Edited version of private ruling

Authorisation Number: 1011678110781

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Ruling

Subject: Non Commercial Losses

Subject

Non Commercial Losses - Commissioners discretion - 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 your business activity in your calculation of taxable income for the 2009-10 to 2012-13 income years inclusive?

Answer

Yes.

This ruling applies for the following period:

1 July 2009 to 30 June 2013

The scheme commenced:

1 July 2001 to 30 June 2002

Relevant facts and circumstances

You commenced your business activity in 2001 year.

You sent a letter requesting an extension of time on a previous private ruling issued to you.

You provided the authorisation numbers (X and Y) to your previous private rulings and the following reasons were given to extend that private ruling:

A special circumstance destroyed the property on which the business activity was occurring.

In excess of 50% of the property and all systems were destroyed.

The area was declared as a disaster zone by the Australian Government.

You provided individual evidence in relation to the special circumstances.

However, the disaster has put production back to where they were in 2006, with the original ruling application.

The expectation of the business activity towards meeting the assessable income test has been postponed to 2013-14 income year.

You received an insurance payout for the systems etc. which were destroyed and now they have been replaced.

You provided income and expenses projections for your business activity from 2011 to 2016 years.

You provided details of your business activity and the information before and after the special circumstances affected your business activity.

You also have previously received two favourable private binding rulings which you applied for the Commissioner's discretion for the following years:

· 2002-03 to 2005-06 income years

· 2006-07 to 2009-10 income years

As per your request, the facts from the previous rulings that issued to you (authorisation numbers X and Y) also form part of the facts for this ruling.

In this application, you have stated that your business activity has not satisfied and will not satisfy any of the tests set out in sections 35-30 (Assessable income test), 35-35 (Profits test), 35-40 (Real property test) or 35-45 (Other assets test) of the ITAA 1997 until the 2013-14 income year.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 section 35-10

Income Tax Assessment Act 1997 section 35-30

Income Tax Assessment Act 1997 section 35-45

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

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, or

· satisfy subsection 35-10(2E) of the ITAA 1997 for that year and one of four tests in sections 35-30, 35-35, 35-40 or 35-45 of the ITAA 1997 is met, or

· the Commissioner exercises the discretion in section 35-55 of the ITAA 1997.

Your business activity will only be potentially subject to these provisions if it is carried on as a business.

You have stated that the activity is carried on as a business and this ruling is made on the basis of accepting that claim.

Section 35-1 of the ITAA 1997 provides that an income requirement must be met (along with certain tests) in order to include losses from a business activity in your taxable income calculation. You have satisfied the income requirement in subsection 35-10(2E) 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) of the ITAA 1997 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;

The Note to paragraph 35-55(1)(a) of the ITAA 1997 states that the particular 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 circumstance.

The above paragraph 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.

It can be seen that 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.

For the Commissioner to exercise the discretion in paragraph 35-55(1)(a) of the ITAA 1997, the Commissioner should be satisfied that the business activity was affected in the year by the special circumstances.

You stated that you did not satisfy the assessable income test in section 35-30 of the ITAA 1997 due to the special circumstances in the 2009-10 income year.

The difficulty you experienced is considered to be 'special circumstances' as it was outside your control for the purposes of paragraph 35-55(1)(a) of the ITAA 1997. The independent evidence you provided support the special circumstances and the special circumstances have affected your income producing activity.

In view of the above, it is accepted that the difficulties you faced were sufficiently 'unusual' to constitute 'special circumstances' and that it prevented the activity from passing the assessable income test in section 35-30 and the other assets test in section 35-45 of the ITAA 1997 for the 2009-10 to 2012-13 income years.

As your business activity was affected by 'special circumstances' in the sense required by paragraph 35-55 (1)(a) of the ITAA 1997 in the 2009-10 to 20012-13 income years, the Commissioner is therefore satisfied that it would be unreasonable to apply the rule in section 35-10 of the ITAA 1997 in relation to your business activity for those years.

The Commissioner accepts that your activity would have returned sufficient income and passed the assessable income test for the 2009-10 to 2012-13 income years had it not been for the special circumstances.

In view of the above, the Commissioner will exercise the discretion in paragraph 35-55(1)(a) of the ITAA 1997, and therefore the rule in subsection 35-10(2) of the ITAA 1997 will not apply to your business activity for the 2009-10 to 2012-13 income years. This means that any 'loss' from that activity can be taken into account in the calculation of your taxable income.

Note:

The issue of this ruling of itself does not constitute a decision of the Commissioner under subsection 35-55(1) of the ITAA 1997 that the loss deferral rule in subsection 35-10(2) of the ITAA 1997 does not apply to you for the income years in question. That decision can only be made in issuing you your assessments, following lodgement of your income tax returns for these income years, being that for the income years ending 30 June 2009-10 to 2012-13. You can lodge the returns on the basis that the Commissioner is bound to make this decision as set out in this ruling, where the facts set out in the ruling do not differ materially from the actual facts concerning your business activity.

Summary of reasons for decision

The Commissioner will exercise the discretion in terms of paragraph 35-55(1)(a) of the ITAA 1997 for the 2009-10 to 2012-13 income years on the basis that the difficulties you encountered are considered to be 'special circumstance' in the sense in which this term is used in paragraph 35 55(1)(a) of the ITAA 1997.

As no test was satisfied in the 2009-10 income year, the rule in subsection 35-10(2) of the ITAA 1997 will apply to defer to a future income year any loss in relation to your activity for that year. A deferred loss is not disallowed and will be deductible against any taxation profit from your business activity, or similar business activity, in the future years.