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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 asset hire 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 period

Year ended 30 June 2010

Year ended 30 June 2011

The scheme commenced on

1 July 2009

Relevant facts

In the 2009-10 financial year, you agreed to purchase a capital asset and it was delivered in April 2010.

The asset was made available for hire to the public from April 2010 as a business activity.

You engaged agents to act as managers and they are paid a commission and management fees. The management agreement provides that 100% of the hire fee belongs to you as owner of the asset.

You have provided profit projections which indicate that a small profit, of just over $3,000, is possible from the first year of operation. These projections are based on an estimated hire rate of 171 days per year at an average fee of approximately $950 per day and depreciation of $20,000.

Your actual hire rates for the three months to 30 June 2010, was 35 days at an average of $835 per day. Your actual hire rates for the six months to 31 December 2010, was 55 days at an average of $XXX per day.

For the 2009-10 financial year, your business activity produced an overall loss of around $10,000.

For the 2010-11 financial year, your business activity produced an overall loss of around $70,000, which included depreciation of almost $65,000.

The region where the asset is based was affected by adverse weather conditions during January and February 2011. This impacted your business activity by lowering the booking numbers and reducing potential customers.

You also believe that the high Australian dollar and the global financial crisis had an affect on your business.

Your income for non-commercial loss purposes in the 2009-10 and 2010-11 financial years was above $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

Section 35-1 of the ITAA 1997 provides that an income requirement must be met (along with certain other tests), in order to include losses from a business activity in your taxable income calculation. If the income requirement is not met, the Commissioner may exercise discretion to allow the inclusion of the losses.

You satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997 if your income for non-commercial loss purposes is less than $250,000.

In your case, you do not satisfy the income requirement as your income for non-commercial loss purposes was above $250,000 in the 2009-10 and 2010-11 financial years.

Special circumstances

The Commissioner's discretion in paragraph 35-55(1)(a) of the ITAA 1997 may be exercised for the financial year where the business activity is affected by special circumstances outside the control of the operators of the business activity.

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. For those individuals who do not satisfy the income requirement, special circumstances are those which have materially affected the business activity, causing it to make a loss.

Taxation Ruling TR 2007/6 sets out the Commissioner's interpretation on the exercise of the 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) of the ITAA 1997 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. 

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 when carrying on a business activity and affect all businesses within a particular industry.

You have asked the Commissioner to consider the affects of the higher Australian dollar and the global financial crisis on your business activity. While these conditions were outside your control, they are not considered to be 'special circumstances' for the purposes of paragraph 35-55(1)(a) of the ITAA 1997.

You have also stated that your business activities were affected by adverse weather conditions in January and February 2011. This impacted your business activity by lowering the booking numbers and reducing potential customers.

It is accepted that these weather conditions were outside your control and are 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 caused your activities to make a loss.

These events took place in the 2010-11 financial year and, therefore, did not cause your business activity to make a loss in the 2009-10 financial year.

In your projection figures, your activities were expected to produce a tax profit in the first year of operation. These projections are based on an estimated hire rate of 171 days per year at an average fee of $X per day, or $X per annum, and depreciation of $X annually.

Your actual hire rate for the six months from 1 July 2010 to 31 December 2010 totalled 55 days with an average fee of $X. If this rate had continued to 30 June 2011, it would equate to an actual hire rate of 110 days per year and total income of $X. As these figures are based on the period prior to the adverse weather conditions, there is some question as to whether or not the projected figures are achievable.

Notwithstanding this doubt, without the affects of the weather, you have projected your business activity would have produced assessable income of $X and achieved a tax profit of around $X in the 2010-11 financial year. However this is based on projected depreciation of $X in lieu of your actual depreciation amount of $Z. This means that taking into account your actual depreciation the activity would still have produced a projected loss of over $Q.

The Commissioner is not satisfied that your activities would have made a profit in the 2010-11 financial year had it not been affected by these special circumstances.

Therefore, the Commissioner is unable to exercise the discretion available in accordance with subsection 35-55(1) and paragraph 35-55(1)(a) of the ITAA 1997 in relation to your activities for the 2009-10 and 2010-11 financial years.