Edited version of private ruling

Authorisation Number: 1011777534865

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Ruling

Subject: Non Commercial Losses

Question 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 in the calculation of your taxable income for the 2009-10, 2010-2011 and 2011-12 financial years?

Answer: No

Question 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 in the calculation of your taxable income for the 2009-10, 2010-2011 and 2011-12 financial years?

Answer: No

This ruling applies for the following periods

Year ended 30 June 2010

Year ended 30 June 2011

Year ended 30 June 2012

The scheme commenced on

1 July 2009

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The following document forms part of the scheme under consideration;

· your Private Ruling application which we received on XX April 20XX

You carry on a business.

Your business commenced over XX years ago.

You have three properties for sale.

You have taxable income which is not associated with your business exceeding $250,000.

You state that during the 20XX-XXfinancial year your business been severely affected by the global financial crisis, the adverse weather events of cyclones and flooding, several interest rate increases and a decline in tourism. It has not been possible to sell your properties even at substantially reduced prices.

All these factors prevented your business activities from producing a profit in the 20XX-XXfinancial year.

You do not meet the income requirement for the 20XX-XX financial year as your adjusted taxable income exceeds $250,000 and you expect this will also be the case for the 2010-11 and 2011-12 financial years.

Summary

The Commissioner will not exercise the discretion in paragraph 35-55(1)(a) of the ITAA 1997 (special circumstances) to allow you to include any losses from your business activity in your calculation of taxable income for the 20XX-XXto 2011-12 financial years. There are no special circumstances that have affected your business activity in the 20XX-XXyear which would allow the non-deferral of losses for the 20XX-XXto 2011-12 years.

You have been in the business for at least XX years, which is considered to exceed the commercially viable period for the industry. The discretion in paragraph 35-55(1)(c) of the ITAA 1997 (lead time) in relation to the 20XX-XXto 2011-12 will not apply where the failure to make a profit is for reasons other than the nature of the business itself.

Detailed reasoning

For the 20XX-XXand later income years, division 35 of the Income Tax Assessment Act 1997 (ITAA 1997) will apply to defer a non-commercial loss from a business activity unless (relevant to this division):

· you meet the income requirement and you pass one of the four tests

· the exceptions apply

· the Commissioner exercises his discretion.

In your situation, you do not satisfy the income requirement (that is, your taxable income, excluding your business losses, exceeds $250,000) and do not come under any of the exceptions. Your business losses are therefore subject to the deferral rule unless the Commissioner exercises his discretion.

Special circumstances

'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 do not satisfy the income requirement, the business activity must have been materially affected by the special circumstances, causing it to make a loss. In this context, the Commissioner may exercise this discretion for the income year(s) in question where, but for the special circumstances:

· your business activity would have made a tax profit

· the activity passes at least one of the four tests or, but for the special circumstances, would have passed one of the four tests.

The question of what constitutes 'special circumstances' has been judicially considered on many occasions. In the Federal Court case of Community Services Health, Minister for v. Chee Keong Thoo (1988) 8 AAR 245; (1988) 78 ALR 307, Burchett J considered 'special circumstances' in the context of the Health Insurance Act 1973 and made the following observation:

Those discretions are intended to be applied to a great variety of situations. in such a context, the core of the idea of 'special circumstances' is that there is something unusual or different to take the matter out of the ordinary course…

Later, in the Federal Court Case of Secretary, Department of Employment, Education, Training & Youth Affairs v. Barrett and Another (1998) 82 FCR 524 'special' was considered in the context of 'special weather conditions' for the purposes of the Austudy Regulations 1990. Tamberlin J observed that:

The word 'special' must be read in context. In normal parlance it signifies that the event or circumstances in question are out of the ordinary or normal course.

Tamberlin J then quoted the following passage with approval from the AAT case of Re Beadle and Director-General of Social Security (1984) 1 AAR 362; (1984) 6 ALD 1:

An expression such as 'special circumstances' is by its very nature incapable of precise or exhaustive definition. The qualifying adjective looks to circumstances that are unusual, uncommon or exceptional. Whether circumstances answer any of these descriptions must depend upon the context in which they occur. For it is the context which allows one to say that the circumstances in one case are markedly different from the usual run of cases. This is not to say that the circumstances must be unique but they must have a particular quality of unusualness that permits them to be described as special.

TR 2007/6 states at paragraph 47:

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 when carrying on a business activity and affect all businesses within a particular industry.

You advise your activities have been affected by the global financial crisis, the adverse weather events, interest rate rises and a decline in tourism.

It is considered that the impact of the global financial crisis would have declined considerable by the 2009-2010 financial year. The property market in the Port Douglas region would not have been more affected by the global financial crises than other tourist regions in Australia. There were increased flights to the region, a five star resort development and an increased presence of cruise ships to encourage visitors.

Your properties were not damaged by a cyclone or flooded as a result of adverse weather events. The affect of the weather on your business activity was not unusual or significantly different to other property developers or enough to take the matter out of the ordinary course.

Australia's economic conditions were stronger than expected in March 2010 when the Reserve Bank of Australia raised the cash rate by 25 basis points. At that stage interest rates to most borrowers were lower than average, raising the interest rate brought the rate closer to average.

It is not considered that any of the factors you have raised constitute special circumstances and in view of the above, the Commissioners discretion in respect of special circumstances will not be exercised for the 20XX-XXto 2011-12 financial years.

Commercially viable period 35-55(1)(c)

For the 20XX-XXand later income years, division 35 of the Income Tax Assessment Act 1997 (ITAA 1997) will apply to defer a non-commercial loss from a business activity unless (relevant to this division):

· you meet the income requirement and you pass one of the four tests

· the exceptions apply

· the Commissioner exercises his discretion.

In your situation, you do not satisfy the income requirement (that is, your taxable income, excluding your business losses, exceeds $250,000) and do not come under any of the exceptions. Your business losses are therefore subject to the deferral rule unless the Commissioner exercises his discretion.

The relevant discretion may be exercised for the income year in question where:

· it is in the nature of your business activity that there will be a lead time before a tax profit can be produced

· there is an objective expectation your business activity will produce a tax profit within a commercially viable period for your industry.

Your business activity has been conducted for over 20 years. It is considered your business activity has exceeded the commercially viable period for the purposes of this discretion.

The discretion in paragraph 35-55(1)(c) of the ITAA 1997 in relation to your business for the 20XX-XXto 2011-2012 financial years will not apply as the discretion is not available in cases where the failure to make a profit is for reasons other than the nature of the business itself, and the commercially viable period has passed.