Edited version of your private ruling

Authorisation Number: 1012112355421

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Subject: Non-commercial losses

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 primary production business activity in your calculation of taxable income for the 2010-11 to 2011-12 financial years

Answer

No.

This ruling applies for the following period

Year ended 30 June 2011
Year ended 30 June 2012

The scheme commenced on

1 July 2006

Relevant facts and circumstances

You do not satisfy the <$250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997 for the 2010-11 financial year.

You will satisfy the <$250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997 for the 2010-11 financial year.

You carry on a business.

The business has been in operation for several years and was building up over time.

While the business has made a loss for each financial year, you believe the overall performance has improved each year until the 2010-11 financial year.

At the end of the 2010 year the shop manager was dismissed. Many of your clientele followed the manager to their new business.

You submit that the economic downturn has hurt the centre in which the business operates in, as did flooding.

A number of businesses in the centre have closed which has further damaged your business.

You have made the decision that if you cannot find a buyer for the shop or take over the lease the business will be closed by 30 June 2012.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 35-10(1)
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

For the years prior to the 2009-10 financial year, all taxpayers have access to the four non-commercial loss (NCL) tests (the assessable income test, the profits test, the real property test, and the other assets test) in determining whether they are required to defer their business losses under the NCL provisions.

From the 2009-10 financial year, the NCL legislation has been amended to include an income requirement. The four NCL tests are only available to taxpayers who meet the income requirement.

Consequently, if the income requirement is not met, the taxpayer must defer their business loss unless the Commissioner exercises a discretion. A discretion is only available in certain circumstances.

The income requirement under subsection 35-10(2E) of the ITAA 1997 is satisfied if your income for non-commercial loss purposes is less than $250,000. In your case, you do not meet the income requirement in the 2010-11 financial year. You expect to meet the income requirement in the 2011-12 financial year.

Paragraph 35-55(1)(a) of the ITAA 1997

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 explains that for those individuals who do not meet the income requirement, the Commissioner considers that it would be unreasonable to require a loss to be deferred where but for the special circumstances, the business activity would have made a profit in that year.

For individuals who meet the income requirement, special circumstances are those which have materially affected their business activity, causing it not to meet any of the four tests.

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.

The question of what constitutes 'special circumstances' has been judicially considered on many occasions. In the Federal Court case of Community Services Health, Minister for v. Chee Keong Thoo (1988) 8 AAR 245; (1988) 78 ALR 307, Burchett J considered 'special circumstances' in the context of the Health Insurance Act 1973 and made the following observation:

Those discretions are intended to be applied to a great variety of situations. In such a context, the core of the idea of 'special circumstances' is that there is something unusual or different to take the matter out of the ordinary course

Later, in the Federal Court Case of Employment, Education, Training Youth Affairs, Department of v. Barrett (1998) 82 FCR 524; (1998) 27 AAR 291; (1998) 52 ALD 499; (1998) 3SSR 38 'special' was considered in the context of 'special weather conditions' for the purposes of the Austudy Regulations 1990. Tamberlin J observed that:

The word 'special' must be read in context. In normal parlance it signifies that the event or circumstances in question are out of the ordinary or normal course.

Tamberlin J then quoted the following passage with approval from the AAT case of Beadle Director-General of Social Security, Re (1984) 1 AAR 362; (1984) 6 ALD 1 at 3:

An expression such as 'special circumstances' is by its very nature incapable of precise or exhaustive definition. The qualifying adjective looks to circumstances that are unusual, uncommon or exceptional. Whether circumstances answer any of these descriptions must depend upon the context in which they occur. For it is the context which allows one to say that the circumstances in one case are markedly different from the usual run of cases. This is not to say that the circumstances must be unique but they must have a particular quality of unusualness that permits them to be described as special. 

In your case, your business has yet to make a profit and was affected in the 2010-11 financial year by various negative factors such as the dismissal of the shop manager, the economic downturn and flooding to the area.

It is not accepted that the dismissal of an employee, a market downturn constitute special circumstances. These factors can be seen as normal occurrences for a business and could reasonably be expected to occur in the normal course of operations. In relation to the flooding you have not provided any evidence to indicate that the effects of the flooding on your business were significant enough to be considered special.

Consequently, the Commissioner's discretion in respect of special circumstances will not be exercised with respect to the 2010-11 to 2011-12 financial years.

Please note that the question of whether your circumstances are considered special appears to be moot. Based on past business performance, it is considered unlikely you would have made a tax profit in the 2010-11 financial year or will pass one of the four tests in the 2011-12 financial year, regardless of the occurrence of the circumstances.