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Ruling

Subject: Non-Commercial Losses Special Circumstances

Question

Will the Commissioner exercise the discretion under paragraph 35-55(1)(a) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include losses from your business in the calculation of your taxable income for the 2009-10 financial year?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2010

Relevant facts and circumstances

Your business commenced many years ago.

You employ staff to operate it.

When the business was purchased it was in a rundown state.

Your business made losses for a long number of consecutive years, although you will make a very small taxable profit in the 2010-11 financial year.

You business was affected by adverse conditions for a considerable time during the past 15 years.

You were forced to spend additional money on the business as a result of the adverse conditions in the 2009-10 financial year.

You did not pass the <$250,000 income requirement for the 2009-10 financial year.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 Subsection 35-10(2E)

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

Reasons for decision

Summary

The discretion will not be exercised for the 2009-10 financial year as the Commissioner is not satisfied that the business would have made a profit if it had not been affected by special circumstances.

Detailed reasoning

For the 2009-10 and later income years, Division 35 of the ITAA 1997 will apply to defer a non-commercial loss from a business activity unless:

· you satisfy the income requirement and you pass one of the four tests

· the exceptions apply, or

· the Commissioner exercises his discretion.

In your situation, you do not satisfy the income requirement (that is your taxable income, reportable fringe benefits and reportable superannuation contributions but excluding your business losses, exceeds $250,000) and you do not come under any of the exceptions. Your business losses are therefore subject to the deferral rule unless the Commissioner exercises his discretion.

The Commissioner's discretion in paragraph 35-55(1)(a) of the ITAA 1997 may be exercised for a financial year where the business activity is affected by special circumstances outside the control of the operators of the business activity and the Commissioner considers that it would be unreasonable to require the loss to be deferred.

Taxation Ruling TR 2007/6 provides guidelines on the exercise of the Commissioner's discretion. It states that for those individuals who do not meet the <$250,000 income requirement, the special circumstances discretion should only be exercised if but for the special circumstances, the business activity would have made a profit in that year.

'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, including drought, flood, bushfire or some other natural disaster.

It is accepted that your business activity was affected by special circumstances outside your control. However, this in itself is not sufficient for the special circumstances discretion to be exercised. The Commissioner must also be satisfied that your business would have made a profit in the 2009-10 financial year if the special circumstances had not occurred.

Your business has made large losses for at least the last 15 years and it has only made a very small profit in the 2010-11 financial year.

During the last 15 years there were a number of years when the conditions were not adverse compared to the long term average and in a number of other years the conditions were within 10% of the long term average. However, your business did not make a profit in any year during this period; your business made large losses in every year. Given this, it is likely that factors other than the adverse conditions contributed to the lack of profitability of the business.

It is also acknowledged that your business incurred additional expenses in the 2009-10 financial year which were higher than normal due to the damage caused by the adverse conditions. However, it is noted that your business made a loss in the 2009-10 financial year that was more than three times the amount you incurred for the additional expenses. Therefore, even if you had incurred no additional expenditure, your business would still have made a large loss for that year.

It is accepted that your business was affected to some degree by adverse conditions during part of the past 15 years. However, having regard to all of the factors discussed in the paragraphs above, the Commissioner is not satisfied that the business would have made a profit in the 2009-10 financial year if it had not been affected by special circumstances.

Consequently, the Commissioner will not exercise his discretion for the 2009-10 financial year.