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Edited version of your private ruling
Authorisation Number: 1012472124235
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 calculating your taxable income for the financial year?
Answer
No.
This ruling applies for the following period:
Year ended 30 June 2010
The scheme commenced on
1 July 2009
Relevant facts and circumstances
You commenced business and a large volume of sales occurred however the global financial crisis and poor conditions resulted in a losses.
Due to large capital gains from the sale of property your income for non- commercial loss purposes was above $250,000 for the relevant financial year.
Relevant legislative provisions
Income Tax Assessment Act 1997 paragraph 35-55(1)(a)
Income Tax Assessment Act 1997 subsection 35-10(2E)
Reasons for decision
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 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.
The question of what constitutes 'special circumstances' has been judicially considered on many occasions. In the Federal Court case of Community Services Health, Minister for v. Chee Keong Thoo (1988) 8 AAR 245; (1988) 78 ALR 307, Burchett J considered 'special circumstances' in the context of the Health Insurance Act 1973 and made the following observation:
Those discretions are intended to be applied to a great variety of situations. In such a context, the core of the idea of 'special circumstances' is that there is something unusual or different to take the matter out of the ordinary course
Later, in the Federal Court Case of Secretary, Department of Employment, Education, Training & Youth Affairs v. Barrett and Another (1998) 82 FCR 524 'special' was considered in the context of 'special weather conditions' for the purposes of the Austudy Regulations 1990. Tamberlin J observed that:
The word 'special' must be read in context. In normal parlance it signifies that the event or circumstances in question are out of the ordinary or normal course.
Tamberlin J then quoted the following passage with approval from the AAT case of Re Beadle and Director-General of Social Security (1984) 1 AAR 362; (1984) 6 ALD 1:
An expression such as 'special circumstances' is by its very nature incapable of precise or exhaustive definition. The qualifying adjective looks to circumstances that are unusual, uncommon or exceptional. Whether circumstances answer any of these descriptions must depend upon the context in which they occur. For it is the context which allows one to say that the circumstances in one case are markedly different from the usual run of cases. This is not to say that the circumstances must be unique but they must have a particular quality of unusualness that permits them to be described as special.
Paragraph 47 of TR 2007/6 states that ordinary economic, weather or market fluctuations that might reasonably be predicted to affect the business activity would not be considered to be special circumstances.
In the relevant financial year you made a loss which you attribute to market anomalies, particularly with the global financial crisis.
It is not accepted that these circumstances constitute special circumstances in the way this term is used in the legislation. Market fluctuations, irrespective of how abnormal, are considered to be normal risks associated with the running of a business.
The Commissioner will not exercise his discretion under paragraph 35-55(1)(a) of the ITAA 1997. You are therefore required to defer your losses.
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