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Ruling

Subject: Commissioner's discretion - 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 activities in the calculation of your taxable income for 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 commenced your business activities in 2010.

Your business activities failed to meet any of the non-commercial loss tests in the 2010-11 financial year.

You have stated that your activities have failed to meet the assessable income test in the 2010-11 financial year due to special circumstances.

The special circumstances you have indentified are:

· excessive initial costs

· time required to set up business

· restrictive operating conditions, and

· a highly competitive market

Your target for the 2011-12 financial year is to produce income of $25,000 from this activity.

Your income for non-commercial loss purposes was less than $250,000 in the 2010-11 financial year.

Relevant legislative provisions

Income Tax Assessment Act 1997 - Division 35

Income Tax Assessment Act 1997 - Subsection 35-10(4)

Income Tax Assessment Act 1997 - Subsection 35-30

Income Tax Assessment Act 1997 - Subsection 35-35

Income Tax Assessment Act 1997 - Subsection 35-40

Income Tax Assessment Act 1997 - Subsection 35-45

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

Reasons for decision

Under Division 35 of the ITAA 1997, a loss made by an individual from a business activity will not be deductible in the financial year in which it arises unless certain conditions are met. Losses that cannot be taken into account in a particular year of income, because of subsection 35-10(2) of the ITAA 1997, can be applied to the extent of future profits from the business activity, or are deferred until one of the tests is passed, the discretion is exercised, or the exception applies. 

Under the rule in subsection 35-10(2) of the ITAA 1997 a loss made by an individual from a business activity will not be taken into account unless: 

· the exception in subsection 35-10(4) of the ITAA 1997 applies; or  

· you satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997 and one of the four tests is met; or  

· if you do not satisfy the income requirement or if one of the tests is not met, the Commissioner exercises the discretion in section 35-55 of the ITAA 1997.

Your business activity is not a primary production activity or a professional arts business activity. Therefore, the exception contained in subsection 35-10(2) of the ITAA 1997 does not apply.

Your income for non-commercial loss purposes was less than $250,000, therefore you satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997. However, your business activity has not satisfied any of the four non-commercial loss tests in the 2010-11 financial year. 

In broad terms, the tests require: 

· at least $20,000 of assessable income in that year from the business activity (section 35-30 of the ITAA 1997);  

· the business activity results in a tax profit in 3 of the past 5 income years (including the current year) (section 35-35 of the ITAA 1997);  

· at least $500,000 of real property, or an interest in real property, (excluding any private dwelling) is used on a continuing basis in carrying on the business activity in that year (section 35-40 of the ITAA 1997); or  

· at least $100,000 of certain other assets (excluding cars, motor cycles and similar vehicles and real property that is taken into account for the real property test) used on a continuing basis in carrying on the business activity in that year (section 35-45 of the ITAA 1997).  

The Commissioner's discretion - special circumstances 

Under paragraph 35-55(1)(a) of the ITAA 1997, the Commissioner's discretion can be exercised where: 

· the business activity is affected by special circumstances such that it is unable to satisfy any of the tests; and  

· the special circumstances affecting the business activity are outside the control of the business activity.  

Taxation Ruling TR 2007/6 sets out the interpretation of the exercise of the Commissioners 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) 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. 

However, the use of the word 'including' indicates that the type of circumstances to which the special circumstances limb of the discretion can potentially apply is broader than those which are natural disasters. For example, circumstances such as oil spills, chemical spray drifts, explosions, disturbances to energy supplies, government restrictions and illnesses affecting key personnel might, depending on the facts, constitute special circumstances of the type in question.

In your case, your have stated that the time required to set up business and excessive setup costs, along with restrictive operating conditions and a highly competitive market, have prevented your business activity from meeting the assessable income test in the 2010-11 financial year. These is not considered to be 'special circumstances' within the meaning of paragraph 35-55(1)(a) of the ITAA 1997.

Therefore, the Commissioner is unable to exercise the discretion in paragraph 35-55(1)(a) of the ITAA 1997 to allow you to offset the losses from your business activities against your other assessable income for purposes of calculating your taxable income for the 2010-11 financial year.