Edited version of private ruling

Authorisation Number: 1011872754961

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Ruling

Subject: non commercial losses

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 primary production activity in your calculation of taxable income for the 2009-10 financial year?

Answer:

No.

This ruling applies for the following period

Year ended 30 June 2011

The scheme commenced on

During 2010

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.

In the 2010-11 financial year you commenced a business.

Whilst attracting clients you were reliant on your spouse's income to support your family.

Your spouse was affected by a medical condition and made a claim for compensation. Their medical condition and subsequent compensation claim resulted in a significant decrease in their income.

You closed your business in order to obtain fulltime employment.

The business had generated no income as at point of closure.

You incurred expenses in relation to the business.

You obtained full time employment.

Relevant legislative provisions

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

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

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

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

Reasons for decision

For the 2009-10 and later financial years, Division 35 of the ITAA 1997 will apply to defer a non-commercial loss from a business activity unless:

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

· the exceptions apply

· the Commissioner exercises his discretion.

In your situation, none of the exceptions would apply and although you satisfy the income requirement, you do not meet any of the four tests in the years of income under consideration. Your 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 your business activity is affected by special circumstances outside your control.

Paragraph 35-55(1)(a) of the ITAA 1997 refers to 'special circumstances' outside of the control of the operators of the business activity. No exhaustive definition is given of 'special circumstances' but the paragraph does include drought, bushfire and other natural disasters. 

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. 

It can be seen that to determine what is 'special circumstances', we need to look at the context in which the phrase is used. Also, it is clear that 'special circumstances' will be something out of the ordinary or unusual. 'Special circumstances' in paragraph 35-55(1)(a) of the ITAA 1997 is used in the context of a situation occurring such that it would be unreasonable for the Commissioner to apply the loss deferral rule for a particular year or years.

For this to be the case, it will not only be necessary that an event or situation has occurred which is of itself unusual, but that it has materially effected the business activity, causing it to fail the tests. Taxation Ruling TR 2007/6 provides examples of what may constitute an event materially effecting the business as:

· destruction of stock or equipment

· delays in ploughing, planting, harvesting

· delay in growth of crops

· inability of key operator to perform duties

· loss of business opportunities.

The context of these examples clearly shows the business activity itself must be directly affected. Ordinary economic, weather or market fluctuations or other events 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

Clearly, if the business activity would not have passed a test even if the event or situation had not arisen, we cannot say that the business activity was affected by 'special circumstances' in the sense in which this term is used in paragraph 35-55(1)(a) of the ITAA 1997.

You submit that due to a medical condition your spouse's income was reduced and that this loss of income affected your business operation. Information provided with your application indicates that this medical condition existed some time prior to your commencing your business activity and could not therefore be said to be unexpected and could reasonably be predicted to affect the business activity and not considered to be special circumstances as intended by paragraph 35-55(1)(a) of the ITAA 1997.

Additionally, it is not considered that the medical condition materially and directly affected your business activity. Its effect was to cause you to cease the business activity and to seek full time employment in order to provide a stable family income given your spouse's decreased earnings, rather than affecting the business activity itself.

As stated above, the medical condition your spouse experienced is not accepted as special circumstances, in the sense of being outside your control, and materially affecting your activity. Also, there is no evidence to show that had these circumstances not occurred your activity would have passed a test for the 2010-11 financial year.

Therefore the Commissioner will not exercise the discretion under paragraph 35-55(1)(a) of the ITAA 1997 and the losses from business for the 2010-11 financial year will need to be deferred in accordance with section 35-10 of the ITAA 1997. A deferred loss is not disallowed and may be deductible against any taxation profit from a similar business activity in future years.