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Edited version of your private ruling

Authorisation Number: 1012557156704

Ruling

Subject: Commissioner's discretion

Question

Will the Commissioner exercise the discretion in subsection 35-55(1) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include any losses from your business in your calculation of taxable income for the 2010-11 and 2011-12 financial years?

Answer

No.

This ruling applies for the following period(s)

Year ended 30 June 2011

Year ended 30 June 2012

The scheme commences on

1 July 2011

Relevant facts and circumstances

You commenced your business in 2011 after being made redundant from your pervious employment.

You decided to build the business up from scratch rather than purchase a franchise and commissioned a logo, business cards, an internet profile and attended a course about running a small business.

You prepared income and expenditure projections for the 2010-11 and 2011-12 financial years where you anticipated assessable income in excess of $20,000 would be achieved in each year and an overall profit would be made.

You did not think it would take long to establish a stable clientele, however, the business was not as successful as planned and you suffered a period of severe depression.

Your health improved in the 2011-12 financial year and you re-focused your time on the business. However, you still experienced difficulty establishing a large enough client base to earn greater than $20,000.

The business did not satisfy any of the other non-commercial loss tests in the 2010-11 or 2011-12 financial year.

Relevant legislative provisions

Income Tax Assessment Act 1997 - Division 35

Income Tax Assessment Act 1997 - Subsection 35-10(4)

Income Tax Assessment Act 1997 - Subsection 35-30

Income Tax Assessment Act 1997 - Subsection 35-35

Income Tax Assessment Act 1997 - Subsection 35-40

Income Tax Assessment Act 1997 - Subsection 35-45

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

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

Reasons for decision

The Commissioner's discretion - special circumstances 

Under paragraph 35-55(1)(a) of the ITAA 1997, the Commissioner's discretion can be exercised where: 

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

In your case, you have stated that you did not think it would take long to establish a stable clientele, however, the business was not as successful as planned and you suffered a period of severe depression.

As stated above, an illness affecting key personnel can, in some cases, constitute special circumstances. However, before the Commissioner can exercise the discretion you must also be able to show that it was the special circumstances that prevented your business activity from passing one of the tests or producing a tax profit.

You have stated that even though your health has improved, and you have re-focused your time on the business, you are still experiencing difficulty establishing a large enough client base to earn greater than $20,000.

While your severe depression could constitute special circumstances for the purposes of paragraph 35-55(1)(a) of the ITAA 1997, when your health did improve you still experienced difficulty establishing a large enough client base to earn greater than $20,000.

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

The Commissioner's discretion - lead time 

Under paragraph 35-55(1)(b) of the ITAA 1997, the Commissioner's discretion can also be exercised where: 

Taxation Ruling TR 2007/6 sets out guidelines on how the Commissioner's discretion under paragraph 35-55(1)(b) of the ITAA 1997 may be exercised. The following has been extracted from paragraphs 70 to 104 of this Ruling. 

In your case, there is nothing in nature of your business that prevents it from producing assessable income quite soon after it has commenced.

Therefore, the Commissioner is unable to exercise the discretion in paragraph 35-55(1)(b) of the ITAA 1997 for the 2010-11 and 2011-12 financial years.


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