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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 in your calculation of taxable income for the 2010-11 financial year?

Answer: Yes.

This ruling applies for the following period

Year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts

You commenced your partnership business activity more than 20 years ago.

Both you and your partner have other employment and conduct your business activity on a part time basis.

The business activity has consistently produced a profit, from soon after it commenced, until the 2008-09 financial year.

In the 2008-09 financial year, the effects of the global financial crisis caused several jobs to be cancelled and resulted in a small loss.

In the 2009-10 financial year, the partnership purchased a capital asset for a significant sum.

For the first seven months of the 2010-11 financial year, the key person in your business activity was unable to work due to medical issues.

The business recommenced in February 2011 and produced total income of approximately $10,000 in the 2010-11 financial year.

Business expenses for the 2010-11 financial year totalled approximately $20,000.

You expect your business to return to profit in the 2011-12 financial year.

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 - 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

Summary

It is accepted that you were unable to satisfy any of the non-commercial loss tests required due to special circumstances in the 2010-11 financial year. Therefore, the Commissioner will exercise the discretion available for the 2010-11 financial year.

Detailed reasoning

You have requested that the Commissioner exercise the discretion under paragraph 35-55(1)(a) of the ITAA 1997 for special circumstances. 

The discretion in paragraph 35-55(1)(a) of the ITAA 1997 may be exercised where:

o you satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997 and the business activity is affected by special circumstances such that it is unable to satisfy any of the tests required; and  

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

You satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997 as your income for non-commercial loss purposes was less than $250,000 in the 2010-11 financial year.

Taxation Ruling TR 2007/6 set out the Commissioners interpretation of the exercise of the Commissioners discretion under paragraph 35-55(1)(a). The following has been extracted from paragraphs 47 to 54 of this Ruling:

Special circumstances are ordinarily those affecting the business activity such that it is unable to satisfy a test and it would be unreasonable for the loss deferral rule to apply. 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 and affect all business within a particular industry.  

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 the 2010-11 financial year, medical issues affected a key person in your business and, as a result, the business was unable to generate business income for a period of time. TR 2007/6 states that an illness affecting key personal might constitute special circumstances, depending on the facts. Your business activities rely on the activities of the key person. The injury and subsequent medical condition of the key person is 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 prevented your business activity from meeting one of the non-commercial loss tests.

You were unable to conduct your business activity between July 2010 and January 2011 due to special circumstances. For the five months, to June 2011, your business activity produced income of approximately $10,000. Had you been able to conduct your business over a full 12 months your income would have been over $20,000 and you would have produced an overall profit.

It is accepted that you were unable to satisfy any of the non-commercial loss tests required due to special circumstances in the 2010-11 financial year.  

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