Edited version of your private ruling

Authorisation Number: 1012453668741

Ruling

Subject: Commissioner's discretion - special circumstances

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 relevant financial year?

Answer:

Yes.

This ruling applies for the following period

Year ended 30 June 2012

The scheme commenced on

1 July 2011

Relevant facts

You have been providing professional services for a number of years as a sole trader.

Since commencing work as a sole trader, your business has always produced a profit.

During the relevant financial year, you suffered a period of illness and required surgery which reduced the amount of work you were able to undertake. In addition, due to the nature of the work undertaken, some payments were not received until the subsequent financial year.

You continued to incur expenses to maintain offices and staff during this period. As a result, your business activity produced an overall loss in the relevant financial year.

During the relevant financial year, you received a trust distribution in excess of $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

Section 35-1 of the ITAA 1997 provides that an income requirement must be met (along with certain other tests), in order to include losses from a business activity in your taxable income calculation. If the income requirement is not met, the Commissioner may exercise discretion to allow the inclusion of the losses.

You satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997 if your income for non-commercial loss purposes is less than $250,000.

In your case, you do not satisfy the income requirement as your income for non-commercial loss purposes was above $250,000 in the relevant financial year

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 set out the Commissioners interpretation of the exercise of the Commissioners discretion under paragraph 35-55(1)(a). The following has been extracted from paragraphs 47 to 54 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) 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.

In your case, you suffered a period of illness and required surgery which reduced the amount of work you were able to undertake during the relevant financial year. TR 2007/6 states that an illness affecting key personal might constitute special circumstances, depending on the facts. Your business activities rely on the activities of you as the key person. Therefore, your medical condition is considered to be special circumstances for the purposes of paragraph 35-55(1)(a) of the ITAA 1997. However, before the Commissioner can exercise the discretion you must be able to show that it was the special circumstances that caused your activities to make a loss.

Since commencing work as a sole trader, your business activity has always produced a profit. During the relevant financial year, your medical condition reduced the amount of work you were able to undertake but you continued to incur expenses to maintain offices and staff during this period resulting in a loss.

The Commissioner is satisfied that your activities would have made a profit in the relevant 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 relevant financial year.