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Edited version of your written advice
Authorisation Number: 1012753841524
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 2013-14 financial year?
Answer
No
This ruling applies for the following period
Year ending 30 June 2014
The scheme commenced on
1 July 2013
Relevant facts and circumstances
The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:
• Your private ruling application.
You carry on a business which made a loss in the relevant financial year.
Your employment income was over $40,000 in the relevant financial year.
You do not satisfy the <$250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997 due to a one off capital gain.
Relevant legislative provisions
Income Tax Assessment Act 1997 subsection 35-55(1)(a).
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 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 Commissioner's 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.
In your case, you received a one off capital gain in the relevant financial year. Receiving this gain did not affect your business, causing it to make a loss. Instead it caused you to fail the income requirement under subsection 35-10(2E) of the ITAA 1997. This is not considered to be 'special circumstances' for the purposes of paragraph 35-55(1)(a) of the ITAA 1997.
While we appreciate your situation, you must defer your loss. There is no other discretion available to the Commissioner in Division 35 of the ITAA 1997 that would allow you to claim your losses in the circumstances you describe.
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