Edited version of private advice

Authorisation Number: 1052235696310

Date of advice: 27 March 2024

Ruling

Subject: Non-commercial business loss - special circumstances

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 your fashion design activity in your calculation of taxable income for the relevant financial year?

Answer

Yes.

This ruling applies for the following period:

Year Ended 30 June 20XX

The scheme commenced on:

1 July20XX

Relevant facts and circumstances

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

You commenced a business of fashion designing on a specified date and trade under a specified trading name.

You sell the menswear fashion designs and provided us with details on the website you sell on.

When you commenced your business, you used savings as capital to fund your business.

On a specified date you suffered a workplace injury from your salary and wage job working. You provided details on your occupation and employer.

You received work cover payments to compensate for the loss of your salary and wage income.

You provided a report from your doctor detailing your injury along with the treatment and medical history.

The injury impacted your ability to work as you were unable to sit or complete computer work and heavy lifting for prolonged periods of time.

You paused running the fashion design business for a specified period due to the injury.

You provided the revenue your business activity had over multiple income years.

Your business activity incurred a loss of a specified amount for the relevant income year.

You occasionally use contractors to outsource logo design and other ad hoc design jobs.

You design the clothing and then use a manufacturer to supply the clothing.

Your daily duties include designing clothing, marketing, bookkeeping and customer enquiries.

You provided details of when you commenced selling through a specific worldwide retailer.

You expect to make a profit in a specified income year due to product improvements, increased marketing, and more attention to customer service.

You funded business losses with employment income, rental income, and family loans.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 35

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

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

Income Tax Assessment Act 1997 subsection 35-10(4)

Income Tax Assessment Act 1997 section 35-30

Income Tax Assessment Act 1997 section 35-35

Income Tax Assessment Act 1997 section 35-40

Income Tax Assessment Act 1997 section 35-45

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

Reasons for decision

Where an individual has a business loss, Division 35 of the ITAA 1997 needs to be considered.

Division 35 of the ITAA 1997 applies to losses from certain business activities. Under subsection 35-10(2) of the ITAA 1997, a loss made by an individual from a business activity will not be considered in an income year unless:

•         The exception in subsection 35-10(4) of the ITAA 1997 applied,

•         You satisfy the income requirement in subsection 35-10(2E) of the ITAA 1997 and one of the following four tests:

o   The assessable test (section 35-30 ITAA 1997)

o   The profits test (section 35-35 ITAA 1997)

o   The real property test (section 35-40 ITAA 1997)

o   The other assets test (section 35-45 ITAA 1997)

•         The Commissioner exercises the discretion in section 35-55 of the ITAA 1997

The exception outlined in subsection 35-10(4) applies to primary production or professional arts businesses. As your business is not a primary production or professional arts business, the exception does not apply.

The income requirement under subsection 35-10 (2E) is met if your income for non-commercial loss purposes is less than $250,000. You met the income requirement for the 2021-22 financial year; however, you were not able to satisfy any of the four tests. Your business losses are therefore subject to the deferral rule under subsection 35-10(2) unless the Commissioner exercise his discretion.

The Commissioner's approach to exercising the discretion under subsection 35-55(1) of the ITAA 1997 is outlined in Taxation Ruling TR 2007/6 Income Tax: non-commercial losses: Commissioner's discretion (TR 2007/6). There are two discretions available to the Commissioner under section 35-55 of the ITAA 1997: lead time and special circumstances. You have applied under special circumstances.

Special Circumstances

The special circumstances 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 unusual or different to distinguish them from the circumstances that occur in the normal course of conducting a business activity.

For those who satisfy the income requirement, there are two main factors that should be considered in deciding if it is appropriate to exercise the discretion, for an income year:

•         the business activity is affected by special circumstances such that it is unable to satisfy any of the tests; and

•         the special circumstances affecting the business activity are outside the control of the operators of the business activity.

Application to your circumstances

In your circumstances, your business activity was affected by an unforeseen workplace injury. This injury prevented you from being able to operate the business for majority of the relevant income year. The pause in business operations prevented you from meeting the assessable income test outlined in section 35-30 of the ITAA 1997.

The Commissioner accepts that in the absence of the special circumstances, it is reasonable to consider you would have met the assessable income test, as indicated by revenue reports for the several income years. Therefore, the Commissioner will exercise the discretion in paragraph 35-55(1)(a) to allow you to include the losses from the business activity in the calculation of your taxable income for the income year ended 30 June 2022.

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