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Ruling
Subject: Commissioner's discretion - special circumstances
Question:
Will the Commissioner exercise the discretion in paragraph 35-55(1)(c) 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: No.
This ruling applies for the following period
Year ended 30 June 2011
The scheme commenced in
1 July 2010
Relevant facts
You commenced your business activity in the 2006-07 financial year.
The business activity has produced more than $20,000 of assessable income each year since commencement and produced a tax profit in the 2006-07 and 2009-10 financial years.
In the 2010-11 financial year, your employment and finance commitments caused you to spend more time on your employment. As a result, you were unable to run the business yourself and you had to hire subcontractors to run the business.
The business produced an overall loss in the 2010-11 financial year.
Your income for non-commercial loss purposes in the 2010-11 financial year 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 2010-11 financial year
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.
You have stated that due to your employment and finance commitments you were unable to spend time on your business activity and you had to hire subcontractors to run the business.
These circumstances were within your control and they are not considered to be 'special circumstances' for the purposes of paragraph 35-55(1)(a) of the ITAA 1997.
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 2010-11 financial year.
While we appreciate your situation, there is no other discretion available to the Commissioner in Division 35 of the ITAA 1997 that would allow you to claim your losses in the circumstances you describe.