Edited version of private ruling

Authorisation Number: 1011673606357

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Ruling

Subject: Non-commercial losses- 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 the partnership activity in your calculation of taxable income?

Answer:

No.

This ruling applies for the following period

Year ended 30 June 2008

Year ended 30 June 2009

The scheme commenced on

1 July 2007

Relevant facts

The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:

· a private ruling application

· a business plan

· cash flow statements

· a letters from a consultant

· a letter from a government agency.

You operated a business.

The business received business income of less than $20,000.

The business made a loss in the income year.

The business did not pass any of the four tests.

The business engaged the services of a consultant to provided service to the business.

The business paid consultancy fees to the consultant.

The consultant did not provide service as contracted to the business because of the insolvency.

You stated that but not for the circumstances (note above), your activity would have passed the assessable income test in section 35-30 of the ITAA 1997.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 subsection 35-30

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 section 35- 55

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

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

Reasons for decision

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:

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

one of four tests in sections 35-30, 35-35, 35-40 or 35-45 of the ITAA 1997 is met 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, the discretion is exercised, or the exception applies.

Are you carrying on a business?

Your activity will only be potentially subject to these provisions if it is carried on as a business. You have stated in your private ruling application that the partnership activity was carried on as a business. This ruling is made on the basis of accepting this claim.

In addition on the facts given, the exception in subsection 35-10(4) of the ITAA 1997, has no relevance for the purpose of this ruling and you have not passed any of the four tests as required by sections 35-30 to 35-45 of the ITAA 1997.

The application of paragraph 35-55(1)(a) of the ITAA 1997

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

The Commissioner may decide that the rule in section 35-10 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:

(a) 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;

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.  

Paragraph 35-55(1)(a) of the ITAA 1997 refers to 'special circumstances' outside of the control of the operators of the business activity. No exhaustive definition is given of 'special circumstances' but the paragraph does include drought, bushfire and other natural disasters.

The question of what constitutes 'special circumstances' has been judicially considered on many occasions. In the Federal Court case of Community Services Health, Minister for v. Chee Keong Thoo (1988) 8 AAR 245; (1988) 78 ALR 307, Burchett J considered 'special circumstances' in the context of the Health Insurance Act 1973 and made the following observation:

Those discretions are intended to be applied to a great variety of situations. In such a context, the core of the idea of 'special circumstances' is that there is something unusual or different to take the matter out of the ordinary course

Later, in the Federal Court Case of Secretary, Department of Employment, Education, Training & Youth Affairs v. Barrett and Another (1998) 82 FCR 524, 'special' was considered in the context of 'special weather conditions' for the purposes of the Austudy Regulations 1990. Tamberlin J observed that:

The word 'special' must be read in context. In normal parlance it signifies that the event or circumstances in question are out of the ordinary or normal course.

Tamberlin J then quoted the following passage with approval from the AAT case of Re Beadle and Director-General of Social Security (1984) 1 AAR 362; (1984) 6 ALD 1:

An expression such as 'special circumstances' is by its very nature incapable of precise or exhaustive definition. The qualifying adjective looks to circumstances that are unusual, uncommon or exceptional. Whether circumstances answer any of these descriptions must depend upon the context in which they occur. For it is the context which allows one to say that the circumstances in one case are markedly different from the usual run of cases. This is not to say that the circumstances must be unique but they must have a particular quality of unusualness that permits them to be described as special.

To determine what is 'special circumstances', we need to look at the context in which the phrase is used. Also, it is clear that 'special circumstances' will be something out of the ordinary or unusual. 'Special circumstances' in paragraph 35-55(1)(a) of the ITAA 1997 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.

In your circumstances

You have provided cash flow statements indicating that the business would have passed the assessable income test under section 35-30 of the ITAA 1997 during the income year. However, due to the bankruptcy of the consultant this affected the setting up of the business and has contributed to business suffering a loss for the income years under consideration. You therefore request that the Commissioner exercise the discretion to allow you a deduction for the losses incurred due to special circumstances.

The bankruptcy of the consultant which affected the setting up and the ongoing operation of the business is not considered to be special circumstances outside your control for the purposes of paragraph 35-55(1)(a) of the ITAA 1997. In terms of paragraph 14 of Taxation Ruling TR 2007/6, such circumstances are specifically defined to include drought, flood, bushfire or some other natural disaster. In the case of other events, failure for no adequate reason to adopt practices commonly used in an industry to prevent or reduce the effects of certain circumstances may point to those circumstances not being outside the control of the operator.

There is a commercial risk taken by you operating this or any business. The failure of a consultant to provide it products or services to a business is considered an every day commercial risk that any business may face. Generally where services or products are not provided to a business, the business will seek to secure these from other suppliers.

In view of the above, it is not accepted that the insolvency of the consultant and the failure to provide contracted services are sufficiently unusual to constitute special circumstances and that it prevented the activity from passing the assessable income test in section 35-30 of the ITAA 1997. Therefore, the Commissioner will not exercise the discretion under paragraph 35-55(1)(a) of the ITAA 1997.