Edited version of private ruling

Authorisation Number: 1011650932183

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Ruling

Subject: Non-commercial losses - Commissioner's discretion - special circumstances

1. Does your business income from your non primary production activity for the year ended 30 June 2010 include an amount paid to you by your employer?

No.

2. 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 non primary production activity in your calculation of taxable income for the year ended 30 June 2010?

No.

This ruling applies for:

Year ended 30 June 2010

Relevant facts

You are a sole trader carrying on a non primary production activity. Your activity returned assessable income and made a loss in the year ended 30 June 2010.

You consider that your activity has passed the assessable income test for the year ended 30 June 2010 if the payment you received from your employer is considered business income. Pay-as-you-go withholding has been deducted from this payment.

In the year ended 30 June 2010 you had to reduce your activities due to a personal circumstance. You negotiated a contract position with your employer. You received payments for part of that year. You were required to perform certain tasks by your employer.

You contend that even though tax has been withheld, these payments were in relation to your sole trader activity. You further contend that the payment from your employer should be added to the business turnover of your non primary production activity for the year ended 30 June 2010. This would have resulted in your activity passing the assessable income test.

You have provided details of your personal circumstances and have explained how it affected your business activity. You submit that your personal circumstances constitute circumstances beyond your control in accordance with paragraph 35-55(1)(a) of the ITAA 1997.

Subsequent to your application for a private ruling you have provided further information that included the assessable income for your activity for past years and a confirmation that the income from your activity is subject to fulfilling certain conditions.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 35-55

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

Income Tax Assessment Act 1997 section 35-30

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

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA of the ITAA 1936 applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA of the ITAA 1936 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 of the ITAA 1936 applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA of the ITAA 1936 may apply.

For more information on Part IVA of the ITAA 1936, go to our website www.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.

Summary of reasons for decision

Income you derived from your employer is not considered as business income for non-commercial loss provisions in Division 35 of the ITAA 1997.

The discretion under paragraph 35-55(1)(a) of the ITAA 1997 will not be exercised for the year ended 30 June 2010 as the Commissioner is not satisfied that your personal circumstance was the only reason that your non primary production activity could not pass a test in that year.

For the year ended 30 June 2010 the rule in subsection 35-10(2) of the ITAA 1997 will apply to defer to a future income year any loss that arises from your non primary production activity. A deferred loss is not disallowed and will be deductible against any taxation profit from your non primary production activity, or a similar business activity, in the future years.

Reasons for decision

Subsection 35-5(2) of the ITAA 1997 provides that the non commercial loss rules under Division 35 of the ITAA 1997 do not apply to those activities that do not constitute a business. Whilst the legislation provides the example of income from passive investments, other activities could be expected to include salary and wage income amongst other things.

You state that in the year ended 30 June 2010 you had to commence working as an employee due to your personal circumstance. The payment you received for the period of employment has been subjected to pay as you go withholding. This shows that you had been treated as an employee. Furthermore, you have shown this income as salary and wage income in your tax return.

You state that you were required to work for a certain period of time in your employment. This is a further indication that the payment you received was not for your non primary production activity.

As discussed above, the payment you received from your employer for the year ended 30 June 2010 was not part of your business income and would not be subject to the non-commercial loss provisions in Division 35 of the ITAA 1997.

Paragraph 35-55(1)(a) of the ITAA 1997 sets out the first arm of 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 (the excluded years) if the Commissioner is satisfied that it would be unreasonable to apply that rule because:

(a) the business activity was or will be affected in the excluded years by special circumstances outside the control of the operators of the business activity, including drought, flood, bushfire or some other natural disaster; or

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.

'Special circumstances' in the above paragraph is used in the context of a situation occurring such that it would be unreasonable for the Commissioner to apply the loss deferral rule for a particular year or years. For this to be the case, 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), as the Note to the paragraph indicates.

The assessable income of your non primary production activity was less than $20,000 for every year since its commencement. Accordingly, your activity has never satisfied the assessable income test in section 35-30 of the ITAA 1997.

You claim that your personal circumstance occurred in the year ended 30 June 2009 and as a consequence you were unable to attend to your activity in the same fashion that you had in previous years. However, your activity did not satisfy the assessable income test in any of the prior years, when your activity had not been affected.

The Commissioner's view in this situation is explained in paragraph 50 of the Taxation Ruling TR 2007/6 as follows:

In the situation where a business activity would have failed to satisfy a test even if the special circumstances had not occurred, it is unlikely that the Commissioner would consider it to be unreasonable for the loss deferral rules to apply and therefore the Commissioner would be unlikely to exercise the discretion.

In view of the above the Commissioner is not satisfied that the reason your activity could not satisfy the assessable income test in the year ended 30 June 2010 was solely due to your personal circumstance.

You contend that if the circumstance had not occurred, you would have returned in excess of $20,000 during the year ended 30 June 2010. You have further stated that this contention is conditional to have conducted the business in the same way as in previous years. Therefore, apart from your circumstances discussed, this could also have been a factor for your activity not being able to satisfy the assessable income test.

Under the circumstances the Commissioner is satisfied that it would be reasonable to apply the rule in subsection 35-10(2) of the ITAA 1997 to defer the losses from your non primary production activity for the year ended 30 June 2010.