Edited version of private ruling

Authorisation Number: 1011619583253

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Ruling

Subject: claiming deferred losses/Commissioner's discretion - special circumstances

Question

Will the Commissioner exercise the discretion under paragraph 35-55(1)(a) (special circumstances) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include losses from your business activity in the calculation of your taxable income for the 2009-10 income year?

Answer: No.

This ruling applies for the following period

For the year ended 30 June 2010

The scheme commenced on

1 July 2003

Relevant facts

You commenced a business in the 2003 year.

To start the business you initially had a few start up costs, advertising and equipment purchases. This led to the business running at a loss for the first couple of years. You needed to go back to doing other work as an individual in the 2005 year.

You have kept the business running in a limited capacity. You have been submitting business returns since you started the business and have been carrying over the loss from the first couple of years.

You feel that had you been able to invest more time and money into the business it would have started turning over a profit in later years.

Relevant legislative provisions

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

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

Reasons for decision

Summary

There are no special circumstances applying in the 2009-10 income year that would allow the Commissioner to apply a discretion to allow the deferred losses to be offset against other income.

Detailed reasoning

Division 35 of the ITAA 1997 applies to losses from certain business activities for the 2000-01 income year and subsequent years. Under the rule in subsection 35-10(2) of the ITAA 1997, a 'loss' made by an individual (including an individual in a general law partnership) from a business activity will not be taken into account in an income year unless:

you satisfy subsection (2E) (Income requirement) and one of four tests in sections 35-30, 35-35, 35-40 or 35-45 of the ITAA 1997 is met;

the 'Exception' in subsection 35-10(4) of the ITAA 1997 applies; or

if one of the tests is not satisfied, the Commissioner exercises the discretion in section 35-55 of the ITAA 1997.

Generally, a 'loss' in this context is, for the income year in question, the excess of a taxpayer's allowable deductions attributable to the business activity over that taxpayer's assessable income from the business activity.

Losses that cannot be taken into account in a particular year of income, because of subsection 35-10(2) of the ITAA 1997, can be applied to the extent of future profits from the business activity, or are deferred until one of the tests is passed (and subsection (2E) is met), the discretion is exercised, or the exception applies.

In effect the losses are quarantined to that business activity.

Special Circumstances

Paragraph 35-55(1)(a) of the ITAA 1997 sets out the Commissioner's discretion as follows:

The Commissioner may, on application, decide that the rule in subsection 35-10(2) does not apply to a business activity for one or more income years if the Commissioner is satisfied that it would be unreasonable to apply that rule because the business activity was, or will be, affected in that or those income years by special circumstances outside the control of the operators of the business activity, including drought, flood, bushfire or some other natural disaster.

A note to this paragraph states:

Note: This paragraph is intended to provide for a case where a business activity would have satisfied one of the tests if it were not for the special circumstances.

In your case you have requested that the Commissioner exercise his discretion under paragraph 35-55(1)(a) of the ITAA 1997 in the 2009-10 financial year.

You have stated that you feel that if you had been able to invest more time and money into the business it would have started turning over a profit in later years.

The fact that you could only carry on the business on a limited basis because you had to do other work is not considered to be special circumstances for the purposes of this section. The circumstances have to be special and outside the control of the taxpayer and it is necessary to show that the special circumstances prevented the business activity from passing one of the objective tests.

The Commissioner will not exercise his discretion. Consequently you are required to defer your business losses in the 2009-10 income year. They can be offset against income from this source in later years or if one of the applicable tests is passed in a later year they can be offset against your other income at that time.