Edited version of private advice

Authorisation Number: 1052129612095

Date of advice: 16 June 2023

Ruling

Subject:Commissioner's discretion for non-commercial business losses

Question

Will the Commissioner exercise the discretion in paragraph 35-55(1)(a) of the Income Tax Assessment Act 1997 to allow you to include the loss from your business activity, in the calculation of your taxable income for the year ended 30 June 20XX?

Answer

Yes

This ruling applies for the following periods:

1 July 20XX to 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You commenced trading as a sole trader in 20XX.

You made a profit from your sole trader business in the 20XX to 20XX income years, inclusive.

You were diagnosed with a relapse of illness in during 20XX and ceased business after that time. You had minimal business income in the 20XX income year.

You were initially unsure on whether you would continue work in the 20XX income year and you incurred some business expenses.

During the 20XX financial year, a reconciliation of fees previously charged to you was found that you were undercharged and as a result, additional fees were charged to you. These additional service fees charged related to income already declared and taxed in the prior financial year.

The business expenses incurred resulted in a net business loss for the 20XX income year.

You became entitled to and then received income protection insurance benefits during the 20XX income year and this exceeded $250,000.

You do not satisfy the $250,000 income requirement set out in subsection 35-10(2E) of the Income Tax Assessment Act 1997.

You have been unable to return to your business due to your illness and treatment and will therefore not be able to generate any future business income to offset the carried forward losses.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 35

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

Income Tax Assessment Act 1997 subsection 34-10(2)

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

Income Tax Assessment Act 1997 section 35-35

Income Tax Assessment Act 1997 section 35-55

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

Income Tax Assessment Act 1997 paragraph 35-55(1)(a)

Reasons for decision

The Commissioner will exercise the discretion in paragraph 35-55(1)(a) of the Income Tax Assessment Act 1997 to allow you to include the loss from your business activity in the calculation of your taxable income for the year ended 30 June 20XX.

Detailed reasoning

All legislative references are to the Income Tax Assessment Act 1997.

Division 35 applies to defer losses from non-commercial business activities unless:

•         you meet the income requirement in subsection 35-10(2E) and you pass one of the four tests referred to in subparagraphs 35-10(1)(a)(i) to (iv)

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

•         the Commissioner exercises discretion under section 35-55 to not defer the losses (subsection 35-10(1) and (2)).

You do not meet the income requirement in subsection 35-10(2E), (that is your taxable income, reportable fringe benefits and reportable superannuation contributions but excluding your business losses, exceed $250,000) and the activity is not an excepted business activity.

Your business loss is therefore subject to the deferral rule under subsection 35-10(2) unless the Commissioner exercises discretion.

Where you do not satisfy the income requirement in subsection 35-10(2E), paragraph 35-55(1)(a) provides that the discretion may be exercised for the income years in question where the Commissioner is satisfied that the business activity was affected in one or more income years by special circumstances outside the control of the operators of the business activity, including drought, flood, bushfire, or some other natural disaster.

Taxation Ruling TR 2007/6 Income tax: non-commercial business losses: Commissioner's discretion provides guidelines on how the discretion in subsection 35-55(1) may be exercised.

Paragraph 54 of TR 2007/6 states that the use of the word 'including' in paragraph 35-55(1)(a) 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.

Having regard to your circumstances and the principles set out in TR 2007/6 it is accepted special circumstances prevented you from making a tax profit in the 20XX income year.

Consequently, the Commissioner will exercise the discretion in paragraph 35-55(1)(a) to allow you to include the loss from your non primary production business activity in the calculation of your taxable income for the year ended 30 June 20XX.

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