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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 activity 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 undertook the required training and received a license to carry out your business activity part way through the 2010-11 financial year.

You commenced your business activity once you received your licence and fully expected to earn in excess of $60,000 in your first year.

Shortly after commencing business you progressively became unwell. Your illness made working difficult and you ceased all work approximately six months later. You have now been diagnosed with a debilitating illness.

Due to your illness, you were only able to complete a small number of jobs and you did not meet the assessable income test.

Your business activity produced an overall loss in the 2010-11 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

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:

· 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  

· 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 Commissioner's interpretation of the exercise of the Commissioner's 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.

Since commencing your business, you have progressively become unwell. Your illness has made working difficult and you ceased all work approximately six months after starting your business. TR 2007/6 states that an illness affecting key personal might constitute special circumstances, depending on the facts. Your business activity relied solely on your ability to carry out the work personally.

Your illness is considered to be special circumstances for the purposes of paragraph 35-55(1)(a) of the ITAA 1997. It is accepted that the special circumstances were outside of your control and as a result, you were unable to satisfy any of the non-commercial loss tests required.  

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.