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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 contractor business activity in the 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 2008

Relevant facts

Your commenced your contractor business activity in 2008.

The peak business season runs from November to April.

Although the work is seasonal, you are required to maintain equipment all year round.

In the 2008-09 financial year, your business activities produced income of less than $10,000 and produced an overall profit of less than $5,000.

In the 2009-10 financial year, your business activities produced income of less than $10,000 and produced an overall profit of less than $1,000.

In the 2010-11 financial year, you were unable to complete the peak business season due to ongoing, unsafe work practices which resulted in you resigning from your contractor role in February 2011.

Your business activity did not meet any of the four non-commercial loss tests in the 2010-11 financial year and produced an overall loss.

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

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

If an activity is not carried on as a business, and cannot reasonably be expected to produce assessable income, for example, it is carried on as a hobby, then you cannot claim general deductions in relation to it, regardless of the operation of Division 35 of the ITAA 1997.

Whether a business is being carried on depends on the large or general impression gained from looking at all the indicators of carrying on a business, and no one indicator will be decisive These indicators are described in Taxation Ruling TR 97/11.

In your case, you have indicated in your application that your activity was carried on as a business. This ruling has, therefore, been determined on the basis of accepting your statement that you were carrying on a business during the 2010-11 financial year.

Non-commercial losses

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 is 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 contained in sections 35-30 (assessable income test), 35-35 (profits test), 35-40 (real property test) and 35-45 (other assets test) of the ITAA 1997 in the 2010-11 financial year.

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 business activity failed to meet any of the four tests or produce a tax profit because you chose to resign from your contractor role during the peak season. This was within your control and 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.