 2008 the amount of stock turned over was large and the amount of purchases was slightly less. However the cost of sales for the purchases sold still amounted to a loss.

In the 2010-11 financial year you sold some longer held stock to minimise your losses.

As the market conditions picked up you made a profit in the 2011-12 financial year.

Second activity

You met the other assets test for the second activity for the 2010-11 financial year.

You commenced a primary production activity and have invested a substantial amount of money into infrastructure and equipment.

Your research found independent evidence that the commercially viable period for your primary production activity was five years.
You have provided projected profit and loss statements showing the primary production activity will produce a profit in the 2013-14 financial year.

Relevant legislative provisions

Income Tax Assessment Act 1997 paragraph 35-55(1)(a)
Income Tax Assessment Act 1997 paragraph 35-55(1)(c)
Income Tax Assessment Act 1997 subsection 35-10(1)
Income Tax Assessment Act 1997 subsection 35-10(2)
Income Tax Assessment Act 1997 subsection 35-10(2E)

Reasons for decision

Activity one

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

· you satisfy the income requirement and you pass one of the four tests

· the exceptions apply, or

· the Commissioner exercises his discretion.

In your situation, you do not satisfy the income requirement (that is your taxable income, reportable fringe benefits and reportable superannuation contributions but excluding your business losses, exceeds $250,000) and you do not come under any of the exceptions. Your business losses are therefore subject to the deferral rule unless the Commissioner exercises his discretion.

The relevant discretion may be exercised for the financial year in question where your business activity is affected by special circumstances outside your control.

For individuals who do not satisfy the income requirement, the business activity must have been materially affected by the special circumstances, causing it to make a loss. In this context, the Commissioner may exercise this discretion for the income year in question where, but for the special circumstances:

your business activity would have made a tax profit

the activity passes at least one of the four tests or, but for the special circumstances, would have passed one of the four tests.

Taxation Ruling TR 2007/6 sets out the Commissioner's interpretation of 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.

You reduced trading through the GFC and decided to wait until the market recovered before selling the product you held at the start of the GFC. When you did sell in the 2010-11 financial year you made losses.

The GFC was outside of your control and may be considered to be 'special circumstances', within the meaning of paragraph 35-55(1)(a) of the ITAA 1997, in some situations. However, it was your decision to reduce trading and hold stock that prevented your activities from making a tax profit and not the GFC. While this cautious approach was taken to limit business losses during this time, this decision was within your control and is not considered to be 'special circumstances'.

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

Activity Two

The income requirement for the 2010-11 financial year has not been met and therefore in order to exercise the discretion for your primary production activity the Commissioner must be satisfied, based on evidence from independent sources, that your business activity will produce assessable income greater than the deductions attributable to it for that year, within a commercially viable period.

You have produced evidence from an independent source that your primary production activity will produce assessable income greater than the deductions attributable to it within a commercially viable period. This commercially viable period includes the 2010-11 financial year.

Having regard to your full circumstances, it is accepted that it is in the nature of the business activity that has prevented you making a tax profit. It is also accepted that you will make a tax profit within the commercially viable period for your industry.

Consequently the Commissioner will exercise his discretion in the 2010-11 financial year for your primary production activity.

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