Edited version of private ruling

Authorisation Number: 1011713409445

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Ruling

Subject: Non Commercial Losses- Commissioner's 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 income year?

Answer

No

This ruling applies for the following period

1 July 2009 to 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts

A few years ago you commenced a small business.

Your aim is to import stock and establish your own brand. You decided to limit your products so that you were seen as a specialist in the area. You also used various methods to increase the market share.

During the first year in operation you were establishing the activity and purchasing stock.

You have always operated without any external financing. You receive income and then purchase new stock. You were also required to purchase in bulk. Part payment for purchases was made at the placement of order and the full payment was made when the stock was dispatched. You were required to make additional payments for freight.

You usually received cash on delivery. However, during the relevant year due to an incident with one of your customers you were unable to purchase stock.

In the mean time you found another venue to display your stock and a new advertising campaign was established. Another order for stock was planned but due to the incident with the customer you had to delay the order.

As a consequence you were not able to satisfy the assessable income test in section 35-30 of the ITAA 1997 in the relevant year.

You have provided information with regards to the income and expenses for the previous years and income for the year you are requesting the Commissioner's discretion.

You have satisfied the income requirement in subsection 35-10(2E) of the ITAA 1997 in the 2009-10 income year.

You are requesting the Commissioner to exercise the discretion in paragraph 35-55(1)(a) of the ITAA 1997 for the income year to allow you to include any losses form your business activity in your calculation of taxable income for the income year.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 paragraph 35-10(2).

Income Tax Assessment Act 1997 paragraph 35-10(3).

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

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 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 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 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 applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website 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.

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

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

You state that your activity was carried on as a business and this ruling is made on the basis of accepting this claim. You have also 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) 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 circumstances.

The above paragraph refers to 'special circumstances' outside 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 relevant income year by the special circumstances.

For the 2009-10 income year, your activity did not pass any of the tests in Division 35 of the ITAA 1997.

You have stated that due to unavoidable circumstances you were not able to satisfy the assessable income test in section 35-30 of the ITAA 1997.

The Commissioner considers that the unavoidable circumstances you have stated are not unusual or unexpected in the normal course of business. Therefore, such events are not 'special circumstances' in terms of paragraph 35-55(1)(a) of the ITAA 1997.

Accordingly, it would be reasonable to apply the rule in subsection 35-10(2) of the ITAA 1997 in relation to your activity for the 2009-10 income year.

Summary of reasons for decision

The Commissioner will not exercise the discretion under paragraph 35-55(1)(a) of the ITAA 1997 for the income year on the basis that it is not accepted that your activity has been affected by special circumstances in the sense in which this term is used in paragraph 35-55(1)(a) of the ITAA 1997.

For the income year, 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 retail activity. A deferred loss is not disallowed and will be deductible against any taxation profit from your retail activity, or similar business activity, in the future years.

If your retail activity, or a similar activity, should satisfy an exception or satisfy one of the tests in Division 35 in any given year, then the whole of the deferred loss will be deductible in that year.