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Ruling

Subject: income requirement for non-commercial loss purposes

Question 1

Can your lump sum payment be excluded when determining if the income requirement contained in subsection 35-10(2E) of the Income Tax Assessment Act 1997 (ITAA 1997) has been satisfied?

Answer

No.

Question 2

Will the Commissioner exercise the discretion in paragraph 35-55(1)(a) of the ITAA 1997 to allow you to include any losses from your business in the calculation of your 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 established a business in the 2009-10 financial year.

The business was created whilst you were still working as an employee. The plan was to retire from your current employment and concentrate on growing the business.

In the 2009-10 financial year, your business activity produced a small loss. The main costs related to training, advertising and travel expenses.

During the 2009-10 financial year, you satisfied the income requirement, however you did not pass any of the four non-commercial loss tests. Therefore your business losses were deferred.

In the 2010-11 financial year, the business grew and turned over more than $20,000 in income. Due to ongoing training and development expenses along with continued other start up costs, the business made a loss.

During the 2010-11 financial year you retired from your employment and received a lump sum payout of unused annual and long service leave as well as a lump sum superannuation payment.

The lump sum payments have caused your adjusted taxable income to exceed $250,000.

You have not previously exceeded the $250,000 income limit.

Relevant legislative provisions

Income Tax Assessment Act 1997 - Section 35-55

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

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

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

Reasons for decision

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 his 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, your adjusted taxable income for the 2010-11 financial year is greater than $250,000. Therefore you do not satisfy the income requirement for non-commercial loss purposes.

The Commissioner does not have any discretion to exclude one off lump sum payments from your taxable income in order for you to satisfy the income requirement in subsection 35-10(2E) of the ITAA 1997.

Section 35-55 of the ITAA 1997 does allow the Commissioner to exercise a discretion in some limited 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 Commissioner's 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. 

In your case, you received some lump sum payments following your retirement from employment. Receiving these lump sum payments did not affect your business, causing it to make a loss. Instead it caused you to fail the income requirement under subsection 35-10(2E) of the ITAA 1997. This is not considered to be 'special circumstances' for the purposes of paragraph 35-55(1)(a) of the ITAA 1997.

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.

Where you cannot claim your loss in the current year under the non-commercial loss rules, your losses are simply deferred until a future year.