Edited version of private ruling

Authorisation Number: 1011768366635

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Ruling

Subject: Commissioner's discretion

Questions

1. 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 the calculation of your taxable income for the 2009-10 financial year?

Answer: No.

2. Will the Commissioner exercise the discretion in paragraph 35-55(1)(c) of the ITAA 1997 to allow you to include any losses from your business activity in the calculation of your taxable income for the 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, in partnership with one other person, commenced your business activities in 20XX.

During 2010, your original partnership was dissolved and new partnership commenced to accommodate the inclusion of a third partner.

The business address of the new partnership is the same as the business address of the original partnership.

Your income for non-commercial loss purposes in the 2009-10 financial year was above $250,000.

Relevant legislative provisions

Income Tax Assessment Act 1997 - Section 35-1.

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

Income Tax Assessment Act 1997 - Subsection 35-55(1)

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

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

Reasons for decision

Separate business activities

Where there are separate business activities, Division 35 of the ITAA 1997 needs to be applied to each business activity separately.

The question of whether there are one or multiple business activities is a question of fact and overall impression. There are a number of factors which can be considered to help determine whether there are one or multiple business activities. These include the location of each of activity, the assets used in each activity, the goods and services produced by each activity, the interdependency of the activities and any commercial links between the activities.

In your case, your business has had a change in partnership during the 2009-10 financial year. The activity is still conducted from the same premises. The assets used have not changed and the same equipment is being utilised by the new partnership. The services provided are essentially the same and these services are being provided to the same clientele. Commercially, the original partnership and the new partnership are the conducting the same business activity with the only change being the partnership structure.

Based on the facts and the overall impression, the partnerships are conducting a single business activity and Division 35 of the ITAA 1997 will be applied to the business activity as a whole for the 2009-10 financial year.

Section 35-1 of the ITAA 1997 provides that an income requirement must be met (along with certain other tests), in order to include losses from a business activity in your taxable income calculation. If the income requirement is not met, the Commissioner may exercise discretion to allow the inclusion of the losses.

You satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997 if your income for non-commercial loss purposes is less than $250,000.

In your case, you do not satisfy the income requirement as your income for non-commercial loss purposes is above $250,000.

Special circumstances

The Commissioner's discretion in paragraph 35-55(1)(a) of the ITAA 1997 may be exercised for the financial year where the business activity is affected by special circumstances outside the control of the operators of the business activity.

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. For those individuals who do not satisfy the income requirement, special circumstances are those which have materially affected the business activity, causing it to make a loss.

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:

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. 

A change in the partnership structure of your business was not outside of your control and is not considered to be 'special circumstances' for the purposes of paragraph 35-55(1)(a) of the ITAA 1997.

Commercially viable period

In order to exercise the discretion in paragraph 35-55(1)(c) of the ITAA 1997, the Commissioner must be satisfied there is an objective expectation, based on evidence from independent sources, that your business activity will produce assessable income greater than the deductions attributable to it for that year, within a commercially viable period.

For the Commissioner to exercise the discretion you must be able to show that the reason your business activity is producing a loss is inherent to the nature of the business and is not peculiar to your situation. For example, the discretion will not be available where the failure to make a profit is for reasons other than the nature of the business such as, a consequence of starting out on a small scale, the hours worked or the need to build a client base.

In your case, you commenced your business activity during 2008. You have not provided any evidence from an independent source to establish the commercially viable period for your industry/business. However, you have stated that your business activity is expected to make a profit in the 2010-11 financial year, or two years after your business activities began.

Taking into consideration the information you have provided, the Commissioner is not satisfied that the commercially viable period for your type of business is two years.

Overall, there is nothing in the nature of the business activity that would prevent it from producing a profit in the year it commenced. The reason your business activities have made a loss is peculiar to your situation.

Where the business does not produce a profit within the commercially viable period, the Commissioner is not able to exercise the discretion.

Therefore, the Commissioner will not exercise the discretion available in accordance with subsection 35-55(1) and paragraph 35-55(1)(c) of the ITAA 1997 for the 2009-10 financial year.