Edited version of private ruling

Authorisation Number: 1011725777047

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Ruling

Subject: Commissioner's discretion - Non-commercial losses

Question and answer

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?

Answer: No.

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts

You conduct a business in partnership with another person.

During the 2009-10 income year, your business had sales income of a certain amount and expenses which exceeded the income. The business made a loss for the income year.

Due to the current trading of the business, the partnership expects to make a small loss in the 2010-11 income year. You then expect to break-even, or be profitable in the following year.

You have requested the Commissioner's discretion to allow you to claim your business losses in the 2009-10 income year based on special circumstances.

You state that your special circumstances are that as you recently retired from your employment, you were in receipt of retirement benefits which resulted in your income from other sources exceeding the $250,000 income threshold.

As your annual pension is less than $250,000, you will be below the income threshold in future years.

Relevant legislative provisions

Income Tax Assessment Act 1997 - Division 35

Income Tax Assessment Act 1997 - section 35-55

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

Reasons for decision

For the 2009-10 income year there have been changes to the non-commercial losses legislation to limit the circumstances where business losses can be offset against other income.

The introduction of the income requirement test means that individuals with an adjusted taxable income in excess of $250,000 for that year will not have access to the four tests. To be able to claim your losses in that year, you have to apply for the Commissioner's discretion under section 35-55 of the ITAA 1997 or meet one of the exclusions.

You have not been able to pass the income requirement test (under $250,000) due to the receipt of lump sum payments on your retirement from your employment.

You have requested the Commissioner's discretion on the basis that your business was affected by special circumstances in the 2009-10 income year.

The Commissioner's discretion - special circumstances

Under paragraph 35-55(1)(a) of the ITAA 1997, the Commissioner's discretion can be exercised where:

· The business activity is affected by special circumstances such that it is unable to satisfy any of the tests; and

· The special circumstances affecting the business activity are outside the control of the business activity.

Taxation Ruling TR 2007/6 sets out the Commissioner's interpretation of the exercise of the Commissioner's discretion under paragraph 35-55(1)(a) of the ITAA 1997. The following has been extracted from paragraphs 47 to 53 of this Ruling.

Special circumstances are ordinarily those affecting the business activity such that it is unable to satisfy a test and it would be unreasonable for the loss deferral rule to apply. Ordinary economic, weather or market fluctuations that might reasonably be predicted to affect the business activity would not be considered to be special circumstances. These fluctuations are expected to occur on a regular or recurrent basis and affect all businesses within a particular industry.

Although not limited to natural disasters, paragraph 35-55(1)(a) of the ITAA 1997 refers to special circumstances outside the control of the business activity, including drought, flood, bushfire or some other natural disaster. Cyclones, hailstorms and tsunamis are examples of other natural disasters that would come within the scope of the paragraph. These events are taken to be special circumstances outside the control of the operators of the business activity. The special circumstances must have affected the business activity.

The inability of your business activity to satisfy one of the four non-commercial loss tests was not due to special circumstances.

The information that you have provided is about why you have not been able to meet the income requirement test, and not about any special circumstances that affected your business. You state that your annual taxable income will not normally exceed $250,000.

There is nothing in Division 35 of the ITAA 1997 that allows an exemption from this test because of one-off payments.

In terms of paragraph 35-55(1)(a) of the ITAA 1997, there are no special circumstances outside of your control that have affected your business activity in the 2009-10 income year. There is no scope to allow the Commissioner's discretion under the special circumstances limb in section 35-55 of the ITAA 1997.

Therefore, as there are no special circumstances that have affected your business activity in the 2009-10 income year, the Commissioner will not exercise the discretion in paragraph 35-55(1)(a) of the ITAA 1997 to allow you to include any losses from your business activity in your calculation of taxable income for the 2009-10 income year.

Your share of the business losses for the 2009-10 income year will have to be deferred to the next income year where they may be deductible.