Edited version of private ruling

Authorisation Number: 1011727982915

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Ruling

Subject: Non-commercial losses - Commissioner's discretion

Question

Will the Commissioner exercise the discretion in paragraph 35-55 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 relevant financial year?

Answer

No

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts

During the relevant financial year, you commenced a business activity.

Your business did not derive any income. However, you incurred expenses.

During the period July to December of the relevant financial year, you derived in excess of $20,000 income from your business activities.

In the relevant financial year, your income from other sources is in excess of $250,000.

The reason for breaching the income requirement is that your adjusted taxable income in the relevant financial year is due to the impact of the termination payments you received as a result of your redundancy from your employment.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 35

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

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

Income Tax Assessment Act 1997 section 35-55

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

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

Reasons for decision

For the relevant financial 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 get access to the four tests. To be able to claim your losses in that year, you have to be able to get 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 impact of the termination payments you received as a result of your redundancy from your.

You have requested the Commissioner's discretion on the basis that it is unreasonable in your circumstances to not allow the losses.

Section 35-55(1) of the ITAA 1997 provides that in circumstances where it would be unreasonable to apply the rule in subsection 35-10(2) of the ITAA 1997, the Commissioner can exercise his discretion. The circumstances where the Commissioner can exercise his discretion are those due to special circumstances or lead time.

Special circumstances

Paragraph 35-55(1)(a) of the ITAA 1997 provides that 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.

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.

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 relevant financial year. There is no scope to allow the Commissioner's discretion under the special circumstances limb in section 35-55 of the ITAA 1997.

Lead time

The second arm of the discretion in section 35-55(1) of the ITAA 1997, where the Commissioner may exercise the discretion and in particular for circumstances where the income requirement has not been satisfied, is paragraph 35-55(1)(c) of the ITAA 1997.

Paragraph 35-55(1)(c) of the ITAA 1997 states that the discretion may be exercised where the business activity has started to be carried on:

· because of its nature it has not met one of the tests set out in Division 35 of the ITAA 1997, and

· there is an expectation that the business activity of an individual taxpayer will either pass one of the tests or produce a taxation profit within a period that is commercially viable for the industry concerned.

The note to paragraph 35-55(1)(c) of the ITAA 1997 states:

Note: This paragraph is intended to cover a business activity that has a lead time between the commencement of the activity and the production of any assessable income. For example, an activity involving the planting of hardwood trees for harvest, where many years would pass before the activity could reasonably be expected to produce income.

The type of feature contemplated by the phrase 'because of its nature', in the context in which it appears, is that referred to in the note quoted above. That is, that there is an inherent or innate feature of the activity resulting in an inability to produce income in the year of commencement and (in most cases) a number of years thereafter: FC of T v Eskandari (2004) FCA 8; 54 ATR 695.

Based on the above, we do not consider that the intention in paragraph 35-55(1)(c) of the ITAA 1997, applies to your type of business activity.

Therefore, the Commissioner will not exercise his discretion in paragraph 35-55(1)(c) of the ITAA 1997 to allow you to offset losses made from your business activity against your other assessable income in the calculation of your taxable income for the relevant financial year.

Conclusion

The information that you have provided is about why you have not been able to meet the income requirement test, not about circumstances beyond your control that affected your business. You state that this is a one-off occasion.

There is nothing in the legislation 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 relevant financial year. Further, in terms of paragraph 35-55(1)(c) of the ITAA 1997, there is nothing 'because of its nature' that applies to your type of business activity. There is no scope to allow the Commissioner's discretion under section 35-55 of the ITAA 1997.

You are not allowed to include the business losses in the calculation of your taxable income for the relevant financial year due to your failure to satisfy the income requirement test in subsection 35-10(2E) of the ITAA 1997. Your failure to satisfy this test is due to a one-off payment as a result of your redundancy from your employment. There is nothing in Division 35 of the ITAA 1997 that allows an exemption from this test.