Edited version of private ruling

Authorisation Number: 1011759713288

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Ruling

Subject: NCL- 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 2009-10 income 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 have stated that you commenced a business during 2009. This ruling has been provided on the basis that you were in business.

You rented a room with a separate company.

You paid the company a commission to operate the equipment during work hours and you operated it on week days and weekends for specified hours.

The company ceased to operate in 2010 and due to the prohibitive cost of relocating and the economic conditions, you decided to discontinue your business.

You did not advertise your business or seek an alternative place to locate the equipment.

Your income in the 2009-10 financial year was less than $XXX and expenses were more than $XXX.

Your income in the 2010-11 financial year was more than your expenses.

You did not meet any of the tests listed in section 35-10 of ITAA 1997 and nor did your activity fall within the exception category.

Your adjusted taxable income was less than $250,000.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 Section 35-10

Reasons for decision

Division 35 of the ITAA 1997 will apply to defer a non-commercial business loss from a business activity carried on by a taxpayer who is an individual unless:

· their business activity satisfies one of the four tests listed in section 35-10 of the ITAA 1997

· the Commissioner has exercised the discretion in section 35-55 of the ITAA 1997 the activity, or

· the individual comes within the exception to Division 35 which may apply to a primary production or professional arts business.

Under the measures the losses that cannot be offset against other income in the year in which they arise may be carried forward to be offset in a future year when there is a profit from the non-commercial activity (or against other income if certain criteria are satisfied or the Commissioner exercises his discretion).

The discretion in section 35-55 of the ITAA 1997 may be exercised for the income year in question where the business activity is affected by special circumstances outside of the control of the operators of the business activity. Such circumstances are specifically defined to include, but are not limited to, drought, flood, bushfire or some other natural disaster.

Taxation Ruling TR 2007/6 is about the Commissioner's discretion. It states the discretion is not intended to apply where a business activity makes a loss because of factors which can apply to any business and which do not affect the ability of the activity to satisfy one of the four tests. Rather, the discretion is intended to be available for a commercial business activity that has failed, or objectively is expected to fail for a period of time, to satisfy any of the tests for certain reasons outside the control of the operator. Paragraph 139 of Taxation Ruling TR 2007/6 provides the following example:

Andrew started a clock repair business in the 2001 income year. Andrew was new to the region and the industry and had yet to establish his clientele. Andrew had intended to operate his business full time but as his funding was very limited he chose to continue with his part time employment to support himself and only worked on his business activity in his spare time. Andrew's premises are in the back of a small arcade and he only opens for business on weekends while the other shops in the arcade are open every day of the week. The arcade is not in an area that attracts business on weekends. Andrew cannot afford advertising and has so few clients that he is unable to cover his expenses and has made losses each year. Andrew's business has yet to satisfy one of the four tests. Other businesses of this type are able to satisfy a test in the first year of operation.

The inability of Andrew's business activity to satisfy any of the four tests is due to his personal business choices as to hours of business, location and advertising, not any inherent characteristics that affect clock repair businesses. Accordingly the requirement of subparagraph 35-55(1)(b)(i) is not met and the Commissioner would not exercise the discretion.

In your case, you commenced an activity in 2009 and you did not meet any of the four tests listed in section 35-10 of the ITAA 1997 in the 2009-10 financial year. Your failure to meet the assessable income test was not due to special circumstances outside of your control, such as a natural disaster. Whilst we accept that the closing of the company was out of your control, this did not affect your business in the 2009-10 financial year. Additionally, the exception does not apply to you as your activity is not considered to fall within the definition of a primary production or professional arts business.

Based on the information you provided, your situation is not of the kind for which section 35-55 of the ITAA 1997 was enacted.

To conclude, the tax legislation does not permit the Commissioner to exercise his discretion for the 2009-10 financial year in your case.

Your loss will be deferred until a future year where one of the tests is satisfied or the Commissioner grants a discretion.