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Ruling
Subject: Non-commercial losses - Commissioner's discretion
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 franchisee business activity in the calculation of your taxable income for the 2010-11 and 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 2010
Relevant facts
You commenced business as a franchisee in 2011.
You borrowed money for the franchisee start up fee, which included equipment.
In the 2010-11, your business activity produced less than $20,000 in assessable income and produced an overall loss.
The franchisor had made misrepresentations as to the likely level of income that could be expected per week.
You have provided a copy of a letter from your solicitor to the franchisors, purporting to exercise your right to terminate the franchise agreement.
In the 2011-12 financial year, you produced no income and incurred depreciation expenses.
Relevant legislative provisions
Income Tax Assessment Act 1997 - Division 35
Income Tax Assessment Act 1997 - Subsection 35-10(4)
Income Tax Assessment Act 1997 - Subsection 35-30
Income Tax Assessment Act 1997 - Subsection 35-35
Income Tax Assessment Act 1997 - Subsection 35-40
Income Tax Assessment Act 1997 - Subsection 35-45
Income Tax Assessment Act 1997 - Paragraph 35-55(1)(a)
Reasons for decision
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; and
· the special circumstances affecting the business activity are outside the control of the business activity.
Taxation Ruling TR 2007/6 sets out the interpretation of the exercise of the Commissioners discretion under paragraph 35-55(1)(a) of the ITAA 1997. The following has been extracted from paragraphs 47 to 53 of this Ruling.
Special circumstances are ordinarily those affecting the business activity such that it is unable to satisfy a test and it would be unreasonable for the loss deferral rule to apply. Ordinary economic, weather or market fluctuations that might reasonably be predicted to affect the business activity would not be considered to be special circumstances. These fluctuations are expected to occur on a regular or recurrent basis and affect all business within a particular industry.
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 operator, 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.
In your case, you have stated that you business failed to meet the assessable income test due to the misrepresentations made by the franchisors in relation to the level of income you were likely to produce from the business.
These misrepresentations may have influenced your decision to enter into the business but they did not prevent your business activity from meeting one of the tests. Fluctuations in income received from these types of business activities would reasonably be expected to occur and are not considered to be 'special circumstances' within the meaning of paragraph 35-55(1)(a) of the ITAA 1997.