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Ruling

Subject: non commercial losses - 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 2009-10 and 2010-11 financial years?

Answer

No.

This ruling applies for the following periods

For year ended 30 June 2010

For year ended 30 June 2011

The scheme commenced on

1 July 2009

Relevant facts

You have stated that you have conducted a business activity in the 2009-10 and 2010-11 financial years and have incurred losses in each year.

These losses have been deferred under the non-commercial losses provisions in each of these years to give accumulated deferred losses.

You have been paid under a Workers Compensation claim since 2008 due to an injury through your employment. Immediately prior to this employment you were on Centrelink benefits due to illness. In a number of years prior to this you were engaged in your own business.

Your doctor has limited the number of hours you can work per week. The workers compensation payers will subsidise payments made to you by an arms length employer but will not provide the same to you if you work in your own business.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 subsection 35-10(2)

Reasons for decision

Summary

It is not considered that the circumstances have arisen during the period you have been conducting this business activity, they were in existence when you commenced this activity. They are therefore not considered to be special circumstances for non-commercial losses purposes. It is not special circumstances that have stopped you from passing one of the four non-commercial losses tests. Therefore the Commissioner will not exercise the discretion in paragraph 35-55(1)(a) of the ITAA 1997 to allow you to include any losses from your business activity in your calculation of taxable income for the 2009-10 and 2010-2011 financial years.

Detailed reasoning

Are you carrying on a business?

Your activity will only be potentially subject to these provisions if it is carried on as a business. You have stated in your request that your activity was carried on as a business. This ruling is made on the basis of accepting this claim.

Non-commercial losses

Losses from activities that do not meet any of the four tests under Division 35 of the ITAA 1997, or the exception in subsection 35-10(4) of the ITAA 1997, will be subject to the loss deferral rule in subsection 35-10(2) of the ITAA 1997, unless the Commissioner exercises a discretion under paragraph 35-55 of the ITAA 1997 that it would be unreasonable to defer the loss.

Paragraph 35-55(1)(a) of the ITAA 1997 sets out the Commissioner's discretion as follows:

The Commissioner may, on application, decide that the rule in subsection 35-10(2) does not apply to a business activity for one or more financial years (the excluded years) if the Commissioner is satisfied that it would be unreasonable to apply that rule because:

(a) the business activity was or will be affected in the excluded years by special circumstances outside the control of the operators of the business activity, including drought, flood, bushfire or some other natural disaster;

Note: This paragraph is intended to provide for a case where a business activity would have satisfied one of the tests if it were not for the special circumstances.  

Taxation Ruling TR 2007/6 (TR 2007/6) outlines the Commissioner's view of the discretion referred to in paragraph 35-55(1)(a) of the ITAA 1997. Paragraph 12 of TR 2007/6 states the Commissioner's discretion in paragraph 35-55(1)(a) may be exercised for the financial year(s) in question where the business activity is affected by special circumstances outside the control of the operators of the business activity.

Example 13 at paragraph122 of TR 2007/6 describes the situation where:

Allison runs a dance instruction business which satisfied the assessable income test in the 2004 income year and was expected to satisfy this test again in the 2005 income year. However in the 2005 income year Allison broke her leg and was unable to dance for 6 months. Allison had to cancel all her bookings for 6 months and as a result incurred a loss for the 2005 income year.

Allison's business did not satisfy any of the tests in Division 35 in the 2005 income year. If the Commissioner does not exercise the discretion in the 2005 income year the losses from the dancing instruction business activity will be deferred.

In her case the Commissioner would exercise the discretion in paragraph 35-55(1)(a) for special circumstances. Allison is a key person in the dancing instruction business. Her broken leg and inability to teach for 6 months would be special circumstances which were outside her control. The business activity was expected to have satisfied a test if not for these special circumstances and consequently the Commissioner would be satisfied that it would be unreasonable for the loss deferral rule in section 35-10 to apply. Allison is able to offset her business losses against her other assessable income in the 2005 income year.

In your circumstances

In the years prior to commencing this current business activity you were on a Centrelink benefit due to ill health, were in employment and then on a workers compensation payment due to an injury incurred in your employment. You had ceased a business before entering into the employment. When you commenced or recommenced the business activity there were certain limitations in place which you were aware of at the time. These limitations were going to affect your ability to conduct a business and therefore the amount of assessable income you could derive. The circumstances are not considered 'special' in terms of the non-commercial losses provisions as they were already in existence and you made a decision to commence the business under these circumstances.

There are not special circumstances that prevent you from passing one of the four tests in these years. Therefore, the Commissioner cannot exercise his discretion. The losses will be deferred and can be offset against future business income from this activity or in a year that a test is passed, they may be offset against other income.