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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 asset hire business 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

During 2009, you contracted to purchase two assets for the purpose of operating a hire business activity.

You have entered into a five year agreement with another party for the management and maintenance of the assets.

You have registered a business name and set up a website to promote your business and to aid bookings.

Your website shows your low hiring season as from a certain month to the end of another month, and high season around certain months. Holiday season covers periods prior to and following high season and well as other periods during the year. All other periods are listed as mid season.

Asset one was due to be delivered during 2010 but, due to manufacturing delays, it was not delivered until later in 2010 and, after completing registration requirements, the asset was first hired in a certain month in 2010.

Asset two was due to be delivered during 2010 but, due to manufacturing delays, it was not delivered until later in 2010 and, after completing registration requirements, the asset was first hired in a certain month in 2010.

You have stated that the problems with the suppliers of both assets caused you to miss the peak hiring season in the 2010-11 financial year and the increasing value of the Australian dollar during this period caused a decline in international tourists.

From 2011 year, the region where your business is situated was affected by adverse weather which caused a rapid and prolonged decline in tourist numbers to the region.

Your projected annual income and expenditure figures show that in a normal year you would expect to make a tax profit of around $X before interest expenses are taken into account.

Your actual interest expenses in the 2010-11 financial year were over $X. These expenses will more than halve in year two.

Your actual income and expenditure figures for the 2010-11 financial year show an overall loss of around $X.

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

Relevant legislative provisions

Income Tax Assessment Act 1997 - Section 35-1.

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

Income Tax Assessment Act 1997 - Subsection 35-55(1)

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

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 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, you do not satisfy the income requirement as your income for non-commercial loss purposes is above $250,000 in the 2010-11 financial year

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 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. 

Ordinary economic, weather or market fluctuations 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.

You have stated that your business activities were affected by problems with the suppliers of both assets, resulting in delays in delivery, which caused you to miss the peak hiring season. In addition to this, the fluctuating value of the Australian dollar increased the cost of holidaying and caused a decline in international tourists visiting the area. While these conditions were outside your control, they are not considered to be 'special circumstances' for the purposes of paragraph 35-55(1)(a) of the ITAA 1997.

However, your business activities were also affected by unanticipated weather events. These weather events caused a rapid and prolonged decline in tourist numbers to the region.

It is accepted that these weather conditions were outside your control and are considered to be 'special circumstances' for the purposes of paragraph 35-55(1)(a) of the ITAA 1997. However, before the Commissioner can exercise the discretion you must be able to show that it was the special circumstances that caused your activities to make a loss.

According to your website, your high season and the majority of your holiday seasons fall in the four months from a certain month to another month. As you have stated, problems with your suppliers caused you to miss your peak hiring period in the 2010-11 financial year. Your projected annual income and expenditure figures show that in a normal year you would expect to make a tax profit of around $X before interest expenses are taken into account. Your actual interest expenses in the 2010-11 financial year were over $X.

While it is accepted that the adverse weather affects of early 2011 did affect your business, the Commissioner is not satisfied that your activities would have made a profit in the 2010-11 financial year even if it had not been affected by these special circumstances.

Therefore, the Commissioner is unable to exercise the discretion available in accordance with subsection 35-55(1) and paragraph 35-55(1)(a) of the ITAA 1997 for the 2010-11financial years.