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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 retail 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

In the 2010-11 financial year, you resigned from your previous employment and used a superannuation payout to purchase a retail business.

As a result of the superannuation payout, your income for non-commercial loss purposes was more than $250,000 in the 2010-11 financial year.

You commenced your retail business activity in January 2011.

You purchased an established business and the previous owner's sales figures for the three months prior to the purchase totalled almost $30,000.

Two weeks after commencing business, the region where your business was located was affected by extreme weather conditions.

The affects of the weather on the region resulted in a downturn in retail sales, with sales figures in the following three months totalling around $12,000.

Your business was further impacted by major reconstruction being undertaken on a nearby shopping centre.

In the period from January 2011 to 30 June 2011, your retail business incurred cost of goods sold and other expenses of almost $65,000, resulting in an overall loss.

In the 2011-12 financial year you have relocated your business away from the reconstruction area and your projected profit and loss statements for the years ended 30 June 2012 and 2013 show you expect the activity to produce a profit in these years.

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.

In your case, your retail business activity was affected by a downturn in sales due to extreme weather conditions and major reconstruction activity in close proximity to your business.

It is accepted that these conditions were outside your control and are '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.

The sales figures provided by the previous owners for the three months prior to you purchasing the business totalled almost $30,000, and these figures include the pre- Christmas period when sales would be expected to increase. Had you been able to maintain these sales figures for the period from January 2011 to 30 June 2011, your sales would have totalled almost $60,000. Your actual expenses for the some period were almost $65,000.

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 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 in relation to your activities for the 2010-11 financial year.