Edited version of your written advice

Authorisation Number: 1012863367451

Date of advice: 21 August 2015

Ruling

Subject: Non-commercial losses and the 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 business activity in your calculation of taxable income for the 20CC-DD financial year?

Answer:

Yes.

This ruling applies for the following period

Year ended 30 June 20DD

The scheme commenced on

1 July 2014

Relevant facts

You commenced your business activity in 20WW.

The business activity produced more than $20,000 in assessable income, and an overall profit, in the 20XX-YY, 20YY-ZZ and 20ZZ-AA financial years.

During the 20AA-BB financial year, you suffered a work injury and were incapacitated for an extended period as a result.

You have provided doctor's certificates for the period from the injury to 20DD which state that you were unable to work during this period.

In the 20AA-BB and 20BB-CC financial years you had limited business income (under $20,000) and produced a loss. You were not required to defer your losses in these years because you had passed the profits test. Your business losses for the 20CC-DD year have been deferred.

You expect your business to return to profit in the 20DD-EE financial year.

Your income for non-commercial loss purposes in the 20CC-DD financial year was less than $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

You have requested that the Commissioner exercise the discretion under paragraph 35-55(1)(a) of the ITAA 1997 for special circumstances. 

The discretion in paragraph 35-55(1)(a) of the ITAA 1997 may be exercised where:

• you satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997 and the business activity is affected by special circumstances such that it is unable to satisfy any of the tests required; and  

• the special circumstances affecting the business activity are outside the control of the business activity.  

You satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997 as your income for non-commercial loss purposes was less than $250,000 in the 20CC-DD financial year.

Taxation Ruling TR 2007/6 set out the Commissioners interpretation of the exercise of the Commissioners discretion under paragraph 35-55(1)(a). The following has been extracted from paragraphs 47 to 54 of this Ruling:

Special circumstances are ordinarily those affecting the business activity such that it is unable to satisfy a test and it would be unreasonable for the loss deferral rule to apply. Ordinary economic, weather or market fluctuations that might reasonably be predicted to affect the business activity would not be considered to be special circumstances. These fluctuations are expected to occur on a regular or recurrent basis and affect all business within a particular industry.  

Although not limited to natural disasters, paragraph 35-55(1)(a) 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.

During the 20AA-BB financial year, you suffered a serious injury and you were unable to work for an extended period, only returning to full time work in 20DD. As a result, you were unable to generate sufficient business income to pass the assessable income test in the 20AA-BB, 20BB-CC and 20CC-DD financial years.

TR 2007/6 states that an illness affecting key personal might constitute special circumstances, depending on the facts. Your business activities rely on you as the key person. Your injury as a key person in your business is considered to be 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 prevented your business activity from meeting one of the non-commercial loss tests.

You were unable to fully conduct your business activity between 20AA and 20DD due to special circumstances. The business activity produced more than $20,000 in assessable income, and an overall profit, in the 20XX-YY, 20YY-ZZ and 20ZZ-AAfinancial years. In the 20AA-BB and 20BB-CC financial years you had limited business income (under $20,000) and produced a loss. However, in these years you passed the profits test.

It is accepted that you were unable to satisfy any of the non-commercial loss tests required due to special circumstances in the 20CC-DD financial year.  

Therefore, the Commissioner will exercise the discretion available in accordance with subsection 35-55(1) and paragraph 35-55(1)(a) of the ITAA 1997 for the 20YY-ZZ financial year.

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