Edited version of private ruling

Authorisation Number: 1011812360685

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Ruling

Subject: Non commercial losses - 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 income year?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2010

The scheme commences on:

1 July 2009

Relevant facts and circumstances

Your business was operated through a trust until the recent year.

The business hires out assets.

Total business turnover in the year was over $10m.

You own the assets in your own name.

You hire out these assets to the trust for a fee.

The assets were put in your name for asset protection purposes.

In the recent year, you decided that due to the success and growth of the business, the business should be operated through a company structure. This is now the best way to protect your assets.

The business activity that you carried on as an individual made a loss for the 2009-10 financial year.

Your income and expenditure from all sources for the year shows wages, investment income and a trust distribution. You have a net loss from your business activity and a carried forward loss. You do not meet the <$250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997.

You believe that the overall business (combining the different entities) is profitable for the year and that the special circumstance was the need to protect private assets that split the area of the business between entities.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 35-10(1)

Income Tax Assessment Act 1997 subsection 35-10(2)

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

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

Reasons for decision

Summary

The reason your business activity produced a loss is due to your chosen business structure. This is not a special circumstance outside of your control. Therefore the Commissioner will not exercise the discretion available for the 2009-10 financial year.

Detailed reasoning

From the 2009-10 income year, section 35-10 of the Income Tax Assessment Act (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 a discretion to allow the inclusion of the losses in certain circumstances.

The income requirement under subsection 35-10(2E) of the ITAA 1997 is satisfied if your income for non-commercial loss purposes is less than $250,000. In your case, you do not meet the income requirement. Therefore, the losses from your asset hire activity must be deferred unless a discretion is exercised.

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.

Although not limited to natural disasters, paragraph 35-55(1)(a) refers to 'special circumstances' as including drought, flood, bushfire or some other natural disaster. 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. Some indicators of the effects on the business activity that could lead to the exercise of the discretion in regard to the special circumstances limb are:

· destruction of stock or equipment (refer to Example 2 at paragraph 112 of TR 2007/6);

· delays in ploughing, planting, harvesting etc (refer to Example 3 at paragraph 115 of TR 2007/6);

· delay in growth of crops (refer to Example 4 at paragraph 118 of TR 2007/6);

· inability of operator to perform duties (refer to Example 5 at paragraph 122 of TR 2007/6); and

· loss of business opportunities (refer to Example 6 at paragraph 125 of TR 2007/6).

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.

You have requested the Commissioner's discretion on the basis that your business structure, chosen originally to protect your assets, does not allow your business losses to be claimed against your income.

In terms of paragraph 35-55(1)(a) of the ITAA 1997, there are no special circumstances outside of your control that have affected your business activity in the 2009-10 year. There is no scope to allow the Commissioner's discretion under the special circumstances limb in section 35-55 of the ITAA 1997.

There are no other discretions, exemptions or exclusions that apply to your situation.