Edited version of private advice

Authorisation Number: 1051745075617

Date of advice: 31 August 2020

Ruling

Subject: Non-commercial losses

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 yourbusiness activity in your calculation of taxable income for the 2019 to 2020 financial years?

Answer

No

This ruling applies for the following period:

Year ended 30 June 2020

The scheme commenced on:

1 July 2019

Relevant facts and circumstances

You satisfy the less than $250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997.

You carry on a business at you home in Australia.

The business is primarily concerned with business activity A.

You commenced business operations in the 2019financial year.

You submit that you were affected by special circumstances in the 2019/2020financial year.

You have submitted the following evidence to substantiate your claim:

·   Application for a private ruling

·   Two submissions prepared by your tax adviser in support of this application

You stated in your application that the "back-end costs" were incurred in the expectation of a new customer however with the pandemic the business arrangement did not complete. This caused expenses to exceed income in the 2019/2020 financial year.

You have provided detailed expense lists for the 2018/2019 and 2019/2020 financial years in support of your application.

We asked for evidence in regard to the effect of COVID-19 on your specific business and also how it has affected your industry However, you were not able to submit evidence that the special circumstances impacted on the profitability of your business. You also did not provide evidence that the pandemic affected the business consultation industry.

You submitted that the COVID-19 pandemic did not prevent the business from continuing and that it became clear that the consulting work would take considerable time to develop to the level required to cover your anticipated living costs.

Accordingly, you accepted a full-time role as an employee and therefore ceased your consulting business.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 35-10(1)

Income Tax Assessment Act 1997 subsection 35-10(2)

Income Tax Assessment Act 1997 subsection 35-10(2E)

Income Tax Assessment Act 1997 paragraph 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 meet the income requirement and you pass one of the four tests

·   the exceptions apply

·   the Commissioner exercises his discretion.

In your situation, none of the exceptions would apply and although you satisfy the income requirement, you do not meet any of the four tests in the years of income under consideration. Your 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.

'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.

For individuals who satisfy the income requirement, the business activity must have been materially affected by the special circumstances, preventing it from making a profit or passing one of the four tests. In this context, the Commissioner may exercise this discretion for the income year(s) in question where, but for the special circumstances your business would have:

·   made a tax profit or

·   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 application to your case you have requested that the Commissioner exercise his discretion under paragraph 35-55(1)(a) of the ITAA 1997 in the 2020financial year because of the current COVID-19 pandemic.

The Commissioner was not provided any evidence that your industry was affected by the pandemic so that COVID-19 could be considered a special circumstance that prevented a test being met. There was no evidence showing how similar businesses have been affected so the conclusion to be drawn is that other businesses were not broadly affected enough to consider this a special circumstance for this industry.

There is no evidence provided that you sought other work once your new customer did not eventuate. It appears on the evidence we have that once that business fell through, you closed your business. Other unsuccessful attempts at attracting other business would have meant there was more evidence to show how COVID-19 was preventing a test being met.

The question that must be addressed is whether the situation described is considered special circumstances. It is not accepted that these circumstances constitute special circumstances in the way this term is used in the legislation. The Commissioner is not satisfied that your activity was affected by the special circumstance, being the COVID-19 pandemic, to the extent that it meant it was unable to satisfy one of the relevant tests.

Therefore, the Commissioner will not exercise his discretion under paragraph 35-55(1)(a) of the ITAA 1997 for the years in question.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).