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Edited version of your written advice
Authorisation Number: 1013124547610
Date of advice: 17 November 2016
Ruling
Subject: Business losses
Question 1
Can your lump sum payment be excluded when determining if the income requirement contained in subsection 35-10(2E) of the Income Tax Assessment Act 1997 (ITAA 1997) has been satisfied?
Answer
No.
Question 2
Will the Commissioner exercise the discretion in paragraph 35-55(1)(a) of the ITAA 1997 to allow you to include any losses from your business in the calculation of your taxable income for the 201X-1X financial year?
Answer
No
This ruling applies for the following period
Year ended 30 June 201X
The scheme commenced on
1 July 201X
Relevant facts
You have a business.The business is operated by you with no employees.
The business has been operating for several years.
In the 201X-1X financial year, you were made redundant by your employer. This was unexpected and resulted in a large employment termination payment. This payment has put you over the $250,000 income threshold.
As you are no longer working, you will be focusing on your business.
Your business has met the assessable income test as the business activity has more than $X0,000 income. The business activity produced a loss in the 201X-1X financial year.
Due to the payout received from your redundancy, you will have more available cash flow for the business and be able to reduce the debt.
Relevant legislative provisions
Income Tax Assessment Act 1997 - Division 35.
Income Tax Assessment Act 1997 - Section 35-55
Income Tax Assessment Act 1997 - Paragraph 35-55(1)(a)
Income Tax Assessment Act 1997 - Subsection 35-10(2)
Income Tax Assessment Act 1997 - Subsection 35-10(2E).
Reasons for decision
For the 200X-X0 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.
You satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997 if your income for non-commercial loss purposes is less than $250,000. In your situation, you do not satisfy the income requirement, that is, your taxable income, reportable fringe benefits, reportable superannuation contributions and net investment losses but excluding your business losses, exceeds $250,000. Also 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 Commissioner does not have any discretion to exclude a one off lump sum payment from your taxable income in order for you to satisfy the income requirement in subsection 35-10(2E) of the ITAA 1997.
Section 35-55 of the ITAA 1997 does allow the Commissioner to exercise a discretion in some limited circumstances.
The Commissioner's discretion in paragraph 35-55(1)(a) of the ITAA 1997 may be exercised for the financial year where the business activity is affected by special circumstances outside the control of the operators of the business activity.
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.
Taxation Ruling TR 2007/6 Income tax: non-commercial business losses: Commissioner's discretion 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 lump sum payment following your redundancy. Receiving this lump sum payment does not affect your business activity, 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.
It is acknowledged that your redundancy was outside of your control; however the lump sum payment does not affect your business activities.
While we appreciate your situation, 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 your circumstances.
Where you can not claim your loss in the current year under the non-commercial loss rules, your losses are simply deferred until a future year.
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