Edited version of private advice

Authorisation Number: 1052125019865

Date of advice: 15 June 2023

Ruling

Subject: Non-commercial loss

Question

Will the Commissioner exercise his discretion under subsection 33-55(1)(a) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include losses from your ride share business activity in your taxable income for the relevant financial year?

Answer

No

This private ruling applies for the following period:

Year ended 30 June 2022

The scheme commenced on:

6 June 2022

Relevant facts and circumstances

This private ruling is based on the facts and circumstances set out below. If your facts and circumstances are different from those set out below, this private ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

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

You purchased a new vehicle with the intent of using it for ride share services and purchased motor vehicle insurance from the same date.

You applied for your industry license at that time from the relevant government authority however your application had been denied as you were not eligible for your industry licence until you had held your driver licence for 12 months. You were not aware of the eligibility criteria for the industry licence when you decided to purchase a new car and commence your ride share business activity.

You have your own ABN and are registered for GST. Your accounting is done on a cash basis. You received your booked hire service licence (BHSL) months later and began conducting your rideshare service.

You conduct your ride share business activity in your local government area. You undertook this activity every day for the rest of the relevant financial year.

You have submitted details of your income and expenses for your ride share activity for the relevant financial year.

You stated that your business activity was affected by the following:

•         COVID-19 lockdown and restrictions

•         flooding in your local government area

•         the relevant authority declining to issue an industry licence as you did not hold your driver licence for 12 months. You had to wait months before being issued the industry licence and because of this, you made car and insurance repayments during this time which you state caused you to make a loss

•         you experienced stress and anxiety due to a family matter which affected your ability to work. You sought and received medical assistance.

You expect your business activity to make a profit in the following financial year.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 subsection 35-55(1)

Income Tax Assessment Act 1997 subsection 35-55(2E)

Reasons for decision

Division 35 of the ITAA 1997 prevents losses from a non-commercial business activity carried out by an individual taxpayer (alone or in partnership) from being offset against other assessable income in the year in which the loss is incurred, unless:

•         the individual meets the income requirement and the business activity satisfies one of the stipulated tests (paragraph 35-10(1)(a));

•         an exception in subsection 35-10(4) applies; or

•         the Commission exercises the discretion in subsection 35-55(1) for the business activity for one or more income years.

In your situation, none of these exceptions would apply and although you satisfy the income requirement, you do not meet any of the four tests in the years under consideration. Your business losses are therefore subject to the deferral rule unless the Commissioner exercises his discretion.

You have requested the Commissioner exercise his discretion under paragraph 35-55(1)(a) of ITAA 1997 in the relevant financial year on the basis of special circumstances.

'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 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.

For the Commissioner to exercise the discretion they must be satisfied that where a business activity has been affected by special circumstances outside the control of the operators of that activity, had these circumstances not existed, the activity would have satisfied one of the four tests in Division 35, or made a tax profit.

In your case, you advised that had the special circumstances not applied, you would have satisfied the $20,000 assessable income test. You stated that your business was affected by COVID-19 lockdowns and restrictions in force in your local area, the floods in this local area in the relevant year, the delay in gaining your industry licence, and your inability to work due to stress and anxiety suffered as a result of a family matter.

COVID-19 and floods

The last lockdown in your local government area ended some 10 months prior to you commencing your ride share business activity. A few months later all domestic travel restrictions affecting your locale were removed. From this date there were some restrictions such as mask wearing and proof of vaccination required for venues. All remaining Public Health Directions regarding COVID-19 were revoked later that year.

Your local government area was also afflicted with floods some months prior to your ride share business activity, and you state this affected your ride sharing business activity.

The COVID-19 lockdowns and restrictions and the floods come within the meaning of the special circumstances described in subsection paragraph 35-55(1)(a) of the ITAA 1997. The Commissioner is not satisfied however that the lockdowns and restrictions prevented you from meeting the assessable income test as these events had passed by the time you qualified for your industry licence and could begin your ride share business activity. Therefore, COVID-19 and floods are not accepted as special circumstances in your situation.

Car and Industry licence

You have stated that the delay in receiving your industry licence was a special circumstance as you had to make car and insurance payments during this time which caused you to make a loss. The delay because you had not held your driver licence for more than 12 months as required for approval for the industry licence.

You made a business decision to purchase your car and insurance and chose to rely on your own resources in researching the requirements to obtain an industry licence rather than consulting with the relevant authority, industry bodies, or other drivers.

These are business decisions within your control and for that reason outside the meaning of special circumstances for which the Commissioner may exercise his discretion.

Family Matter

You had an ongoing family matter and sought legal and medical assistance in prior years and during the relevant income year. You suffered from stress and anxiety from this and received legal and medical assistance months before you began your ride share business activity. While we appreciate this must have been difficult for you, there is no evidence that this affected your ride share business activity once you had received your industry licence and started driving. You stated you continued to drive every day for the rest of the financial year.

Based on your circumstances you would not have passed one of the four tests or made a tax profit if the special circumstances had not occurred.

Therefore, the Commissioner will not exercise his discretion under paragraph 35-55(1)(a) of the ITAA 1997 for the relevant financial year. The losses from your ride share business activity cannot be used against your other income in the relevant financial year. The losses will be carried forward to be offset against later years where there is a profit from your ride share business activity or if you meet the requirements in Division 35 to be able to claim the deferred losses in a later year.

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).