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Authorisation Number: 1011739738103

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Ruling

Subject: Commissioner's discretion

Question1

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 activities in the calculation of your taxable income for 2009-10 financial year?

Answer:

No.

Question 2

Will the Commissioner exercise the discretion in paragraph 35-55(1)(b) of the ITAA 1997 to allow you to include any losses from your business activities in the calculation of your taxable income for 2009-10 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

You run your business on a part time basis.

In 2010, you lodged an amendment request in relation to your 2008-09 income tax return.

Due to systems upgrades taking place at the time, the processing of your amendment request was delayed.

You lodged a complaint in relation to the delay.

Your amended assessment issued approximately three months later, resulting in a tax refund and interest on the overpaid amount.

You lodged a compensation application claiming compensation for interest and loss of business for the period of the delay. The grounds for your claim were described as 'defective administration due to the change of software by the Tax Office'.

You were later advised that you had received interest on the over paid amount, and that your situation did not give rise to a payment of compensation to you.

In the 2009-10 financial year, your business did not pass any of the four tests, contained in Division 35 of the ITAA 1997, to determine the commerciality of a business.

You requested the Commissioner exercise his discretion to allow you to claim your losses for the 2009-10 financial year in relation to your business.

You claim that, as a result of the delay in processing your amendment request, your business cash flow was adversely affected and you were unable to take on new work during the delay period.

You state that your cash flow is 'tenuous at the best of times' and is usually managed through the use of a credit card. During this period, you state that your credit card had reached its limit and was not available.

You have stated that your business activity would have met the assessable income test had you received your refund in a more timely manner.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 35

Income Tax Assessment Act 1997 Subsection 35-10(4)

Income Tax Assessment Act 1997 Subsection 35-30

Income Tax Assessment Act 1997 Subsection 35-35

Income Tax Assessment Act 1997 Subsection 35-40

Income Tax Assessment Act 1997 Subsection 35-45

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

Income Tax Assessment Act 1997 Paragraph 35-55(1)(b)

Reasons for decision

Division 35 of the ITAA 1997 sets out four tests to determine the commerciality of a business. These are contained in sections 35-30 (assessable income test), 35-35 (profits test), 35-40 (real property test) and 35-45 (other assets test) of the ITAA 1997. 

In broad terms, the tests require: 

· at least $20,000 of assessable income in that year from the business activity (section 35-30 of the ITAA 1997);  

· the business activity results in a tax profit in 3 of the past 5 income years (including the current year) (section 35-35 of the ITAA 1997);  

· at least $500,000 of real property, or an interest in real property, (excluding any private dwelling) is used on a continuing basis in carrying on the business activity in that year (section 35-40 of the ITAA 1997); or  

· at least $100,000 of certain other assets (excluding cars, motor cycles and similar vehicles and real property that is taken into account for the real property test) used on a continuing basis in carrying on the business activity in that year (section 35-45 of the ITAA 1997).  

If a business does not pass any of these tests, losses must be deferred except in certain circumstances. 

These circumstances are where the Commissioner exercises the discretion under paragraph 35-55(1)(a) or 35-55(1)(b) of the ITAA 1997. If the Commissioner exercises the discretion an individual whose business activity has not passed any of the tests can offset that business loss against other assessable income in the year of that loss. 

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 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 business 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.

In your case, you have stated that you business failed to meet one of the four tests due to the delay in processing your amendment request which adversely affected your business cash flow and, in turn, prevented you from taking on more work. Delays in payment are a regular or recurrent event that would reasonably be expected to occur when carrying on a business activity and is not considered to be 'special circumstances' within the meaning of paragraph 35-55(1)(a) of the ITAA 1997.

The Commissioner's discretion - lead time 

Under paragraph 35-55(1)(b) of the ITAA 1997, the Commissioners discretion can be exercised where: 

· the business activity has started to be carried on but because of its nature it has not satisfied, or will not satisfy, one of the tests set out in sections 35-30, 35-35, 35-40 or 35-45 of the ITAA 1997; and  

· there is an objective expectation that within a period that is commercially viable for the industry concerned the activity will meet one of the tests listed above or produce assessable income for an income year greater than the deductions attributable to it for that year.  

TR 2007/6 sets out the interpretation of the exercise of the Commissioners discretion under paragraph 35-55(1)(b) of the ITAA 1997. The following has been extracted from paragraphs 70 to 104 of this Ruling. 

The discretion is provided to ensure that certain individuals who carry on genuine commercial businesses are not disadvantaged due to particular circumstances which prevent them from satisfying tests 1 to 4. 

This arm of the safeguard discretion will ensure that the loss deferral rule in section 35-10 of the ITAA 1997 does not adversely impact on taxpayers who have commenced to carry on activities which by their nature require a number of years to produce assessable income. The 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. Such activities have an inherent characteristic that cannot be overcome by conducting the business activity in a different way but only by changing the nature of the business. 

In your case, there is nothing preventing your business from producing assessable income quite soon after it commenced, therefore, lead time, as set out in paragraph 35-55(1)(b) of the ITAA 1997, does not apply.

The inability of your business activity to satisfy any one of the non-commercial loss tests or make a tax profit is due to the small scale and sporadic nature in which it is carried on. Therefore, the Commissioner will not exercise the discretion in section 35-55 of the ITAA 1997 to allow you to offset the losses made from your business activities against your other assessable income for purposes of calculating your taxable income for the 2009-10 income year.