Edited version of your private ruling

Authorisation Number: 1012461685598

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

Answer

No.

This ruling applies for the following period

Year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts and circumstances

You do not satisfy the income requirement set out in subsection 35-10(2E) of the ITAA 1997 as your adjusted taxable income was more than $XXX,000 in the 20YY-YY financial year.

You have operated a business over many years and in the 200X-XX financial year you returned a profit. You commenced a project in 200X-0X where you expected a profit.

You borrowed money for the project. When the global financial crisis (GFC) impacted sales through industry downturn a receiver was appointed and the project was sold for a greatly reduced price. This resulted in losses over the 20YY-YY and 20YY-YY financial years.

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)

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

Reasons for decision

Summary

The Commissioner will not exercise the discretion under paragraph 35-55(1)(a) or paragraph 35-55(1)(c) of the ITAA 1997 for the 2010-11 financial year. It is not reasonable to conclude that the losses made in the 2010-11 financial year were the result of special circumstances and the business has made a profit prior to the loss of the 2010-11 financial year.

Detailed reasoning

Commissioner's discretion - paragraph 35-55(1)(a) of the ITAA 1997

For the 2009-10 and later financial years, Division 35 of the ITAA 1997 will apply to defer a non-commercial loss from a business activity unless:

· you meet the income requirement and you pass one of the four tests

· the exceptions apply

· 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 contained in paragraph 35-55(1) (a) of the ITAA 1997 may be exercised for the financial year in question where the Commissioner is satisfied that:

an event has occurred that would be considered special circumstances (in terms of the relevant legislation) for your business activity and this event was outside your control; and

the impact of these special circumstances prevented your business activity from making a tax profit in the year you are seeking the discretion.

'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.

No exhaustive definition of 'special circumstances' is given in the legislation.

The question of what constitutes 'special circumstances' has been judicially considered on many occasions. In the Federal Court case of Community Services Health, Minister for v. Chee Keong Thoo (1988) 8 AAR 245; (1988) 78 ALR 307, Burchett J considered 'special circumstances' in the context of the Health Insurance Act 1973 and made the following observation:

Those discretions are intended to be applied to a great variety of situations. In such a context, the core of the idea of 'special circumstances' is that there is something unusual or different to take the matter out of the ordinary course…

Later, in the Federal Court Case of Secretary, Department of Employment, Education, Training & Youth Affairs v. Barrett and Another (1998) 82 FCR 524 'special' was considered in the context of 'special weather conditions' for the purposes of the Austudy Regulations 1990. Tamberlin J observed that:

The word 'special' must be read in context. In normal parlance it signifies that the event or circumstances in question are out of the ordinary or normal course.

Tamberlin J then quoted the following passage with approval from the AAT case of Re Beadle and Director-General of Social Security (1984) 1 AAR 362; (1984) 6 ALD 1:

An expression such as 'special circumstances' is by its very nature incapable of precise or exhaustive definition. The qualifying adjective looks to circumstances that are unusual, uncommon or exceptional. Whether circumstances answer any of these descriptions must depend upon the context in which they occur. For it is the context which allows one to say that the circumstances in one case are markedly different from the usual run of cases. This is not to say that the circumstances must be unique but they must have a particular quality of unusualness that permits them to be described as special.

In the context of Division 35 of the ITAA 1997, special circumstances are ordinarily those affecting the business activity such that it would be unreasonable for the loss deferral rule to apply. TR 2007/6 states at paragraph 47:

…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 when carrying on a business activity and affect all businesses within a particular industry.

You have stated that the GFC caused the loss of sales through industry downturn and subsequently you returned a loss in the 2010-11 financial year. However your business returned a profit in the 2009-10 financial year, a year more likely to be affected by the GFC, suggesting that reasons other than the GFC produced these losses. Therefore the downturn of the market in 2010-11 financial year is considered to be ordinary market fluctuations that might reasonably be predicted and would not be considered to be special circumstances.

The Commissioner will not exercise the discretion under paragraph 35-55(1)(a) of the ITAA 1997 for the 2010-11 financial year on the basis that that it is not reasonable to conclude that the losses made in the 2010-11 financial year were caused by special circumstances.

Commissioner's discretion - paragraph 35-55(1)(c) of the ITAA 1997

Taxation Ruling TR 2007/6 states that the 'lead time' discretion provided for by paragraph 35-55(1)(c) of the ITAA 1997 is available for a business activity if there is an initial period from when the activity commenced where the nature of the activity prevents a tax profit from being made.

The commercially viable period for an activity is measured from the commencement of the business activity itself: Applicant 1761 of 2011 v. Commissioner of Taxation [2011] AATA 779 at 27. You have conducted a property development business prior to the start of the Queens Road project therefore the commencement date for your business activity is not considered to have started when you commenced this project.

Paragraph 35-55(1)(c) of the ITAA 1997 allows a period of time to lapse before a profit is made. You fulfilled the provision of paragraph 35-55(1)(c) when you first made a profit in your business activity prior to the 2010-11 financial year. Therefore the Commissioner will not exercise the discretion under paragraph 35-55(1)(c) of the ITAA 1997 to allow you to deduct a loss in the 2010-11 financial year.