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Edited version of private ruling
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Ruling
Subject: Non-Commercial Losses: Commissioner's discretion
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 business activity in your calculation of taxable income for the income year ended 30 June 2010?
Yes.
This ruling applies for the following period
Year ended 30 June 2010
The scheme commenced on
1 July 2009
Relevant facts
You commenced carrying on your business activity.
The business is carried on as a partnership between you and your spouse.
Your business activity operates in and around area A.
During the 2009-10 income year the following events occurred affecting the operation of the business:
· Country A announced a ban on the export of product X.
· This ban significantly reduced the demand for product X.
· There was a natural disaster in area A. This is the predominant location where you carry on your business.
Due to this natural disaster you could not access area A during the natural disaster and for a significant time after. This resulted in no generation of income for a number of months.
Due to these unexpected events you will not generate a profit in 2009-10 and are unable to satisfy any of the Division 35 non-commercial loss rules. If these events did not occur simultaneously, you would have either made a profit or satisfied the assessable income test.
You have provided information demonstrating that you have generated a profit or satisfied the non-commercial loss rules in the five years prior to the special circumstances events in 2009-10.
Your projection for 2010-11 shows you expect to satisfy the assessable income test, however, you may not make a profit due to the ban by Country A still in effect during this year.
You expect by 2011-12 that the ban will be lifted and the business can once again operate at full capacity.
You project the business will yield results similar to when it was operating at full capacity and not affected by other circumstances.
Relevant legislative provisions
Income Tax Assessment Act 1997 Subsection 35-10(2).
Income Tax Assessment Act 1997 Subsection 35-10(4).
Income Tax Assessment Act 1997 Paragraph 35-55(1)(a).
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.
Reasons for decision
Losses from activities that do not meet any of the four tests under Division 35 of the ITAA 1997, or the exceptions in subsection 35-10(4) of the ITAA 1997, will be subject to the loss deferral rules in subsection 35-10(2) of the ITAA 1997, unless the Commissioner exercises a discretion under paragraph 35-55(1)(a) of the ITAA 1997.
For special circumstances to be considered, it will not only be necessary that an event or situation has occurred which is of itself unusual, but that it has resulted in the business activity failing to pass a test. Clearly, if the business activity would not have passed a test even if the event or situation had not arisen, we cannot say that the business activity was affected by special circumstances in the sense in which this term is used in paragraph 35-55(1)(a) of the ITAA 1997.
You state that if the ban on product X from Country A and the natural disaster in area A did not occur simultaneously you would have either made a profit or satisfied the assessable income test. This expectation is accepted as being reasonable based on past performance of your business activity.
It is accepted that the ban on product X from Country A and the natural disaster in area A affected your business activity which prevented you from either making a profit or satisfying the assessable income test.
The information that you have provided demonstrates that there is an objective expectation that your business activity will satisfy the assessable income test in 2010-11 even though you may not make a profit due to the ban still in effect during this year.
Therefore, the Commissioner's discretion under paragraph 35-55(1)(a) of the ITAA 1997 has been granted for the income year ended 30 June 2010.