Edited version of private ruling

Authorisation Number: 1011680786279

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Ruling

Subject: Non commercial losses-Commissioner's discretion

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 financial year?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts

You are a qualified tradesman with 20 years experience.

You responded to a series of advertisements run by the Australian Government in open press. The Australian Government had designed a scheme whereby home owners could have their houses assessed by a person trained by the Australian Government for sustainability. This involved the examination of the home by the authorised person, who was to identify minor improvements which could be made to improve the sustainability of the house.

The scheme was set up to obtain clients via an extensive advertising campaign, run by the government. Interested home owners were to contact a central number and their details would he sent to the nearest assessor. There was no direct cost to the home owner, the fee was to be paid by the Australian Government to the assessor. The expected fee was $250 per assessment with the Australian Government suggesting four assessments per day could be done. You expected to do this work for three and a half days per week for 48 weeks earning $168,000 for one year.

The assessor was expected to contact the home owner to arrange a mutually convenient time to visit. The assessor was required to provide transport and all relevant infrastructure to run a small business.

Items of likely interest include double glazing, insulation, the location of trees, either to provide shade or to shield from noise, the elimination or reduction of external noise, the type of lighting in the house and water usage.

Recommendations could range from small items, like installing a dual flush cistern in the toilet, to changing all light fittings to be compact fluorescent units, to fitting weather seals to doors and windows through to more major items such as installing double glazed windows and planting a line of trees to provide shade in summer.

The assessor was to recommend various changes to the house, with indicative pricing, so the home owner could make their own decision about improving the sustainability of their house, and also reducing the running cost of the house in the longer term.

You successfully completed the training at a cost to you of $X,XXX that was provided by the Australian Government. You were certified as a home sustainability assessor.

Relying on these representations you bought additional plant and equipment necessary to commence assessing homes.

You conducted sustainability visits however you received no income form the Australian Government. You were verbally advised by the Department of Environment, Water, Heritage and the Arts after you had submitted the required contract to them, that the scheme may not go ahead however you should continue carrying out your private assessments.

Your income for non-commercial loss purposes for the relevant financial year was less than $250,000.

Reasons for decision

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 your activity was carried on as a business. This ruling is made on the basis of accepting this claim.

Detailed reasoning

Losses from activities that do not meet any of the four tests under Division 35 of the ITAA 1997, or the exception in subsection 35-10(4) of the ITAA 1997, will be subject to the loss deferral rule in subsection 35-10(2) of the ITAA 1997, unless the Commissioner exercises a discretion under paragraph 35-55 of the ITAA 1997 that it would be unreasonable to defer the loss.

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 financial 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;

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.  

Taxation Ruling TR 2007/6 (TR 2007/6) outlines the Commissioner's view of the discretion referred to in paragraph 35-55(1)(a) of the ITAA 1997. Paragraph 12 of TR 2007/6 states the Commissioner's discretion in paragraph 35-55(1)(a) may be exercised for the financial year(s) in question where the business activity is affected by special circumstances outside the control of the operators of the business activity.

Example 8 at paragraph 130 of TR 2007/6 describes the situation where Sam operated a bluetail fishing business which satisfied the assessable income test in 2003 and was expected to satisfy this test in the 2004 financial year. A local environment protection authority placed a temporary restriction on fishing in Sam's fishing grounds for the 2004 financial year which resulted in Sam's business making a loss in that year.

In this case the Commissioner would exercise the discretion in paragraph 35-55(1)(a) of the ITAA for special circumstances. The loss of business due to the restriction on fishing would be special circumstances which were outside Sam's 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 to apply. As a result, Sam is able to offset his business losses against his other assessable income in the 2004 financial year.

In your circumstances

You expected to satisfy one of the tests in the relevant financial year. The cancellation of funding for the scheme by the Australian Government is an event that you had no control over and therefore is considered to be special circumstances for the purposes of paragraph 35-55(1)(a) of the ITAA 1997.