Edited version of private ruling

Authorisation Number: 1011669888583

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Ruling

Subject: non-commercial losses and the Commissioner's discretion

1. Will the Commissioner grant his discretion to allow each partner to include their share of the loss from their business activity in calculating their taxable income for the year ended 30 June 2009?

No.

2. Will the Commissioner grant his discretion to allow each partner to include their share of the loss from their business activity in calculating their taxable income for the year ended 30 June 2010?

Yes.

This ruling applies for the following periods

1 July 2008 to 30 June 2009

1 July 2009 to 30 June 2010

The scheme commenced on

1 July 2008

Relevant facts and circumstances

The partners operate a business.

During the 2008-09 income year the partners sourced and purchased products from overseas and spoke to clients.

One partner became ill and was hospitalised during the 2008-09 income year.

In the early stages of the partner's illness, the business continued to purchase and sell products.

The business did not earn any assessable income in the 2008-09 income year. In the 2009-10 income year the business earned less than $20,000 of assessable income. Over half of the sales income was earned over a consecutive two month period.

The partnership has now ceased.

The activity did not meet the assessable income test, the profits test, the real assets test or the other income test in either of the 2008-09 or 2009-10 income years.

The partners believe that special circumstances, in the form of the partner's illness, prevented the business activity from meeting the assessable income test.

Each partner's income for non-commercial loss purposes was less than $250,000 for the 2009-10 income year.

This ruling has been prepared on the basis that the activity was conducted as a business for tax purposes.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 35-10

Income Tax Assessment Act 1997 Section 35-55.

Reasons for decision

Summary

For the year ended 30 June 2009

The Commissioner cannot exercise his discretion under section 35-55 of the Income Tax Assessment Act 1997 (ITAA 1997) in relation to your business. We are unable to determine the impact of the partner's illness on the business activity as no assessable income was earned during the year.

As no test was satisfied and the Commissioner's discretion will not be exercised, the loss generated from the activity should be deferred until the 2009-10 income year as the Commissioner's discretion will be exercised for that income year (see below).

For the year ended 30 June 2010

The Commissioner has exercised his discretion under section 35-55 of the ITAA 1997 to allow the partners to claim the losses from their business as we consider it was due to the impact the partner's illness which prevented the business from meeting the assessable income test.

Detailed reasoning

Division 35 of the ITAA 1997 will apply to defer a non-commercial business loss from a business activity carried on by a taxpayer (either as a sole trader or a partner in a partnership) who is an individual unless:

· their business activity satisfies one of the four tests listed in section 35-10 of the ITAA 1997

· the Commissioner has exercised the discretion in section 35-55 of the ITAA 1997 in respect of the activity, or

· the individual comes within the exception to Division 35 which may to apply to a primary production or professional arts business.

The discretion in section 35-55 of the ITAA 1997 may be exercised for the income year in question where the business activity is affected by special circumstances outside the control of the operators of the business activity. Such circumstances are specifically defined to include, but are not limited to, drought, flood, bushfire or some other natural disaster.

It is intended that the Commissioner only exercises this arm of discretion if one of the tests would have been satisfied but for the special circumstances. In other words, the discretion would not be exercised for a loss making activity which was not in any event going to pass an objective test, but which due to special circumstances has increased its loss (Delacy v. FC of T [2006] AATA 198; 2006 ATC 2119; (2006) 62 ATR 1053).

Taxation Ruling TR 2007/6 discusses the situations where the Commissioner's discretion may be applied due to the existence of special circumstances. Paragraphs 122 to 124 of TR 2007/6 provide the following example:

Allison runs a dance instruction business which satisfied the assessable income test in the 2004 income year and was expected to satisfy this test again in the 2005 income year. However in the 2005 income year Allison broke her leg and was unable to dance for 6 months. Allison had to cancel all her bookings for 6 months and as a result incurred a loss for the 2005 income year.

Allison's business did not satisfy any of the tests in Division 35 [of the ITAA 1997] in the 2005 income year. If the Commissioner does not exercise the discretion in the 2005 income year the losses from the dancing instruction business will be deferred.

In this case the Commissioner would exercise the discretion in paragraph 35-55(1)(a) [of the ITAA 1997] for special circumstances. Allison is a key person in the dancing instruction business. Her broken leg and inability to teach for 6 months would be special circumstances which were outside of her control. The business activity was expected to have satisfied a test if not for these special circumstances and consequently the Commissioner would be satisfied that it would be unreasonable for the loss deferral rule in section 35-10 [of the ITAA 1997] to apply. As a result, Allison is able to offset her business losses against her other assessable income in the 2005 income year.

The partnership commenced its activities during the 2008-09 income year but did not earn any assessable income. In the following income year over half of the income was received in a two month period.

Based on the information provided, the Commissioner is unable to determine the impact of the partner's illness on the business activities in the 2008-09 income year. This is because no assessable income was earned prior to the partner becoming ill to compare with the assessable income earned after the onset of their illness.

As we are unable to determine if the partnership would have passed any of the tests contained within the legislation in the 2008-09 income year, the Commissioner is unable to exercise his discretion in the partners' favour.

The Commissioner considers that the partner's illness severely impacted on the earning of assessable income in 2009-10 income year. Over half of the partnership's assessable income was received in a two month period. This was earned whilst the partner was ill.

The Commissioner considers that had the partner recovered from their illness, the partnership would have earned sufficient income to pass the assessable income test. Therefore, he will exercise his discretion to allow the individual partners to claim their share of the losses from this business activity in their tax returns for the year ended 30 June 2010.