Edited version of private advice

Authorisation Number: 1052165486075

Date of advice: 6 September 2023

Ruling

Subject: Non-commercial business losses

Question

Will the Commissioner exercise his discretion to allow you to claim the loss incurred from your business against your assessable income for the 20XX income year under paragraph 35-55(1)(a) of the Income Tax Assessment Act 1997?

Answer

Yes

This ruling applies for the following period:

1 July 20XX to 30 June 20XX

The scheme commenced on:

1 July 2020

Relevant facts and circumstances

You were a qualified professional.

You have conducted a practice for many years.

You commenced your practice through a company and then as a sole trader.

You later closed your business.

You were the only qualified professional working in your business.

The onset of a disease as well as being diagnosed with a second illness has had an adverse impact on your business.

You have been diagnosed with a disease. The advancement of the disease has caused severe mobility issues with constant pain as well as you tire quickly.

You had breathing issues and were considered a high risk individual to contract an illness.

Your hamstrings tighten when you sat. With your weak knees that have arthritis, weak back and disabled right leg, you struggled without assistance to get out of your chair or lounge to stand up.

The effects of the disease together with contracting the illness caused difficulties for you being able to work normal hours and getting to your office.

You ceased attending your office as a result of the COVID-19 lockdowns.

You were diagnosed with an illness and admitted to hospital. You also experienced a fall and were very weak. This affected your ability to attend and action any work.

You were later diagnosed with narrowing of the airways which impacted your ability to work, including tiring easily and falling asleep while working.

Due to the COVID-19 lockdowns as well as being diagnosed with an illness together with having a disease impacted your business in the 20XX income year.

Your business relied solely on your ability to manage the business and could not operate without your involvement.

As a result of your reduced ability to perform work, your staff attended to all your clients' work under your supervision. However, due to your limited capacity to attend work, the time available to review work was reduced which affected the ability to service your clients in a timely manner.

As your clients were impacted, you were eventually forced to close your business.

You satisfied the non-commercial loss test in paragraph 35-10(1)(a) of the Income Tax Assessment Act 1997 for the 20XX, 20XX and 20XX income years of the basis that for each of the income years:

•                     your adjusted taxable income was less than $250,000, and

•                     your assessable income was at least $20,000.

You do not satisfy the non-commercial loss test for the 20XX income year under section 35-10 of the Income Tax Assessment Act 1997 as your adjusted taxable income is greater than $250,000 pursuant to section 35-10(2E).

Your assessable income for the 20XX income year is greater than $20,000.

You request the Commissioner to exercise his discretion to claim the loss incurred from the business against your assessable income from other sources for the 20XX income year.

Relevant legislative provisions

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

Does IVA apply to this private ruling?

Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or diverted profits tax benefit in connection with an arrangement.

If Part IVA applies, the tax benefit or imputation benefit can be cancelled (for example, by disallowing a deduction that was otherwise allowable) or you or another taxpayer could be liable to the diverted profits tax.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies, we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select 'Part IVA: the general anti-avoidance rule for income tax'.

Reasons for decision

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) as your taxable income, reportable fringe benefits and reportable superannuation contributions but excluding your business losses exceeds $250,000 and the activity is not an excepted business activity.

You meet the requirement of paragraph 35-30(a) that the assessable income of your business for the 20XX income year is at least $20,000.

Your business loss is therefore subject to the deferral rule under subsection 35-10(2) unless the Commissioner exercises his 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 (TR 2007/6) 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.

In your case, your business was impacted by your disease and illness. Your business relied solely on your ability to manage the work of the business as you were the only qualified professional. The business could not operate without your involvement. Due to your limited capacity to attend to your business, the time available to review the work was reduced which affected the ability to service your clients in a timely manner.

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 20XX income year.

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