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Ruling

Subject: non-commercial business loss

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 legal services activity in the calculation of your 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 on

1 July 2010

Relevant facts and circumstances

Your conduct a business activity.

You also earned salary and wage income in the 2010-11 financial year.

Your income for non-commercial loss purposes in the 2010-11 financial year was less than $250,000.

You state that you will be unable to pass the assessable income test for the 2010-11 financial year as:

· you have spent more time devoted to your salary & wage income this year than usual

· you have been unable to find time to bill out your work in progress

· some of your salary & wage income could have been paid as contract payments (business income) but was not.

You will make a loss of in the 2010-11 financial year from your business activity.

You expect to make a tax profit in the 2011-12 financial year.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 35

Income Tax Assessment Act 1997 Section 35-10

Income Tax Assessment Act 1997 Section 35-30

Income Tax Assessment Act 1997 Section 35-35

Income Tax Assessment Act 1997 Section 35-40

Income Tax Assessment Act 1997 Section 35-45

Income Tax Assessment Act 1997 Section 35-55

Reasons for decision

In your case, you have indicated in your application that your activity is carried on as a business. This ruling has, therefore, been determined on the basis of accepting your statement that you were carrying on a business during the 2010-11 financial year.

Non-commercial losses

Under Division 35 of the ITAA 1997, a loss made by an individual from a business activity will not be deductible in the financial year in which it arises unless certain conditions are met. Losses that cannot be taken into account in a particular year of income, because of subsection 35-10(2) of the ITAA 1997, can be applied to the extent of future profits from the business activity, or are deferred until one of the tests is passed, the discretion is exercised, or the exception applies. 

Under the rule in subsection 35-10(2) of the ITAA 1997 a loss made by an individual from a business activity will not be taken into account unless: 

· the exception in subsection 35-10(4) of the ITAA 1997 applies 

· you satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997 and one of the four tests is met

· if you do not satisfy the income requirement or if one of the tests is not met, the Commissioner exercises the discretion in section 35-55 of the ITAA 1997.

Your business activity is not a primary production activity or a professional arts business activity. Therefore, the exception contained in subsection 35-10(2) of the ITAA 1997 does not apply.

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

However, your business activity has not satisfied any of the four non-commercial loss tests contained in sections 35-30 (assessable income test), 35-35 (profits test), 35-40 (real property test) and 35-45 (other assets test) of the ITAA 1997 for the 2010-11 financial year. 

Commissioner's discretion

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

Under paragraph 35-55(1)(a) of the ITAA 1997, the Commissioner's discretion can be exercised where: 

· the business activity is affected by special circumstances such that it is unable to satisfy any of the tests

· the special circumstances affecting the business activity are outside the control of the operators of the business activity.  

Taxation Ruling TR 2007/6 sets out the interpretation of the exercise of the Commissioner's 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) refers to special circumstances outside the control of the operators 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 your case, you state that you were unable to pass the assessable income test due to the fact you have spent more time devoted to your employment activities than usual. This is reflected in the fact that you have earned an additional salary and wage income from one of your employers and, that you had work in progress from your business activity in the 2010-11 financial year that had not been billed. In addition, you state that some of your salary and wage income could have been paid as contract payments (business income) rather than salary and wages, but was not.

While we acknowledge that you may have spent extra time on your employment activities than you usually would, the fact remains that your inability to bill your work appropriately or, devote sufficient time and resources to your business activity, was not outside of your control. It is not considered that these circumstances are of the type that the 'special circumstances' discretion was intended to apply to, such as natural disasters or an injury/illness to a key employee.

As it is not accepted that the extra time spent on your employment activities amount to special circumstances outside of your control, the Commissioner will not exercise his discretion under paragraph 35-55(1)(a) of the ITAA 1997 for the 2010-11 financial year in relation to your business loss.