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Ruling

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 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 on

1 July 2009

Relevant facts and circumstances

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

In the 2009-10 financial year you were employed.

In the 2009-10 financial year you commenced a business.

You sought to significantly increase your turnover and profitability by purchasing a truck and a equipment.

You planned to work four to five days per fortnight on your business.

You had expected and planned on a turnover of well in excess of $20,000 however unusually wet seasonal conditions negatively impacted on the business.

You submit that due to wet weather tracks into areas where you conducted your business became impassable. Transport was done by outside transport companies and given the gross mass of loaded vehicles travel became an impossibility due to the risk of bogging and because property owners were insistent that there was no damage to tracks.

You have yet to make a profit.

You made less than $2,000 in the 2009-10 financial year

You made less than $10,000 in the 2010-11 financial year.

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 2009-10 and financial years, Division 35 of 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, none of the exceptions would apply and although you satisfy the income requirement, you do not meet any of the four tests in the years of income under consideration. Your losses are therefore subject to the deferral rule, unless the Commissioner exercises his discretion.

The relevant discretion may be exercised for the income year in question where your business activity is affected by special circumstances outside your control.

Paragraph 35-55(1)(a) of the ITAA 1997 refers to special circumstances outside of the control of the operators of the business activity. No exhaustive definition is given of special circumstances but the paragraph does include drought, bushfire and other natural disasters.

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 Secretary, Department of Employment, Education, Training & Youth Affairs v. Barrett and Another (1998) 82 FCR 524 '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 Re Beadle and Director-General of Social Security (1984) 1 AAR 362; (1984) 6 ALD 1:

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.

It can be seen that to determine what is special circumstances, we need to look at the context in which the phrase is used. Also, it is clear that special circumstances will be something out of the ordinary or unusual. Special circumstances in paragraph 35-55(1)(a) of the ITAA 1997 is used in the context of a situation occurring such that it would be unreasonable for the Commissioner to apply the loss deferral rule for a particular year or years. For this to be the case, it will not only be necessary that an event or situation has occurred which is of itself unusual, but that it has resulted in the business activity failing to pass a test. Clearly, if the business activity would not have passed a test even if the event or situation had not arisen, we cannot say that the business activity was affected by special circumstances as the note to paragraph 35-55(1)(a) indicates.

 Ordinary weather fluctuations that might reasonably be predicted to affect the business activity would not be considered to be special circumstances.

In your case you have not provided evidence that the weather conditions experienced were exceptional or out of the ordinary, rather than a standard seasonal fluctuation. These circumstances are considered to be a standard risk faced by all businesses in this industry.

 It is not accepted that there were special circumstances which prevented the business activity from passing a test in the 2010-11 financial year. The weather conditions cited were not sufficiently unusual to constitute special circumstances which were outside your control as the operator of your business activity.

As your business activity was not affected by special circumstances in the 2010-11 financial year, the Commissioner is therefore satisfied that it would not be unreasonable to apply the rule in section 35-10 of the ITAA 1997 in relation to your business activity in this year.