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Ruling
Subject: deferred 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 accumulated deferred losses from your now ceased primary production business investment in your calculation of taxable income for the 2010-11 financial year?
Answer: No.
This ruling applies for the following period
Year ended 30 June 2011
The scheme commenced on
1 July 2010
Relevant facts
You have been a participant in the primary production business investment for a number of years.
You currently have deferred losses in relation to this activity.
The activity has now ceased and the management company has gone into liquidation.
The liquidators have advised you that it appears unlikely that you will receive any returns as a result of the sale of the company's assets.
Relevant legislative provisions
Income Tax Assessment Act 1997 - Section 35-1.
Income Tax Assessment Act 1997 - Subsection 35-10(2)
Income Tax Assessment Act 1997 - Subsection 35-55(1)
Income Tax Assessment Act 1997 - Paragraph 35-55(1)(a).
Reasons for decision
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.
Taxation Ruling TR 2007/6 sets out the Commissioner's interpretation on the exercise of the 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.
In your case, you have deferred losses in relation to your primary production business investment in the 2010-11 financial year. This business activity has now ceased and the company has gone into liquidation.
The liquidation of a company is not considered to be 'special circumstances' for the purposes of paragraph 35-55(1)(a) of the ITAA 1997. Therefore, the Commissioner is unable to exercise the discretion available to allow you to include these losses in the calculation of your taxable income.
Taxation Ruling TR 2001/14 discusses the issue of deferred losses when a business activity ceases to be carried on. It states, at paragraph 55:
In some cases an individual taxpayer's circumstances may change leaving issues about their ability to deduct the full extent of any loss made. Any amount deferred under subsection 35-10(2) will only be deductible in a subsequent year if the business activity that gave rise to this amount, or one 'of a similar kind', is carried on in that subsequent year. If the activity, or one 'of a similar kind', is never carried on again, the entitlement to deduct the amount will be lost.
In your case, the business activity that gave rise to your deferred losses has now ceased. If this business activity, or one of a similar kind, is never carried on again, you will be unable to claim the losses in the future and they will be lost.
While we appreciate your situation, there is no other discretion available to the Commissioner in Division 35 of the ITAA 1997 that would allow you to claim your losses in the circumstances you describe.