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Ruling

Subject: Commissioner's discretion for 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 activities in your calculation of taxable income for the 2011-12 financial year?

Answer

No

This ruling applies for the following periods:

Year ended 30 June 2012

The scheme commences on:

1 July 2011

Relevant facts and circumstances

You commenced your breeding business several years ago and for each year your expenditure has exceeded your income.

An outbreak of a disease affected the health of your stock and resulted in the loss of new stock, and this led to the loss of sales income in the following years. There was also stock which was not able to be sold that was retained for breeding.

The global financial crisis caused a downturn in your industry.

Your income for non-commercial loss purposes was above $250,000.

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

For the 2009-10 and later income years, Division 35 of the Income Tax Assessment Act 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 relevant discretion may be exercised for the income year in question where your business activity is affected by special circumstances outside your control.

'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: see Taxation ruling TR 2007/6.

For individuals who do not satisfy the income requirement, the business activity must have been materially affected by the special circumstances, causing it to make a loss. In this context, the Commissioner may exercise this discretion for the income year(s) in question where, but for the special circumstances:

· your business activity would have made a tax profit

· the activity passes at least one of the four tests or, but for the special circumstances, would have passed one of the four tests.

In your case, it is accepted that the disease outbreak constitutes special circumstances. However, this in itself is not sufficient for the discretion to be exercised. The Commissioner must also be satisfied that your activity would have made a profit but for the special circumstances. That is, the special circumstances discretion can only be exercised where it can be seen that it was only the special circumstances which caused a loss to be made. For the discretion to be granted in your case, you would need to show that the special circumstances prevented you from making a tax profit.

Your expenses were much greater than your income. The magnitude of these expenses in relation to income produced indicates that your business would have run at a loss irrespective of the disease outbreak. This conclusion is supported by estimates of the financial impact that you have provided.

For example, you estimate that the business would still have run at a loss had the special circumstances not have existed.

You have not shown that but for special circumstances your business would have made a tax profit. Therefore, the Commissioner is unable to exercise his discretion.

Global Financial Crisis

You state that your industry continues to be affected by the affects of the Global Financial Crisis.

As stated above, paragraph 35-55(1)(a) of the ITAA 1997 refers to 'special circumstances' outside of the control of the operators of the business activity, including drought, bushfire and other natural disasters. However the list is not meant to be exhaustive. There are a range of other circumstances which may be considered as special.

Paragraph 47 of TR 2007/6 explains that to qualify as special circumstances the circumstances must go beyond the normal or expected fluctuations in business, weather or market conditions. Ordinary economic, weather or market fluctuations that might reasonably be predicted to affect the business activity as well as trading downs and risks associated with running a business will not be considered to be special circumstances.

Whilst we accept that the global financial crisis was not within your control, we consider the market fluctuations to be a normal part of any industry.

It is considered that a downturn in the industry is the result of ordinary market fluctuations that affects all businesses within that industry, and is a circumstance that might be reasonably expected to occur when carrying on a business activity.

In view of the above, the Commissioners discretion in respect of special circumstances will not be exercised for the GFC.