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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 business activity in your calculation of taxable income for the 2010-11 financial year?

Answer: Yes.

This ruling applies for the following period

Year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts

You were a member of a partnership for more than 20 years.

The partnership provided professional services under a licensing agreement.

The partnership had numerous staff and has returned a profit in every year of operation.

In the 2010-11 financial year, some of the partners left the partnership putting it in breach of its licence agreement.

The partnership tried to find suitable replacements without success and a merger opportunity was sought.

The remaining partners, staff and clients merged with another firm. Under the new business structure, you receive part of your remuneration as salary and wages.

The limited trading in the 2010-11 financial year resulted in a partnership loss.

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

Relevant legislative provisions

Income Tax Assessment Act 1997 - Section 35-1.

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

Income Tax Assessment Act 1997 - Subsection 35-55(1)

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

Reasons for decision

The Commissioner's discretion in paragraph 35-55(1)(a) of the ITAA 1997 may be exercised for the financial year where the business activity is affected by special circumstances outside the control of the operators of the business activity.

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. For those individuals who do not satisfy the income requirement, special circumstances are those which have materially affected the business activity, causing it to make a loss.

Taxation Ruling TR 2007/6 sets out the Commissioner's interpretation on the exercise of the 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) of the ITAA 1997 refers to special circumstances outside the control 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.

Some indicators of the effects on the business activity that could lead to the exercise of the discretion in regard to the special circumstances limb are:

· destruction of stock or equipment;

· delays in ploughing, planting, harvesting etc;

· delay in growth of crops;

· inability of operator to perform duties; and

· loss of business opportunities

In your case, the partnership lost key members of the business leaving it unable to perform fully and putting the partnership in breach of its licence agreement. The partnership traded for a limited period in the 2010-11 financial year and produced an overall loss.

It is accepted that these conditions were outside your control and are 'special circumstances' for the purposes of paragraph 35-55(1)(a) of the ITAA 1997. As the partnership had always returned a profit previously, it is accepted that the special circumstances caused the business activity to produce a loss in the 2010-11 financial year.

The Commissioner is satisfied that your activities would have made a profit in the 2010-11 financial year had it not been affected by these special circumstances.

Therefore, the Commissioner will exercise the discretion available in accordance with subsection 35-55(1) and paragraph 35-55(1)(a) of the ITAA 1997 for the 2010-11 financial year.