Edited version of your private ruling

Authorisation Number: 1012424817567

Ruling

Subject: Non-commercial losses - Commissioner's discretion

Question 1

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 in your calculation of taxable income for the 2009-10 income year?
Answer

No.

Question 2

Will the Commissioner exercise the discretion in paragraph 35-55(1)(c) of the ITAA 1997 to allow you to include any losses from your business in your calculation of taxable income for the 2009-10 income year?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts and circumstances

Your business commenced operations in 2002 and during the 2009-10 income year the business suffered losses

Your income for non-commercial loss purposes is greater than $250,000.

A source in a similar business wrote that his business made a profit after eight years and this period would be the industry standard.

You believe the Global Financial Crisis contributed to the loss made in the 2010 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 paragraph 35-55(1)(a)

Income Tax Assessment Act 1997 paragraph 35-55(1)(c)

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

Reasons for decision

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

The Commissioner may, on application, decide that the rule in subsection 35-10(2) does not apply to a business activity for one or more income years (the excluded years) if the Commissioner is satisfied that it would be unreasonable to apply that rule because:

(a) the business activity was or will be affected in the excluded years by special circumstances outside the control of the operators of the business activity, including drought, flood, bushfire or some other natural disaster;…

Paragraph 47 of Taxation Ruling TR 2007/6 explains that to qualify as special circumstances the circumstances must go beyond the normal or expected. 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 fluctuations in market prices and an economic downturn are not within your control we consider them to be a normal part of your industry, it is not something unexpected.

In view of the above, the Commissioner's discretion in respect of special circumstances will not be exercised for the 2009-10 income year.

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

Under paragraph 35-55(1)(c) of the ITAA 1997, the Commissioner's discretion can be exercised where the business activity satisfies these requirements.

for an applicant who carries on the business activity who does not satisfy subsection 35-10(2E) (income requirement) for the most recent income year ending before the application is made - the business activity has started to be carried on and, for the excluded years:

(i) because of its nature, it has not produced, or will not produce, assessable income greater than the deductions attributable to it; and

(ii) there is an objective expectation, based on evidence from independent sources (where available) that, within a period that is commercially viable for the industry concerned, the activity will produce assessable income for an income year greater than the deductions attributable to it for that year (apart from the operation of subsections 35-10(2) and (2C)).

The Note to subsection 35-55(1) states;

Paragraphs (b) and (c) are intended to cover a business activity that has a lead time between the commencement of the activity and the production of any assessable income. For example, an activity involving the planting of hardwood trees for harvest, where many years would pass before the activity could reasonably be expected to produce income.

Paragraphs 32 and 33 of Taxation Ruling TR 2007/6 state:

32.In paragraph 35-55(1)(a) the phrase 'outside the control of the operators of the business activity' is used to convey the point that these 'particular circumstances' are not a consequence of the operator's actions or inactions and therefore it would be unreasonable to disadvantage operators by deferring the losses from their business activity.

33. This point is continued in paragraphs 35-55(1)(b) and (c) with the phrase 'because of its nature'. This takes into account circumstances which are a result of the nature of the business activity itself and which prevent the business activity from satisfying a test or producing a tax profit. Stone J took this view of 'because of its nature' in the Eskandari case when looking at the type of activities referred to by the note and the EM at FCA 31:

Such activities have an inherent characteristic that cannot be overcome by conducting the business activity in a different way but only by changing the nature of the business.

It has been accepted based on the information you have supplied that you started carrying on a business activity in October 2002 and it has not produced assessable income greater than the deductions attributable to it in the 2009-10 income year. However, it is not accepted that it is because of the nature of your activity it has not produced assessable income greater than the deductions attributable to it.

Paragraph 2.25 of the Explanatory Memorandum of the Tax Laws Amendment (2009 Budget Measures No.2) Act 2009 states:

…For individuals with an adjusted taxable income of $250,000 or more, they must demonstrate that the reason they do not or will not make a profit is because of the nature of the business and not for some other reason which is peculiar to that individual's particular business.

Paragraph 2.34 of the Explanatory Memorandum of the Tax Laws Amendment (2009 Budget Measures No.2) Act 2009 states:

…For taxpayers that do not meet the income requirement, the Commissioner may exercise a discretion after an application by a taxpayer, where the Commissioner is satisfied that - based on evidence from independent sources - the business will produce assessable income greater than available deductions, in a timeframe that is considered commercially viable for the industry concerned. 

Notwithstanding the opinion of the similar business source we do not consider that there is anything inherent or innate in the nature of your business activity which means that it has not yet been able to produce assessable income greater than the deductions attributable to it. In particular, we think your activity is of a type that is able to produce assessable income greater than the deductions attributable to it quite soon after its commencement. We believe it is the manner that your business has been conducted rather than its inherent nature that is the major reason why it did not produce assessable income greater than the deductions attributable to it for the year ended 30 June 2010.

Therefore the Commissioner's discretion in paragraph 35-55(1)(c) will not be exercised for the 2009-10 income year.

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