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Edited version of private ruling
Authorisation Number: 1011746267459
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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 2009-10 year of income?
Answer
Yes.
This ruling applies for the following period
For year ended 30 June 2010
The scheme commenced on
1 July 2008
Relevant facts
You acquired stock for the purpose of resale.
You sold some of the stock during the particular financial year.
The remaining stock on hand with a cost price in excess of $20,000 was held in special storage with controlled conditions.
It was discovered in the recent financial year that the remaining stock was damaged and had to be dumped.
The damage occurred due to prolonged exposure to extreme climatic conditions causing damage to the seal which allowed hot air to enter the storage.
The event is not usual, and the particular climatic conditions were extreme..
Your taxable income for non-commercial losses purposes for the 2009-10 financial year was less then $250,000.
Reasons for decision
For the 2009-10 and later years of income, division 35 of the Income Tax Assessment Act 1997 (ITAA 1997) will apply to defer a non-commercial loss from a business activity unless:
· you meet the income requirement - subsection 35-10(2E) of the ITAA 1997 - and you pass one of the four tests - sections 35-30, 35-35, 35-40, 35-45 of the ITAA 1997
· the exceptions contained in section 35-10 of the ITAA 1997 apply; or
· the Commissioner exercises his discretion under section 35-55 of the ITAA 1997.
In your situation you meet the income requirement, but you do not meet any of the four tests in the year of income and none of the exceptions would apply. Your losses are therefore subject to the deferral rule, unless the Commissioner decides that it would be unreasonable for this to occur and exercises his discretion.
The relevant discretion contained in paragraph 35-55(1)(a) of the ITAA 1997 may be exercised for the income year in question where your business activity is affected by special circumstances outside your control.
'Special circumstances' are those circumstances which are sufficiently different to distinguish them from the circumstances that occur in the normal course of conducting a business activity, including drought, flood, bushfire or some other natural disaster.
For individuals who satisfy the income requirement, special circumstances are those which have materially affected their business activity, causing it not to meet any of the four tests. In this context, the Commissioner may exercise this discretion for the income year(s) in question where, but for the special circumstances the activity would have passed at least one of the tests.
It is accepted that the duration and extent of the extreme climatic conditions were special circumstances. The impact on your business was that the sealed room storage facility was affected, your stock valued at over $20,000 (cost price) was damaged and had to be dumped. It is reasonable to expect that if you had this stock available for sale that you could have sold it for in excess of $20,000, therefore passing the assessable income test in the 2009-10 year of income.
Having regard to your full circumstances, it is accepted that your business activity was affected by special circumstances outside your control and that these prevented you meeting one of the four tests contained in division 35 (assessable income test).
Consequently the Commissioner will exercise his discretion in the 2009-10 year of income.