Edited version of private ruling

Authorisation Number: 1011715198361

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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 non-primary production activity in your calculation of taxable income for the year ended 30 June 2010?

Answer

No

This ruling applies for the following period

Year ended 30 June 2010

Relevant facts

You have been operating your non-primary production activity from a given location. You had several employees and several clients.

A copy of a letter you provided shows that you have been contracted to provide the service for a number of years. Over recent years with changes in legislation, the fixed term contracts are required to go through a tender process at the end of the term.

In the year ended 30 June 2010 you have been notified that your tender submission for the new term was unsuccessful.

After losing the tender you moved to a different location and now you operate your business activity at a small scale due to various reasons including reduced client base. Currently your client base is low but slowly increasing.

You have not passed any of the tests for the year ended 30 June 2010.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 35-55

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

Income Tax Assessment Act 1997 section 35-30

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

Does Part IVA, or any other anti-avoidance provision, apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 (ITAA 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 of the ITAA 1936 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 of the ITAA 1936 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 of the ITAA 1936 applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA of the ITAA 1936 may apply.

For more information on Part IVA of the ITAA 1936, 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

· one of four tests in sections 35-30, 35-35, 35-40 or 35-45 of the ITAA 1997 is met (together with an income requirement), or

· if one of the tests is not satisfied, the Commissioner exercises the discretion in section 35-55 of the ITAA 1997.

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.

You state that your non-primary production activity is carried on as a business and this ruling is made on the basis of accepting this claim.

Paragraph 35-55(1)(a) of the ITAA 1997 sets out the first arm of 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; or


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.

Tamberlin J 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.

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.

In your case your non-primary production activity did satisfy the assessable income in the years prior to the year ended 30 June 2010. The activity did not satisfy the test in the year in question. For the Commissioner to exercise the discretion in paragraph 35-55(1)(a) of the ITAA 1997, he should be satisfied that your activity was affected by a special circumstance and the activity would have satisfied one of the tests but for that special circumstance.

You were contracted to supply your service. Your contract was renewable at the end of the term through a tender process. At the end of fixed term contracts there is a requirement to openly advertise the business opportunity through a tender process. You were required to go through the tender process at the end of your term to provide service. Your tender was unsuccessful in the year ended 30 June 2010.

The tender process was a requirement over recent years. You were aware of this process. You were aware that you will not be able to continue your non-primary production activity at that location if your tender application was unsuccessful.

The circumstances in your case, that is the unsuccessful tender, do not have anything unusual, uncommon or exceptional to consider as special. This was something expected in your business when you are contracted to provide services. We do not consider the tender procedure was any different to the ordinary procedures in the industry concerned. There is no unusualness in the arrangement to that permits it to be special.

Although your activity has suffered due to moving to a new location causing it not to satisfy the assessable income test, the circumstances involved in this were not special as these terms are used in Division 35 of the ITAA 1997.

Accordingly the Commissioner will not exercise the discretion in paragraph 35-55(1)(a) of the ITAA 1997 in relation to your non-primary production activity for the year ended 30 June 2010.

As no test was satisfied for the year ended 30 June 2010, the rule in subsection 35-10(2) of the ITAA 1997 will apply to defer to a future income year any losses that arises from your non-primary production activity for that income year. A deferred loss is not disallowed and will be deductible against any taxation profit from your activity or similar business activity in the future years. If your activity or a similar business activity should satisfy one of the tests in Division 35 of the ITAA 1997 in any given year, then the whole of the deferred loss will be deductible in that year.

Summary of reasons for decision

The Commissioner will not exercise the discretion in terms of paragraph 35-55(1)(a) of the ITAA 1997 in relation to your non-primary production activity for the year ended 30 June 2010 on the basis that the difficulties you encountered are not considered to be 'special' in the sense in which this term is used in Division 35 of the ITAA 1997.

As no test was satisfied in the year ended 30 June 2010, 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 activity, in the future years.