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Ruling

Subject: Non-commercial losses

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 in your calculation of taxable income for the 2010-11 and 2011-12 financial years?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2011

Year ending 30 June 2012

Relevant facts and circumstances

You operate a business in partnership with your spouse.

Gross income of the business was more than $100,000 in each of the last two financial years.

The business returned a profit in the 2009-10 financial year.

During the 2009-10 income year you relocated temporarily interstate to meet the requirements of your employment. Initially you were meant to relocate for a number of months but this has been extended due to circumstances affecting your employer.

You expect to be working interstate for more than two years.

Approximately six months after you relocated, you decided to appoint a manager to run the business so that your spouse could join you.

But for the employment of a full time manager your business would have returned a tax profit in the 2010-11 financial year.

Your income for non-commercial loss purposes is in excess of $250,000.

Relevant legislative provisions

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

Reasons for decision

For the 2009-10 and later financial years, Division 35 of the ITAA 1997 will apply to defer a non-commercial loss from a business activity unless:

§ you meet the income requirement (subsection 35-10(2E) of the ITAA 1997) and you pass one of the four tests (sections 35-30, 35-35, 35-40, and 35-45 of the ITAA 1997);

§ the exceptions contained in section 35-10 of the ITAA 1997 apply; or

§ the Commissioner exercises his discretion under section 35-55 of the ITAA 1997.

In your situation, you do not satisfy the income requirement (that is, your income for non-commercial loss purposes exceeds $250,000) and you do not come under any of the exceptions in section 35-10 of the ITAA 1997. Your business losses are therefore subject to the deferral rule unless the Commissioner exercises his discretion.

The relevant discretion contained in paragraph 35-55(1)(a) of the ITAA 1997 may be exercised for the income year in question where your business activity is affected by special circumstances outside your control.

'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, including drought, flood, bushfire or some other natural disaster. 'Special circumstances' may include circumstances other than natural disasters, for example, illnesses affecting key personnel might, depending on the facts, constitute special circumstances.

You advised that your business has have been affected by the need to employ a full time manager in your spouse's place so that your spouse could join you while you were working interstate.

It is acknowledged that you moved interstate to meet the requirements of your employment and it is understandable that you would not want to be separated from your spouse for an extended period. However, although we can understand the reasons behind it, the relocation was not outside of your control. It is not considered that your circumstances are of the type that the 'special circumstances' discretion was intended to apply to, such as a natural disaster or an injury/illness to a key employee.

As it is not accepted that the relocation interstate of you and your spouse are special circumstances outside of your control, the Commissioner will not exercise his discretion under paragraph 35-55(1)(a) of the ITAA 1997 for the 2010-11 and 2011-12 financial years in relation to your business losses.

Other information

Where you cannot offset your business loss against any of your other assessable income in a financial year, your loss is simply deferred to future years. If your business makes a tax profit in a following year, you can offset the deferred loss against the amount of this profit.